A Little Magic for the RIA Industry

It didn’t take a wizard to predict that sales for J.K. Rowling’s Harry Potter and the Deathly Hallows would be a record breaker for the big-selling series. So it’s not rocket science either to know that 2006 turned out to be a banner year for the RIA industry.

AUM Tops Itself, Again

For the fourth year in a row, the advisory industry has benefited from asset under management (AUM) growth with assets jumping 15% to a median $142 million in 2006. At that asset level, advisory firms on average manage approximately twice as much money today as compared to 1999 (when the stock market was at all-time highs, as shown in the chart below). Since advisors’ most important objective is to increase AUM (according to 55% of advisors), the industry as a whole is having no problem attaining this goal. While one-third (33%) of advisors expect their cumulative growth rate over the next five years to be between 11% and 20%, nearly the same percentage of financial professionals have much loftier goals and expect their growth rate will be 30% or more. While this may sound unattainable, these goals are in fact realistic, considering the 15% AUM growth in 2006 and 18% growth in 2005.

There is even more encouraging news: Positive stock market performance is not the only impetus to this increase. Asset growth continues to outpace the stock market, with the S&P 500 up 12% in 2006 while AUM growth posted a 15% increase for the same period

(see “Median Advisor” chart below). Much of the AUM growth is likely due to the significant expansion of RIAs’ client bases over the last three years with advisors seeing a 7% increase in the number of clients in 2006 alone–much of this growth coming from the large and prosperous baby boomer generation.

Boomers Fueling Record Revenues

The money stream from retiring boomers has led to significant growth within financial advisory practices–growth of revenues, growth of assets under management, and growth of client base. By the end of 2006, advisors had built their practices to the highest levels in the past eight years, with both assets under management and revenue reaching record high levels.

Asset growth in 2006 fueled a revenue growth increase among our survey respondents to a median $1.558 million–an 18% jump over 2005 levels. Assets and revenues have increased for four years running hitting record levels in 2006. Median revenue nearly doubled from $880 in 2000 to $1,558 by 2006. During the same period, AUM showed a similar growth rate, jumping to a median of $142 million in 2006 from $87 million in 1999 (see “Revenue vs. AUM” chart below). In 2006, revenue increased 18%, while assets moved 15% higher.

Conjuring a Better Bottom Line

Advisors have enjoyed tremendous growth in the last few years and they continue to be optimistic about their industry–for good reason. The last four years have been incredible: RIA firms have seen assets under management (AUM) grow, revenues increase, and profit margins rise. Overall, 2006 was a great year for independent advisors. However, there is one caution when reviewing these numbers–the growth rate of assets and revenues slid slightly from 2005 levels, largely due to the 20% increase in expenses in 2006. Advisors need to rein in their expenses and keep an eye on the bottom line to keep their profitability on track.

One area advisors may not associate with profitability is “time spent with clients.”