“Bigger is better.” It’s hard not to buy into it. These days it seems we’re conditioned to want the bigger house with the bigger yard with the bigger SUV in the bigger garage. It’s no surprise that this mentality has also influenced the planning industry as advisors seek to acquire new clients to bolster assets under management. While there’s nothing wrong with this approach, it ignores the fact that many smaller firms can–and do–enjoy a great deal of success without reaching the lofty AUM goals that have become the industry standard.
Believing that profitability–not AUM–should serve as the industry’s yardstick for measuring success, we at Rydex AdvisorBenchmarking set out to pinpoint what separates the best from the rest within different size categories. We looked at the most profitable smaller firms (those with less than $100 million in AUM) and compared them to their counterparts in the small firm peer group. Likewise, we examined the large firm category (those with more than $450 million in AUM) to see how the most profitable stacked up against their peers. Interestingly, we found that best practices among small and large firms do vary. If you’re still taking a one-size-fits-all approach to practice management, we hope these findings help you tailor your efforts to achieve greater profitability and success (see “Defining the Best” sidebar, for more on what defines a “top” firm).
The Best Small Firms
Tip #1: Commit to an AUM range that feels right.
The most profitable small firms are those that have been in business the longest. The average age for a top small firm is 14 years compared to nine years for their peers. On the surface it seems fairly intuitive that the most profitable firms are the ones with the most time and experience under their belts. Look a bit deeper, and this finding also suggests that smaller firms that have been in business for more than 10 years have made the strategic decision to stay small. Instead of focusing exclusively on asset gathering, the most profitable small firms emphasize increasing efficiencies and maximizing existing client relationships.
With approximately $80 million in assets under management, Harrisburg, Pennsylvania-based TEAM Financial Services has been in business for more than 20 years. According to principal James Dailey, the demographics of the firm’s geographic market play a large role in determining appropriate AUM goals. “The vast majority of our clients are middle-class Americans. They’re teachers and government workers–salt-of-the-earth people who would not meet the large account minimums imposed by firms that might be based in wealthier regions such as Philadelphia or New York, for instance.”
Instead of struggling to become one of the larger firms on the block, TEAM Financial focuses on enhancing existing client relationships. “Traditionally it’s been the high net-worth individuals that have received the most attention from advisors,” explains Dailey. “But our specialty has been to bring an extremely high level of service to the middle class. We’re very high touch in the way we manage client relationships, and it has paid off for us.”
For those small firms that are contemplating getting bigger, Dailey encourages advisors to be honest with themselves about their motives and expectations. “There’s a lot of self-imposed pressure in this industry aimed at increasing AUM,” he says. “But I’d urge advisors to take some time for reflection and determine who they are and what business model is going to work best for them.”
Tip #2: Clearly define your market niche.
Along with knowing what differentiates your firm from competitors, it’s important to know what sets your ideal clients apart from the masses. Advisors who periodically examine their client base and consider what their best clients have in common can more effectively market their services. Rydex AdvisorBenchmarking findings show that the most successful small firms demonstrate a better ability to define their market niche compared to their peers. While advisors traditionally consider wealth range first when selecting potential clients, our research suggests that they may be well served to look beyond this broad characteristic to better define their target market. Top small firms have a tendency to select clients based on specific investment needs or specific age groups. They also place a higher emphasis on selecting clients based on careers and lifestyles and, in some cases, even hobbies.
“Everyone seems to be chasing clients that meet a specific wealth range criteria, but we’ve found that this creates a vacuum for firms like ours to step in and provide financial planning to the mass affluent and middle classes,” says Dailey. “While the industry tends to focus on high- and ultra-high net worth individuals, we’re able to focus on the bread and butter. I believe that this has become our niche.”
According to Dailey, his clients’ investment needs tend to fall under the general financial planning umbrella. “We target clients who need help with the basics–budgeting, saving for retirement and planning for their kids’ college educations. We don’t need to have an in-house attorney or CPA to meet these needs and it’s definitely helped our bottom line.”
Tip #3: Move beyond AUM fees.
For those advisors who wish to maintain a certain AUM level, it’s essential to focus on growing their practices in other ways that help boost profitability. The most successful small firms are diversifying their revenue streams by incorporating additional pricing structures.