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January 01, 2008 at 02:00 AM
There’s a new benchmarking tool that gives advisors a snapshot of what competitors and colleagues in their backyards are up to. The Financial Planning Association (FPA) and McLagan Partners, a compensation consulting firm, released in late November the first FPA Practice Management Scorecard study, which is designed to help advisors benchmark their practices. The Scorecard provides participants with a three-page customized report detailing the advisor’s entire business performance and how he stacks up against his local peers.
Over the years, there have been a number of benchmarking studies performed by firms such as Moss Adams (the originator of advisor benchmarking studies) that have provided national benchmarking stats for advisors–including a look at the local competition. But Peter Keuls, head of private client services at McLagan, says the FPA and McLagan were eager to launch the Scorecard because they believed that for independent advisors, “there was no good benchmarking information that took into account one of the most important drivers of practice performance, and that’s location.” National benchmarks, he argues, “are really useless as a practical tool for an individual advisor or practice that’s operating in a specific market.”
For instance, he says, “How advisors in Los Angeles are performing is of no relevance at all to a practice in Des Moines. The markets are so different; the wealth levels are different, [and] that drives the growth opportunities and the types of clients they might have. The cost structures of doing business in L.A. are completely different than the cost structures, salaries, and overhead you pay in Des Moines.”
Mark Tibergien, CEO of Pershing Advisor Solutions, and former head of Moss Adams’s securities and insurance practice, says that the FPA/McLagan Scorecard is valuable in that it is “localizing” advisor data to help advisors benchmark their firms, but this type of data is “also possible with the analysis that Moss Adams does.” Tibergien adds that using “a combination of data points is helpful, so I would encourage advisors to seek it wherever they can.”
One of the Practice Management Scorecard’s findings, which was sponsored by Fidelity Investments, is that independent advisory practice profit margin before owners’ draw varies greatly–ranging from less than 20% to more than 80% depending on the part of the country.
The Scorecard–which polled 500 fee-only and hybrid independent advisor participants with practices of varying sizes–tracks practice revenues, assets, number of clients, average client size, new assets, profitability, compensation, staffing, and expenses. The study surveyed practice performance for the year ended December 31, 2006. Keuls says that in a few months McLagan and FPA will start the next Scorecard, as it will be an annual study.
Some of the first Scorecard findings reveal differences between regional and urban versus suburban and rural data–considerations that have also been incorporated into Moss Adams’s annual studies of the advisory industry. For instance, the Scorecard found that median practice revenue ranges from almost $800,000 in and around New York City to just under $300,000 in smaller and rural markets throughout the Northeast. Also, markets such as southern California, Washington D.C., and San Francisco have lower net effective payout rates primarily because of the high overhead costs relative to the productivity of practices in those markets, the Scorecard found. But Washington D.C. and San Francisco offer opportunities for growth that may make up for the higher cost of those markets, the study suggests. Washington D.C. has the second highest new assets per advisor of the markets surveyed with more than $9 million of new assets per advisor.
Another Scorecard finding is that net effective payout (practice profit margin before owners’ draw) ranges from 68% in New York City to only 45% in Dallas-Ft. Worth. Markets with the highest net effective payout, the study reveals, enjoy a combination of high productivity levels, low overhead rates, and low professional compensation costs. For example, the study says, “while the New York tri-state area features high productivity levels that generate scale economies for practices located there, Virginia and North Carolina achieve high effective payout rates with moderate productivity because of relatively low professional compensation costs.”
Why Advisors Participated
