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

Leon Rousso, a planner in south central California whose firm manages $25 million in assets, says he jumped at the chance to participate in the Scorecard because he wanted to get a sense of his “firm’s value and how it stacked up against other planners in the area.” Rousso is now cultivating a 10-year transition strategy that will allow the two younger associates in his planning firm to buy him out (he’s in his 60s and the associates are in their 30s). He characterizes his practice as “atypical” compared to other advisors in his area because in moving from the insurance industry to being a financial advisor, he’s built what’s basically an employee benefits practice.

After getting his Scorecard results, Rousso says he found that his business is “so different” from his local peers. But the Scorecard “gave me a sense of numbers as far as profitability,” he says, adding that he also found out that he has far too many clients. Right now he has 800 clients, with 500 that are individual health insurance clients. “It’s way out of hand,” he says. “I’m beginning to shift all of the individual health insurance clients to the junior associates. I realize that I need to narrow my client base to about 100, and transition these two younger associates to the rest of the clients.”

Michael Halvorsen, a planner with Asset Planning Services in Harleysville, Pennsylvania–just north of Philadel-phia–says that over the past 10 years, his firm has been looking to benchmark itself from an “overall” standpoint against industry peers, and using that information to “effectively price out the services” the firm offers to its 275 clients. By participating in the Scorecard, “we were looking to get some validation of the Moss Adams study to make sure there weren’t any significant differentials with what we were seeing with the Moss Adams numbers as well as other studies,” Halvorsen says. The Scorecard “did show that we had some good confidence in the Moss Adams numbers, even though we hoped the [Scorecard] study size [as far as number of participants] would be larger; I’m sure that it will be [the case] in the future.” [Disclosure: Investment Advisor works with Moss Adams to encourage its readers to participate in its annual study.--Ed.] While Halvorsen’s firm has clients throughout the U.S., “we’ll see clients who maybe work with other planners in our area, so we thought it good to have a regional look and see what other planners are doing and how we compare to that.”

Halvorsen, for one, wonders whether advisors will have the stamina to participate in an annual study, but Keuls says the study includes “no qualitative questions; it’s all objective, numerical quantitative measures of performance–growth in revenues, average practice size, new assets that have come in, cost structures and expense ratios, compensation, staffing levels.” This, he says, “makes it easier for a practice to participate because there aren’t a lot of long qualitative questions to answer.”

Keuls also says the feedback he’s gotten from advisors who’ve participated is “enormously positive” and the advisors who participated see the benefits of the study. “It will take a bit of time [for advisors] to see how important it is to use a benchmark that is local and not misleading, which a national benchmark may be,” Keuls says. The Scorecard is available only to advisor participants and costs $195 for those who are FPA members and a bit more for non-FPA members, Keuls says. “We believe that if you give away results to those who haven’t participated, it doesn’t create much incentive for them to participate. In the long term that’s bad for the study.”

But Fidelity is sharing the study’s results with its affiliated advisors through its relationship managers, says Jim Dario, executive VP for relationship management at Fidelity’s Institutional Wealth Services unit, the former FRIAG. Fidelity asks its relationship managers to “understand the business needs of advisors,” determining if they are trying to grow their practice, their client base, “scale their practice, or [introduce] new products for customers,” Dario says. The relationship managers have been trained on how the Scorecard works, he says, “and now that the study has been produced, we have trained them on the results and we are utilizing the study and the tool as part of our business planning practice that we do with advisors.” The relationship managers tell “advisors how they rank versus their peer group, what opportunities there are for improvement, and where they are excelling and how they can leverage that,” Dario says.

Fidelity isn’t the only big firm that’s picking up the tab so its advisors can participate in the Scorecard for free. Wachovia Securities and Ameriprise also pay for their advisors’ participation, Keuls says, and “we’re expanding the program in 2007 to a number of other firms who want to offer this to their advisors.”

To be sure, advisors who benchmark their practices against their competitors–local or not–will indeed be able to create stronger practices, and this benefits not only advisors but their clients as well.


Washington Bureau Chief Melanie Waddell can be reached at mwaddell@investmentadvisor.com.