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Practice Management > Building Your Business

From Good to Best: Practice Edge, August 2009

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During his three terms as mayor of New York City, Ed Koch was known for asking just about everyone, “How am I doing?” This month’s Practice Edge will help advisors answer this introspective question by comparing the average advisory practice to the most accomplished ones.

In analyzing the way the industry’s top advisors managed their practices during the challenging times in 2008, we uncovered a few characteristics that distinguished them from their fellow investment professionals. These techniques separate the very best from the rest and provide the rest of us with ideas to maximize our growth potential.

What Is a “Top Firm,” Anyhow?

To identify the “top firms,” we applied a multi-criteria scoring model that includes four variables: size of firm, growth rate, profitability, and range of services offered. Based on this screening, we created a Top Firms’ Benchmark–comprising the firms that met our tough performance criteria. Then we contrasted the resulting 26 most successful RIA firms against the rest of the marketplace to showcase the differences.

One major distinction is that top firms enjoyed AUM growth of 6% in 2008, compared to the average RIA firm, whose assets slid 12%.

It’s no surprise that the top advisory practices sport higher profits, and more clients, AUM, and growth rates than their peers. But looking deeper, we find that there are other factors that differentiate top performers from average firms: proactive communication with clients during challenging times, better time management and time spent with clients, marketing and focusing on a particular niche, higher assets, and higher average client size.

Proactively Communicating with Clients

While communication is always important, it’s especially crucial during a crisis. That’s because hearing nothing usually leads clients to assume the worst–including indifference on the part of their advisor. In 2008′s market meltdown, top advisors had a game plan for communicating key issues to clients. They were aware of their clients’ expectations and reviewed their original goals. It’s natural that advisors with solid relationships with their clients are more successful and have better client retention rates.

Our research verifies that theory as the best firms report that they lost only 1% of clients in 2008 compared to average firms, who lost 21% of their clients in 2008. The best advisors are much more proactive communicators that their average counterparts–with top firms outpacing the average ones in every communication method: e-mail, newsletters, client reviews, special occasion communications, and more.

Time Well Spent

Time management is a challenge for many investment advisors. Some report that they are too busy running day-to-day operations to think about strategic planning, but the most successful advisors have made time management an important part of their business practices. Time management allows top advisors to spend more time working directly with clients. Principals of top firms spend the majority of their time (41-50 hours per week) working directly with clients compared to the average firm principals, who spend 11-15 hours a week with their clients. Clients are getting more attention at top firms and are thus more likely to show loyalty to those firms.

Comparing the Numbers

Taking a look at a number of characteristics for the top firms versus the average firm provides some insight into the economies of scale the top firms have achieved. Top firms have 628 clients on median, compared to 304 clients for the average RIA firm. Top firms also work with much larger accounts. The difference between a top firm and an average firm is significant: the median AUM per client for top firms is $1.3 million–about three times larger than that of an average firm’s AUM of $485,714.

Due to the tremendous economies of scale and much larger client accounts for top firms, their profitability and revenue per employee is also much higher than that of the average firm. Top firms have more coverage for clients (at top firms, each principal covers 126 clients vs. the 140-to-1 ratio at average firms), ensuring that clients at the top firms get more attention, which can enhance loyalty.

So How Do You Stack Up?

Top firms can provide valuable ideas for enhancing your business. While average firms may not be able to significantly increase their minimum account size or boost assets dramatically in these turbulent times, lessons to be learned from the top firms include:

l Carve Out as Much Time as You Can for Your Clients. Top firm principals spend the majority of their time with clients. Our research shows that time spent with clients directly links to profitability–firms that spend 60% or more of time with clients are eight times more profitable than their counterparts. It’s sure to enhance client loyalty as well, something that top firms excel at.

l Communicate. Communicate. Communicate. No matter the news, it’s essential that advisory firms be proactive about their communication with clients–especially in downturns.

l Principals Have (a Few) Client Focus Areas. While the average advisory firm has gotten much better at looking for clients with similar needs, every single top firm focused its client acquisition efforts on specific market niches.

Taking a look at the top firms in the industry can yield some great insights into how your firm compares to the best. The number one takeaway is that in order to compare your business to the rest of the industry, it’s essential that you track your own metrics beyond the basics of AUM and profit margin–such as client retention rates, number of clients, clients per employee, AUM growth rates, and time spent on various activities–and it’s essential that you track your metrics over time to see trends. Comparing your numbers against your industry peers can identify gaps in efficiency and prompt you to consider changes you could make in managing your day-to-day business operations.

Maya Ivanova is a market research manager with Rydex|SGI AdvisorBenchmarking She can be reached at [email protected].

Rydex|SGI AdvisorBenchmarking is a research and analysis center focused on the registered investment advisor (RIA) marketplace. The service is aimed at helping advisors grow and enhance their firms by comparing how their businesses fare against other advisors. Advisors also learn best practices of the most successful advisors in the business.

AdvisorBenchmarking is an affiliate of Rydex|SGI. The analysis on Rydex is based on the number of completed surveys and reflects only information from those surveys. This information is intended to be general in nature, and these overviews are no substitute for professional, legal or consulting advice. This information should not be construed as advice from Rydex Investments|SGI and it affiliates or any of its affiliates.


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