In the September edition of Practice Edge, we talked about the best business practices in the RIA industry when it comes to proactive client communication and referrals. This month, we'll examine another area that separates the best advisory firms from the rest: operating performance.
In order to enhance your firm's operating performance, you'll need to analyze your performance and compare it to that of the best performers in the industry. First, convert key financial performance numbers into ratios, and then compare your ratios to top-performing firms and to firms that are the size of yours. The next step is to determine the size of the gap between your firm and the best firms.
In this article, we will provide some matrices of financial performance based on the data from the 2010 Rydex|SGI AdvisorBenchmarking survey.
Financial Matrix: Profit Margins
Industry margins have been under stress for nearly a decade now, and have been shrinking steadily since 1999. While margins and profits jumped a bit in the mid-2000s with the asset bubble in equities, they have since resumed their decline. History is showing us that asset growth on its own can no longer be relied on to make up for the industry’s inherent inefficiencies—especially during severe market dislocations.
While the 2010 AdvisorBenchmarking survey found that top-performing firms posted 40% higher AUM growth in 2009 compared to an average firm, top firms' outperformance in expenses, revenue and margins was even higher. These firms grew revenue more than three times faster than other firms, and actually decreased expenses at the same time. At average firms, expenses were going up, while new assets were not translating into as much revenue growth.
As a result, top performers were able to operate at nearly twice the margins of other firms. Top firms are able to turn new
assets into revenues and profits at a much higher rate than other firms can. Our data indicates that these firms are bringing in higher-quality new business while also keeping costs restrained. For example, nearly a quarter of advisors do not focus on specific types of clients. Of those that do, many focus narrowly on assets. The overall industry response for “wealth range” as the defining factor of an ideal client increased from 49% of firms in 2008 to 63% of firms in 2009.
Revenues and Expenses
Increased assets and slightly increased AUM fees helped boost revenues in 2009. The average RIA’s revenues increased to $1.485 million on median, a 6% increase over 2008 levels. Top advisors enjoyed a 20% increase in revenues over 2008 levels. Increased assets and slightly increased AUM fees drove much of advisors’ revenues, with 75% of total revenue attributed to AUM fees in 2009 compared with just 63% in 2008. Overall revenues increased for RIAs in 2009, and therefore, as the Revenues Per Client chart below shows, advisors generated about 11% more revenue per client than in 2008—during 2009, advisors generated $5,133 per client.
Along with revenues and assets, expenses also increased 3% in 2009 to $1.170 million on median for the average firm. The increase in expenses was attributed to an increase
in direct expenses—such as principal compensation (including all compensation, bonuses and benefits). In 2009, median principal compensation expenses increased to 51% of total expenses from 45% in 2008.
Since most advisors tie their own compensation to revenue or assets—both of which increased in 2009—the increase in principal compensation is not surprising. Unlike owner compensation, indirect expenses such as staffing compensation stayed at the same level as in 2008 (18%). Most other expenses remained relatively in line with 2008 levels.
Rent, expressed as a percentage of total expenses, fell slightly to 6% of expenses from 8% in 2008—with the real estate market correction likely holding some bargains for savvy advisors who were able to renegotiate space costs.
Using relevant data to compare the operating performance of your business against that of your peers will help you identify areas that need improvement—and tactics to consider for enhancing your firm's performance.
Maya Ivanova is a market research manager with Rydex AdvisorBenchmarking.com. She can be reached at [email protected].
Rydex|SGI AdvisorBenchmarking is a research and analysis center focused on the registered investment advisor (RIA) marketplace. Study results quoted in this article are based on the 427 RIA firms that took the online survey in March-May 2010. 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|SGI AdvisorBenchmarking.com 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|SGI or any of its affiliates.