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Industry Spotlight > Women in Wealth

2011 Top Wealth Managers: Productivity and Profitability

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In the lead story in the 2011 Top Wealth Managers Survey Special Report, we discussed the overall findings of survey respondent. In the second article plumbing the survey findings, we explored the services offered by firms and the prices they charged for those services.

In this, the third article in our Top Wealth Managers Special Report, we focus on a key measure related to firm profitability: productivity of all staff members of a firm.

The profitability of a wealth management firm is a direct function of the productivity of its professionals and its staff.

Top Wealth Managers--Revenue Per Staff

Other surveys have shown that close to 75% of all expenses in a wealth management firm are related to compensation and training of the staff. This is why achieving higher productivity is critical for the financial success of a firm.

The revenue per staff is a good measure of the overall productivity of the firm and its ability to achieve a return on its human capital investment. The ratio does not discriminate between the different functions in the firm—including investments, advice, operations and administration—but it does provide an overall sense of the use of people in the firm.

Productivity ratios continue to improve across every type of firm. The largest firms in the report generate on average $269,524 per staff member, compared to $244,373 for midsize firms and $203,115 for small firms. It is important to note that these apparent economies of scale are a function of leveraging certain functions in the firm. Most of all, the functions that are leverageable with size are:

  • Executive management (CEO, managing partner, COO, CCO, etc);
  • Investment research (relatively fixed investment for the creation of a department);
  • Portfolio management (will grow in size but not nearly as fast as the AUM);
  • Internal IT;
  • Accounting and HR administration;
  • Internal administration (executive assistant, receptionist, etc.).

The ability to leverage those functions allows firms to achieve higher productivity per staff member. However, these functions are often created at a larger firm size resulting in a slight drop in overall productivity as the firm grows before it starts leveraging the new capability.

For example, the investment research department may not even exist until the firm reaches $1 billion in AUM and at that point, the addition of the new professionals will temporarily reduce productivity. Therefore, while the largest firms have always shown the best productivity ratios in the survey, the midsize firms have at times appeared less productive than the small firm category.

The revenue per professional in a firm measures the productivity of professionals. A high ratio usually indicates a profitable firm with a well-structured service model and good size client relationships.

Top Wealth Managers--Revenue Per Professional and Staff

A very high ratio may indicate the need to hire. A low ratio on the other hand may indicate that the firm has a lot of free capacity or has underutilized departments and capabilities. The best approach in analyzing these ratios is to compare them over time.

The components of productivity that every firm needs to manage are the level of utilization of a professional, the average size of the relationship and the number of clients a professional can manage (theoretical capacity defined by the service package).

Top Wealth Managers--Clients Per Professional and Staff

What is interesting is how drastically and dramatically the capacity changes with the increase in the average size of client relationships. It appears that once a firm starts to work with clients that are over $10 million in AUM, the capacity of the professionals drops to less than a quarter of that of firms who work with smaller relationships. In fact, while firms that work with accounts smaller than $5 million on average have close to 60 relationships per professional, firms that work with clients over $10 million have only 11 relationships per professional.

As a result, as we will see in the following two sections, an increase in the average size of the relationship stops being productive at some point. In fact, it seems to add to the cost faster than it adds to the productivity of the firm.

See part four of our special report on the findings of the 2011 Top Wealth Managers Survey.

Return to our 2011 Top Wealth Managers home page for further analysis and data.


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