This year marks the fifth release of the annual FA Insight “Study of Advisory Firms.” The five-year history of the studies underscores the resilience of the advisory industry. During this period, notable for a global financial meltdown that shuttered major Wall Street firms, advisory firms struggled to maintain their footing. Trying times forced firms to tighten management controls with a new level of discipline that appears to have held through a return to stability.
In 2012, the typical advisory firm achieved the highest profitability and greatest level of owner income of any FA Insight study year. While resurgent equity markets deserve a share of the credit for the turnaround, performance indicators also point to improved management practices, especially those relating to controlling costs and the more effective use of people.
Across all of our annual studies, one conclusion is irrefutable: Well-designed people practices accelerate growth and provide insulation against periods of adversity. “The 2013 FA Insight Study of Advisory Firms: People and Pay,” the third FA Insight study to focus on human capital, underscores the influential role that people play in the resource mix of an advisory firm. Unlike any other business asset, a firm’s investment in human capital is a complex but crucial foundation of sustainable growth.
This article provides an overview of key findings from the 2013 study. It is the first of a four-part series featuring highlights from “People and Pay” that will be made available in the coming months through collaboration with our media partner, Investment Advisor. The complete study, which includes detailed industry compensation data, is available for purchase at www.FAInsight.com. (Visit www.ThinkAdvisor.com/Tag/People-and-Pay for all of FA Insight’s articles on the People and Pay study.)
Comeback Nears Completion
In 2012, advisory firms continued to shake off the worst economic stress since the advice industry first took hold more than 30 years ago. Firm owners are optimistic about positive performance continuing through 2013.
Client numbers increased 5.5% in 2012, a slower pace than in 2011 but much healthier than the less than 5% rates of growth at the depths of the recent economic recession. Stronger client growth is expected through 2013. A return to double-digit AUM growth in 2012 offset more sluggish new client activity. Buoyed by AUM performance, firm owners expect the rate of revenue growth to increase in 2013 (see Figure 1).
Firms Haven’t Forgotten Hard Lessons Learned During Recession
In years past, even slim growth expectations often lulled firms into lapses in management discipline. A close examination of financial performance suggests this time looks different. Five years of FA Insight study data show that firms have not yet forgotten hard lessons learned during the recession. While firms are clearly benefitting from the current recovery in security markets, their financial results suggest that management practices have also improved (see Figure 2).
Operating costs, as measured by overhead expenses as a share of revenue, tied a five-year low in 2012. Productivity in terms of revenue per professional nearly matched the five-year record set in 2011. Profit per client reached a five-year high in 2012, a level more than double what firms achieved in 2009 and a one-third increase relative to one year prior.
Cost control, combined with solid productivity and rapidly increasing client profitability, supported record income and profits for advisory firm owners in 2012. Typical advisory firms logged profit margins in excess of 20% in 2012, the highest in the survey’s five-year history. Most important for shareholders, median total owner income hit a five-year high, with growth in owner income significantly outpacing growth in firm revenue.
Staying Committed to a Firm’s Greatest Resource
During an extremely challenging five-year stretch, firms managed to control costs without shrinking payrolls. Most firms maintained or expanded their teams, and compensation levels increased across a broad spectrum of positions. Figure 3 shows the five-year history of median full-time equivalents (FTEs) from current and past FA Insight studies, as well as expected FTEs for 2013 based on the latest study responses.
As signs of recovery emerged and advisors acted on deferred hires, median FTEs increased in 2010. Firm size in terms of FTEs remained largely flat from that point through 2012. With security markets and the economy demonstrating more strength, the typical advisory firm expects to expand its team from six to seven FTEs in 2013.
Better Growth Through People Management
Clearly, people continue to be a prominent component in the delivery of advice. People-related expenditures dominate as a share of all expenses, averaging 75 cents for every dollar in costs during 2012. Given the influential role of people in the resource mix of an advisory firm, maximizing the return on investment in this resource is critical.
In 2012, our annual study focus was “Growth by Design,” which took a unique look at the drivers of scale and why so many firms are yet to experience advantages of the scale created. Study findings in that year revealed that growth can bring about positive people-related benefits. Growth could have a downside for people as well, however, including increasing dependency on key individuals and challenges in defining career opportunities. As a result, a key objective of this year’s study is to guide firms in minimizing the negative outcomes and accentuating the positive results that affect team members when firms grow.