Does the independent advisory industry really need another study? Like most of you, I suspect, I would have thought it probably didn’t. Then I got around to reading “The Future of Practice Management,” a survey of financial advisors by the FPA’s Research and Practice Institute released in December 2013. Conducted in conjunction with Julie Littlechild’s Advisor Impact, the Institute’s inaugural effort is an online survey that attracted some 1,954 senior “advisors” (and 422 junior advisors and staff), making it, to my knowledge, the largest study in the independent advisory world—and therefore, probably offering the most valid results.
What’s more, this study avoids many factors that often skew advisory research by focusing on practice management information, thereby avoiding incentives for advisors to make their firms look bigger, more successful or more profitable than they really are. Consequently, the results obtained by the Institute probably represent the most comprehensive insight to date into how independent advisory firms are run, puncturing more than a few practice management myths and offering valuable guidelines for how advisory businesses can be run better, and how institutions and companies that support independent advisors can better help them do it.
Let me point out at the start that despite its title, this report doesn’t tell us much about the future of practice management. Even the questions that ask advisors to predict what they will do in five or 10 years only offer insight into advisors’ attitudes today about the future. Moreover, the survey is based on Advisor Impact’s rather rigid management model that has owner-advisors curiously defining their firms’ business model before they decide who their ideal clients will be or what services they’ll need.
At the same time, the survey offers relatively little information about whom its 1,954 advisor participants are, making it difficult for readers to determine how well the results might apply to them. For instance, this survey by the Financial Planning Association refers to participants as “advisors” rather than “financial planners,” begging the question of just who these advisors might be. It does tell us that 81% of the participants are male and 19% female; that 38% have less than 10 years’ experience as advisors, leaving 62% with more than 10 years as advisors (45% had more than 15 years and 31% more than 20 years).
It also tells us that 51% are under 50 years of age, with 49% over 50 (including 17% over 60); that 48% have less than $50 million in client AUM and 68% have less than $100 million, while 32% have over $100 million and 13% have over $250 million; and that client asset minimums are quite high, with 33% under $250,000, 28% between $250,000 and $500,000, and 40% over $500,000. (Of course, no one is checking to see what percentage of clients are actually meeting these “minimums.”) But the survey gives us no information about the designations, registrations and licenses of the participants, nor about their affiliations with broker-dealers or custodians, or their method of compensation. (As of this writing, neither the FPA nor Advisor Impact divulged this information, either.)
We do get some insight—as well as some surprises—into what kind of advisors are represented in the survey by what services they offer. The fact that 86% offer financial planning, 89% offer retirement planning, 80% offer portfolio management, 79% offer college planning and 65% offer estate planning strongly suggests that a large majority are CFPs. But with 77% offering life insurance and 63% offering health, disability or long-term care insurance, I’d suspect that a good portion are also insurance agents, with stockbrokers making up a relatively low percentage of participants. I don’t know what to make of the fact that 30% offer trust services, while only 18% offer tax work.
With that rather murky view of who the participants are, here are the highlights of the issues that their survey answers raise:
Business Planning. Only 50% of the participants have a formal, written business plan. Yes, you read that right: half. The strong indication that most of the participants are financial planners makes one wonder, doesn’t it? However, some 97% review their performance against a plan or goals regularly. This suggests that virtually all advisory firms have goals, even if they don’t put them into a formal plan, and at least raises questions about the value of the time and effort spent on those plans.
It would be instructive to compare long-term performance data for firms that have formal business plans and those that don’t, but I don’t know of any current surveys that track those numbers out more than five years. (“Long-term” is a problem for researchers as firms tend to drop out of surveys over time.) It seems at least plausible that firm owners who have only a general idea of where they want their businesses to go might have the mental flexibility to react more successfully to changing business environments than those who rigidly adhere to a five- or 10-year-old vision.
Performance Measures. Here’s a quick list of the percentage of advisors who said their firm tracks the following metrics:
- AUM: 79%
- Gross revenue: 77%
- New clients: 69%
- Total expenses: 58%
- Revenue by client: 54%
- Total profit: 53%
- Lost clients: 48%
- Client satisfaction: 38%
- Free cash flow: 35%
- Profit by client: 39%
Now, I don’t know about you, but for me, every one of these answers raises a question. How can 21% of advisory firms not track their assets under management? Or revenues, expenses, profits, client satisfaction or profit per client? I can understand not tracking certain financial stats every day or even every week, but not tracking them at all? One can only hope that the participants didn’t understand the question. Hopefully, these businesses are small enough that the owners can intuitively know how profitable each client is, how much money is coming in and how much of that they can take home. Still, it would seem a good thing for a financial advisor to occasionally check to see how accurate they are, wouldn’t it?
Succession Planning. Here’s another shocker. It seems that some 64% of advisors plan to sell their businesses at some point. (The fact that 36% don’t plan to sell suggests a fairly high percentage of insurance agent participants, who don’t have assets under management.) Yet only 25% have a succession plan in place (which means 75% don’t). Even among those age 60 to 64, the number who have a plan only goes up to 31%.
Seeing as how some 41% of respondents want to sell to a successor advisor, maybe financial planning colleges need to beef up their time-value-of-money course, because most advisors aren’t giving their successors much time to earn the money to buy them out. Seems to me that if custodians and BDs don’t start offering serious succession financing, we’re going to see an industrywide free-for-all to “recruit” the clients of these firms.
Target Clients. Here’s another result that seems to fly in the face of conventional practice management wisdom. The survey tells us that 25% of advisory firms have a formal definition of their target client and 61% more have a general idea of their target client. However, only 6.25% of respondents say that target clients account for at least three-quarters of their client base. What are we to make of this? It would be interesting to know how many firms have even half of their client base made up of target clients—but the implication is that it wouldn’t be a very high number. That raises the question, “How much do firms really benefit from even having ‘target clients?’” Perhaps the wisest advisors are those who don’t worry so much about target clients.
Wealth Management. The survey seems to confuse the business model of an advisory firm with how a firm describes itself, but one thing is clear: If participants’ predictions come true, within the next five years, “wealth manager” will leap over “financial planner” as the most-used way financial advisors describe themselves. Participants described themselves four ways: financial planner (38%), investment planner (22%), wealth manager (21%) and money manager (11%). When asked how they will describe their business in five years, the only category to gain advisors was “wealth manager,” which shot up to 39%, while “financial planner” fell to 29% and “investment planner” down to 13%.
Perhaps before long, the Research and Practice Institute surveys will be put out by the Wealth Management Association—and the debates about the CFP Board will be moot—and these surveys will change the way advisory firms are managed by showing what firms do in reality, rather than in theory. Maybe this survey is about the future of practice management, after all.