During my 30-year career as a financial journalist (wow: that’s sobering), I’ve witnessed four major market downturns: in 1987, 1991, 2001 and 2008. During every one of them, I remember major financial services companies and financial publishing companies (which rely on the financial services companies for advertising revenues) acting as if they were caught completely by surprise.
I particularly remember Dow Jones & Company executives, owners of Investment Advisor magazine at the time, freaking out during the dot-com crash of 2001, and thinking: “Come on, guys, you’ve been doing this since 1882; market downturns can’t come as a big surprise.”
These were my thoughts as I was reading through FA Insight’s recently released “2014 Study of Advisory Firms: Growth by Design,” the results of which authors Dan Inveen and Eliza De Pardo summed up this way: “On aggregate, advisory firms enjoyed a stellar year in 2013, and the typical firm owner is optimistic that prosperity will continue through 2014. […] Undoubtedly, appreciating security markets, an improving economy and growing demand for financial advice are working in favor of advisory firms.”
And as you’ll see, the performance results from the 342 (60% RIA) participants in the study are quite stellar. Yet, as much as I hate to be Donny Downer here, what is “working in favor” of advisors is a six-year bull market that began after a market crash that cut the portfolios of many advisory clients in half. It seems to me that rather than patting each other on the back, now might be a good time for advisors to think about avoiding the traditional financial services head-in-the-sand, bull-markets-go-on-forever mentality and consider positioning their firms for the inevitable market downturn.
But first, the good news: FA Insight’s data tells us that between 2011 and 2013, the average number of advisory firms’ clients grew by 20.3%. Client AUM increased by 50.2%, and firm revenues shot up 41.3%.
In the five years from 2009 to 2013, average firm profitability has increased from 11.3% to 22.1%, pushing the average income per owner up from $227,959 to $344,279.
These are very healthy numbers, indeed, but before we get too giddy about this trend, it might be instructive to consider what’s behind them. In a nice little piece by InvestmentNews announcing the annual “Financial Performance Study of Advisory Firms,” released in September in partnership with Moss Adams, Matt Sirinides addressed “the real reason behind advisory firms’ big gains in AUM.” That study found a 19.2% increase in advisory AUM in 2013, which followed a 15.5% increase in 2012, representing a cumulative 37.7% two-year growth in AUM. This seems to be in the ballpark of FA Insight’s three-year 50.2% growth.
According to Sirinides, the Moss Adams/InvestmentNews study found that while the S&P 500 Index grew by 13% in 2012 and 30% in 2013, “the market still accounted for the identical proportion of AUM increase” in both years: 39% of new assets. New assets from new clients (45%) and from existing clients (16%) made up the difference in 2013. (The study also broke down the sources for those assets from “new clients”: client referrals, 30%; professional referrals, 23%; business development, 47%.)
As for information that can help owner-advisors manage their firms better, like most surveys, FA Insight’s breaks participants down by firm size (annual revenues), which they call “developmental stages.” Unfortunately, their four stages are called Operators ($100,000 to $500,000), Cultivators ($500,000 to $1.5 million), Accelerators ($1.5 million to $ 4 million) and Innovators (more than $4 million). I write about this study every year, and every year, I have to copy this list and tape it to my computer monitor so I can remember who is what. (Note to Dan and Eliza: To be user friendly, category names should obviously relate to the categories they describe. For instance: small, bigger, biggest and huge, to pick four out of the blue.)