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August 28, 2018 at 09:00 AM
It’s a given that registered investment advisors must have “scale” to grow. But how much scale (aka size) is needed to deliver the highest level of value to clients and produce strong returns for RIA owners and team members?
The latest research from Dynasty Financial Partners and Advisor Growth Strategies highlights data that differ from figures often cited by industry consultants, which may surprise some RIAs.
“Based on the results of our analysis, it became clear that optimum scale for RIAs is greater than the $1 billion to $2 billion assets … size that is industry conventional wisdom,” stated Dynasty Chairman Todd Thomson and Advisor Growth Strategies Principal John Furey in the report.
The research compared the results of firms affiliated with Dynasty to several other industry benchmarks, and it looked at the benefits of working on a shared platform. The analysis finds that Dynasty member firms gain substantial scale via the firm’s expertise and negotiating power with technology and custodial providers. Plus, those in its RIA cohort are more profitable than firms operating on a stand-alone basis and grow at a faster pace.
Metrics Matter The research argues that due to the disparity in business structures across the RIA industry, earnings before owner compensation (or EBOC) is not the most “meaningful measure for larger, more professional RIA firms.” Plus, earnings before interest and taxes, or EBIT, “does not tend to work for smaller, owner-operated firms.”
Thus, the research developed and examined a new margin performance benchmark: EBAC, for earnings before owner and advisor compensation.
“EBAC allows for an apples-to-apples comparison for the true margin of RIAs before paying advisors and owners, and thus offers a meaningful comparison of margin across all sizes and types of RIA firms, regardless of how they structure their ownership,” the authors explained. In their analysis, firms sharing a platform report EBAC of 62% of average revenue on average vs. industry benchmarks of 56–58% EBAC.
“The Shared Platform Cohort pays more for their state-of-the-art platform and consulting services, but these higher costs are outweighed by far lower personnel costs and other expenses,” according to Dynasty/AGS.
