The Wall Street cliché of a rising tide lifting all boats is usually applied to stock prices, but the past decade is proof that it can just as easily be applied to the financial planning industry.
While 2020 will likely produce some anomalies related to the pandemic and resulting economic disruptions, the stock market rally over the past decade has been nothing if not charitable to the independent advisory space. The latest pricing and profitability study, produced by InvestmentNews Research in conjunction with BNY Mellon’s Pershing and The Ensemble Practice, shows 10 straight years of median revenue growth by advisory firms.
That run, including a median revenue growth peak of 15.5% in 2013 and a trough of 5% in 2016, is presented against the backdrop of the S&P 500 Index’s 11.6% 10-year annualized gains and a 245% cumulative rally over the period. Put plainly, while myriad factors contributed to the trend of steady revenue growth in the advisory space, at least half of it can be attributed to market performance.
“A lot of the industry is getting credit for the success of a bull market. That has left a lot of firms not investing in marketing, and many of the marketing efforts they do have are pretty antiquated,” said Jud Mackrill, chief marketing officer at Carson Group.
In 2019, for example, when median revenue growth was up 7.1% over 2018, more than half of the 22.6% average growth in assets under management came from the financial markets.
Clearly, the strength of the financial markets has been a boon for an industry that largely charges fees pegged to assets under management.
But what the rising-tide scenario also underscores is the fact that a lot of advisory firms have become overly dependent on markets for their revenue growth, sometimes ignoring basic business practices related to things like marketing and technology.
“For a lot of the last decade, the talk has been around relying on markets for growth, and the elephant in the room is that it was going to end at some point,” said Devin McGinley, InvestmentNews Research analyst.
“The volatility we saw in early 2020 underscores the vulnerability of firms that don’t have formal business development efforts,” McGinley said.
The research, which included a survey of more than 300 independent and hybrid advisers, shows that the second biggest contributor to AUM growth after the stock market was the rainmaking efforts of company founders.
Leaning on the founders to bring in new business is the traditional way to build an advisory practice. But as firms grow, merge and consolidate, that kind of growth strategy will not sustain bigger firms, said Christina Townsend, head of relationship management, consulting and platform strategy for Pershing’s Advisor Solutions business.
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“The majority of new business is still coming from founders or key partners,” Townsend said. “Whether it’s a smaller or larger firm, the reality is this is still a relationship business and only 12% of new business is coming from marketing. The question is, in the next decade, how much can we rely on people and referrals to generate new business and as founders retire, what is the game plan to continue to see growth?”
Asked about their marketing strategies, survey respondents selected the following as their top five: host networking events, community involvement, website redesign for lead generation, social media activity,and volunteering on nonprofit boards.
Jim Dickson, chief executive and founder of Sanctuary Wealth, said part of the challenge for a lot of advisers when it comes to marketing is that it can feel too much like the sales culture that the independent advisory space is trying to distinguish itself from these days.
“People have criticized the industry as a sales business, and the advice side is now so much better, but now closers are harder to find,” he said. “When we find those people that have a process and can market, they demand a premium.”
The survey found that firms are allocating less than 4% of revenues to marketing and technology.
Asked to highlight firm business development initiatives over the past two years and going forward, 21% of respondents said they had implemented new growth strategies over the past two years, and 29% said they planned to implement a new strategy this year.
Twenty-two percent of firms selected allocating more adviser time to business development as a strategy for both past and future time periods.
Meanwhile, only 15% of firms implemented adviser sales training over the past two years and only 12% plan to do so going forward.
According to the report, even firms that expect marketing to jump-start growth are missing some basics of sales management techniques. The research shows inadequate lead tracking, and advisers have very little individual accountability.
The lack of a solid business development strategy has the potential to create wide disparities in future growth, Mackrill said. “The delta is big right now from where the average adviser is and can be.”
Dickson of Sanctuary sees “haves and have-nots” in terms of marketing efforts.
“You’ve got a group of younger advisers who are active in marketing and maybe doing it differently, and then there’s another set who are sort of happy with where they are and riding this market out,” he said. “The ones actively marketing are doing really well because there are some who are not marketing at all. We talk to advisers who say they never dreamed it would be this good. They haven’t had to market and are enjoying the ride because their practice is on cruise control.”
In addition to enjoying the lift from a historic bull market run, advisers have been uniquely immune to the pressure on fees spreading across much of the financial services industry.
And that is not expected to change anytime soon, Pershing’s Townsend said.
“We see advisory firms consistently looking to add more value, and price is only an issue in the absence of value,” she said.
The research found that only 24% of advisory firms changed their fees over the past two years; of those firms that made changes, 68% raised their fees.
“Fee compression is the biggest misconception in the industry right now,” Dickson said.
“Advisers are taking the fee compression out of the asset managers by using ETFs,” he added. “And a lot of advisers are doing more tax planning to keep that fee.”
The research found that fees are most consistent across all sizes of firms for clients with up to $1 million in assets. The average fee for that size portfolio is 96 basis points, with a range of between 94 and 102 basis points.
Advisory fees drop and become more varied as the size of client portfolios climbs.
For clients with $5 million, for example, the average fee is 69 basis points, ranging from an average of 44 basis points at solo practitioners to 90 basis points at the largest super ensembles, which are firms generating at least $10 million in annual revenue.
The spread is equally extreme for clients with at least $10 million in assets. The average fee is 43 basis points, and the range includes an average of 20 basis points charged by solo practitioners up to an average of 79 basis points at super ensembles.
“The comprehensive service models are really preventing any erosion in those AUM fees,” said InvestmentNews Research’s McGinley, who attributed fee variations to advisers aggressively going after market share.
“A lot of the competitive behavior occurs when firms go after clients outside their core service areas,” he added. “Smaller firms pursuing very large clients, that’s when you see a lot of the discounting.”
And then there is the 2020 factor, which could have lasting implications on pricing, profitability and the way advisory firms operate in the future.
“This year taught us the importance of diversifying how you market and grow,” said Mackrill of the Carson Group.
“Wine tastings and chicken dinners don’t work right now,” he said. “We have to be more sensitive to creating experiences for our clients, because advisers aren’t competing with other advisers, they’re competing with Netflix, and there has to be a level of entertainment.”
With 2020 being such an anomaly in terms of remote work and the forced economic shutdown, Townsend believes the spike in productivity the industry is currently experiencing could see a reversal if the blurred lines between work and home result in burnout.
“I would say firms generally were able to navigate the move to a remote environment remarkably well,” she said. “What we’re seeing is that advisers and people in offices are working more hours not only because they don’t have a commute, but clients know they aren’t calling the office, so there’s no such thing now as an office and a home, it’s a home office.”
Productivity, as measured by revenue generation per adviser, generally climbs with firm size and the advantages of economies of scale.
According to the research, the largest advisory firms have an average adviser productivity (total revenue divided by number of advisers) of more than $690,000, and staff productivity (total revenue divided by number of staff, including advisers and owners) of more than $433,000.
By comparison, firms with $1 million in revenue have average adviser productivity of about $300,000, and staff productivity of just over $180,000.
But as Townsend underscored, there is no way of knowing how that productivity trajectory will be impacted by the events of 2020.
“All signs point to more work getting done, however, we’re running into a point where there will be fatigue,” she said. “You’re tied to one room in your house, and you’re not getting out and seeing clients and colleagues. The longer this goes on, we could see a drag on productivity.”
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