The financial advice industry is growing up, having evolved over the past decade from a cottage industry into a dominant force in the wealth management business.
Indeed, over the last 10-plus years, there has been an explosion in the revenue that financial advisory firms generate and the income that advisers earn.
Financial advisory practices, on average, have seen revenue increase to almost six times what they were in 2002, according to the
InvestmentNews/Moss Adams Adviser Compensation and Staffing Study, sponsored by Pershing LLC.
And firms are now reaching a “critical mass” that will facilitate more growth, said Mark Tibergien, chief executive of Pershing Advisor Solutions LLC.
The financial advice industry “has gone through the cycle of early childhood and now is into adolescence,” Mr. Tibergien said.
But growth has consequences for financial advisers and their burgeoning practices, he said. “It's like advisers are waking up to find they're getting zits and their clothes don't fit.”
Mark Tibergien on why some advisory firms go broke during their growth phases
'Bright futures'
“The good news is that there is a bright future for many advisers,” Mr. Tibergien said. “There are fewer advisers today than 10 years ago, but more clients. What an amazing business to be in.”
In the very first Moss Adams study, published in 2002, revenue for the average participating firm was $600,000. Today, the average revenue for firms in the study is $3.5 million.
That's an annualized growth rate of 19.3% for the last 10 years, which means the average advisory firm doubles in size in just under four years, said Brandon Odell, director of business consulting with The Ensemble Practice LLC and one of the authors of the study.
Ten years ago, the financial advice industry was akin to the Wild West, Mr. Odell said. “It was like everyone was rushing to Oklahoma to stake a claim and get a piece of land,” he said. “Advisers dotted the landscape, and people wanted to have their own little fiefdom and be geographically centered.”
Mr. Odell added: “Now it's the emergence of real businesses, with multiple advisers owning shops.”
What's more, many advisory practices have multiple branches. “Many have a broader geographic scope and cast a bigger net,” Mr. Odell said.
The growth in the financial advice industry over the last decade has outstripped the broad stock market, he said.
The S&P 500 grew 57% from 2002 to 2012, or 4.6% annually.
“The growth of the financial advisory industry has been greater than the broad equity market over the last 10 years,” Mr. Odell said. “Financial advisory firms have been a fantastic investment.”
And the financial advice industry sidestepped the worst effects of the financial crisis of 2008-09, during which the broad market dropped more than 40%, Mr. Odell noted.
Resilient industry
“The industry was extremely resilient to show this growth over a period including the recession starting in 2008,” he said.
This year's
InvestmentNews/ Moss Adams
study collected information from 309 firms, including full income statements, asset and client demographic data, and compensation information for 24 positions employed by independent advisory firms.
Of the firms in the survey, about one-third were registered as broker-dealers or “hybrids,” meaning registered as a registered investment adviser and with a broker-dealer, Mr. Odell noted. The remainder operated strictly as registered investment advisers.
The
InvestmentNews/Moss Adams study highlights the evolutionary stages of an advisory firm, breaking the industry into three distinct types of practices.
The first is the “solo,” a firm with a single, client-facing professional. The next is the “ensemble,” a firm with more than one adviser and with less than $5 million in annual revenue. The third is the “superensemble,” a multiprofessional firm with $5 million or more in annual revenue.
The average financial advisory firm in the study has a staff of seven, and the most common job description is “employee adviser.” More than 80% of the participants were ensemble firms. In addition, there were 61 firms with more than $5 million in revenue and/or $1 billion in assets under management.
The industry has changed significantly over the last decade, according to the study.
“The top firms in the country have embraced the term "organization' in place of "practice,' they actively train and develop their talent, and they have designed structures for better client service and productivity,” according to the study.
Reaching that superensemble stage means a financial advisory practice has achieved the critical mass to facilitate even more growth, Mr. Tibergien noted. “That's the level at which an advisory firm can afford to lose a big client or a partner. If something bad happens, the firm continues.”
Not only has the financial industry seen revenue explode, but the income financial advisers earn likewise has increased sharply over the past 10-plus years, according to the study.
Highest profitability
“This year, financial advisory firms were larger in size and enjoyed the highest level of profitability this study has ever recorded,” the study stated. The average income per owner of an advisory firm was close to $425,000, making advisers among the highest-paid professionals in the country.
Solo owners had income of $309,019, compared with $356,206 for ensemble owners, according to the study, with the average owner of a superensemble seeing income of $768,623.
Ten years ago, the average income for advisers was between $150,000 and $200,000 per year, Mr. Odell said.
“These business owners are right up there with the leading professions in the country, with older respected professions of doctors and lawyers,” he said. “Now you put these owners [of advisory firms] in the same book.”
