A Little Magic for the RIA Industry
Advisors Enjoy a Successful 2006, but Need a Tighter Rein on Expenses

It didn't take a wizard to predict that sales for J.K. Rowling's "Harry Potter and the Deathly Hallows" would be a recordbreaker for the big-selling series. So it’s not rocket science either to know that last year would be a banner year for the RIA industry.

AUM Tops Itself, Again
For the fourth year in a row, the advisory industry has benefited from asset under management (AUM) growth with assets jumping 15% to $142 million on median in 2006. This means that at this asset level, advisory firms on average manage approximately twice as much money today as compared to 1999 (when the stock market was at all-time highs, as shown in the chart below). Since advisors’ most important goal is to increase AUM (according to 55% of advisors), the industry as a whole is having no problem attaining this goal. While one-third (33%) of advisors expect their cumulative growth rate over the next five years to be between 11% and 20%, nearly the same percentage of financial professionals have much loftier goals and expect their growth rate will be 30% or more. While this may sound unattainable, these goals are realistic considering the 15% AUM growth in 2006 and 18% growth in 2005.

And there is even more encouraging news: Positive stock market performance is not the only impetus to propel this growth. Asset growth continues to outpace the stock market, with the S&P 500 up 12% in 2006 and AUM growth posting a 15% increase for the same period. Much of the AUM growth is likely due to the significant expansion of advisors’ client bases over the last three years with advisors seeing a 7% increase in the number of clients in 2006 alone–much of this growth coming from the large and prosperous baby boomer generation.

Chart 1: Median Advisor AUM vs. S &P 500 (1999-2006)

Boomers Fueling Record Revenues
The money stream from retiring baby boomers has led to significant growth within financial advisory practices—growth of revenues, growth of assets under management, and growth of client base. By the end of 2006, advisors had built their practices to the highest levels in the past eight years, with both assets under management and revenue reaching historic levels.

Asset growth in 2006 fueled a revenue growth increase to $1.558 million on median—an 18% jump over 2005 levels on median. Assets and revenues have increased for four years running hitting record levels in 2006. Median revenue nearly doubled from $880 in 2000 to $1,558 by 2006. During the same period, AUM showed a similar growth rate, jumping to a median of $142 million in 2006 from $87 million in 1999. In 2006, revenue increased 18%, while assets moved 15% higher.

Chart 2: Revenue vs. AUM Change (2000-2006)

Conjuring a Better Bottom Line
Advisors have enjoyed tremendous growth in the last few years and they continue to be optimistic about their industry—for good reason. The last four years have been incredible: RIA firms have seen assets under management (AUM) grow, revenues increase and profit margins rise. Overall, 2006 was a great year for independent advisors. However, there is one caution when reviewing these numbers—the growth rate of assets and revenues slid slightly from 2005 levels, largely due to the 20% increase in expenses in 2006. Advisors need to rein in their expenses and keep an eye on the bottom line to keep their profitability on track.

Your Time is the Ticket
One area advisors may not associate with profitability is “time spent with clients.”
Our research shows that time spent with clients directly correlates to more successful firms. In fact, we looked at the “top firms” in the industry (as defined by number of services offered, profitability, assets and growth rates) and found that these “best practices” are providing what their clients want most—their time. More than half of the top firms (57%) spend the majority of their time (more than 60%) with clients. In contrast, only 12% of “average” advisors spend more than 60% of their time in front of clients and 15% spend less than 30%. Don’t have enough time in the day to devote to client meetings? Harness your staff to help out. Many advisors are taking this to heart now. Our research shows that while advisors were less afraid of relinquishing control of client relationships in 2006 than in past years, about a third (35%) of advisors still don’t delegate any meetings or client relationships to staff—and that may be costing them. Advisors who delegate client relationships enjoy revenues that are about 15% higher than average advisors. The ratio of clients per employee is also more favorable at the top firms—32 per employee compared to 42 per employee at all firms.

The takeaway here is: If you don’t have the time to spend a good amount of time with your clients, make sure your staff is nurturing those relationships—especially your lower asset accounts. Clients who get more attention are more likely to stay loyal to your firm and bring in referrals and additional assets. If Harry and his friends have shown us anything, it’s that loyalty can be a real lifesaver. It’s not magic, just good business. A little extra client attention could help you run your firm like a true muggle