With the current economic challenges—low growth, sovereign debt woes and volatile markets—it’s easy to overlook the welfare of an important component of the financial services industry—the financial advisor. How is he or she faring in this unsettled environment, characterized by a weak, prolonged recovery that isn’t always conducive to investing? How is the book of business? Are revenues and profits up? What about AUM or number of clients?
According to the Rydex|SGI AdvisorBenchmaking survey conducted this spring, and no doubt much to the relief of advisors, businesses are holding their own, thank you very much. Despite the recent market turmoil, advisors—accustomed to putting their clients’ interests first—are demonstrating the value in continuing to keep the needs of their business top of mind. A successful practice is essential not only to keep the lights on but to achieve more worthy goals—for example, the opportunity to focus on dispensing investment advice and to present a healthy image to clients and other business relationships.
In 2010, RIAs reported their highest level of assets under management (AUM) in the history of the survey, with median advisor AUM reaching $208 million. As shown in the table below, after suffering a drop in AUM in 2008, the advisor industry benefited from significant AUM growth in subsequent years, with 28% growth in 2009 and almost 20% in 2010.
Median Advisor AUM (1999-2010)
With the S&P 500 up 15% in 2010, much of the increase in RIA assets was associated with positive market performance. However, RIAs’ efforts did help boost bottom lines, as AUM levels rose more than stock market performance (see chart below). Many advisors were successful in raising new assets, and their asset allocation and investment management skills may also have helped them retain current assets.
Median Asset Change vs. S&P 500 Annual Return
Increased assets helped boost revenue to a new record in 2010. The average RIA’s revenue increased to $1.737 million on median, a 17% increase over the 2009 level. The prior record was $1.668 million in 2007, just before the financial market crisis. Expenses, meanwhile, increased less than revenue—7% in 2010, to $1.257 million on median.
The favorable income statement helped drive net profit up in 2010, to a median of $375,000, compared with $315,000 in 2009, while profit margin rose from 19% to 21%. These figures are shown in the table below. Both profit level and profit margin, however, remain below the highs seen mid-decade.
Margin vs. Net Profit (1999-2010)
In 2010, the survey showed that the median number of clients increased 8% to 341 clients from 316 clients per firm the previous year. New client assets and market performance were a big contributor to the increase in both revenue and assets.
Many advisors wonder, amid widespread financial troubles both among their client base and in the broader community, what they can do to let clients know how business is going, while also being sensitive. Here are three suggestions:
- Create a regular review/commentary. It’s a great method of not only laying out your investment philosophy and market views, but how you run your business. In a low-key way, you can use it to explain your approach to asset allocation, including use of alternative investments, or how investments are selected. Also, describe your average client, how you generate new business and the new-client on-boarding process. Include as many metrics as you’re comfortable disclosing, such as AUM and how it is allocated, as well as how it’s grown. Advisors may also wish to provide metrics that describe the size or profitability of their business.
- Work your business into your outreach. When the economy is on the skids, or the stock market is falling, don’t hesitate to reassure your clients, and mention your business stability in the process. Many advisors increase outbound calls during market stress, checking allocations and comfort level with market disruptions. Offer experiences of how your other clients are dealing with market events and remind each one you speak with that the strength of your business reflects the confidence your clients as a group have in your ability to help them successfully navigate financial markets.
- Target dissatisfied potential clients. When markets are in turmoil, make particular efforts to seek new clients who may be upset with the lack of attention they’re receiving from their current advisor, or who have been underwhelmed by how their portfolio has held up under adverse market conditions. Have specific examples of your clients who have managed market turmoil by following you advice on asset allocation or diversification, and who have entrusted you with more of their assets as a result. Explain how your business has grown despite difficult markets.
Most advisors are so busy tending to client needs that they often overlook the importance of knowing and promoting the value of their book of business. So they may be surprised to learn that assets are up throughout the RIA industry, and AUM at its highest level in the history of the AdvisorBenchmaking survey. A quick review of their business metrics and some time spent in preparing and presenting highlights may enable them to position themselves strongly in the current roller-coaster market environment and be optimistic that their businesses are well-positioned to attract new clients and improve assets and profitability.
 Marc Zeitoun is managing director and head of distribution at Rydex|SGI.
He can be reached at mzeitoun@sg-investors.com.
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