Back in the early 1990s and before joining Moss Adams, I started doing benchmark studies of financial planning practices sponsored by the International Association for Financial Planning (one of the predecessors to today's FPA). These were the relatively early days of independent RIA firms and independent contractor reps affiliated with broker-dealers. Compared to today, most firms were tiny. Very few had over $100 million in assets under management (AUM), or multiple partners and staff. Much has changed.
In the recently released 2013 InvestmentNews/Moss Adams Advisor Compensation and Staffing Study sponsored by Pershing, we found the median participating firm is generating over $2 million in revenue with more than $200 million in AUM—the median! By comparison, the first of these studies that we did under the auspices of Moss Adams in 2002 showed the average participating firm generated $350,000 with $25 million in AUM.
The most notable number in our 2013 study comes from the 57 participating firms that have revenue over $5 million, the firms we now refer to as "super ensembles." These particular firms average revenue of $11.8 million and AUM of $1.5 billion.
By Small Business Administration (SBA) standards, these are still regarded as small businesses. But as advisory firms, they clearly represent the direction and momentum that the independent advisor movement is enjoying. With size come benefits:
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More opportunities to do business
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More points of contact in the community
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Operating leverage
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A process for recruitment, retention and development of people
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Greater profitability
For example, super ensembles have revenue per staff of $465,000 compared to $213,000 for solo practices, yet have only 33 clients per staff compared to 45 for solos. Super ensembles are generating $1.3 million of revenue per professional staff compared to $587,000 for solos. The average income per owner within a super ensemble is $769,000, compared to $348,000 for solo practitioners.
These are a lot of numbers to digest, but from a financial point of view it appears that bigger is indeed better. The question is whether being big contributed to the better ratios, or whether a focus on growing their firms in a disciplined way resulted in better numbers as well as bigger numbers. From our 25 years of observing the operating performance of financial advisory firms, we conclude that the answer involves a little of both.
Top performing advisory firms tend to do several things right.
First, they develop a clear proposition and a clear idea of who their optimal client is and build their business around these principles. What's interesting in looking at the top firms is that they each have different strategies, different markets, different geographic locations and somewhat different offerings. The top firms are more effective at communicating which market they choose to serve, however, and articulating how their approach would benefit their clients. Rarely does their messaging focus on education or job history or years in the business, but rather on why what they do is in line with the expectations and desires of their optimal client.
Second, they create organizational structures that allow them to leverage work flow, technology and staff. When advisory firms delegate much of the work to non-partners, they increase the number of relationships the firm can serve and increase the overall productivity of its rainmakers and wisest advisors.
