For many advisors, the good times have returned. Following some fallow times brought on by the three-year bear market, the latest results from the Rydex AdvisorBenchmarking Research Study shows that advisors by the end of 2003 had built their practices back to 1999 levels, with both assets under management and revenues reaching or exceeding five-year highs. Advisors are spending more time building their books of business from existing clientele, a tactic that paid off in increased management fees and revenues. Despite regaining that lost ground, however, not everything is rosy–while revenues and profits have increased, profit margins failed to keep pace with that growth as registered investment advisors increased staff compensation and spent more time and money dealing with compliance issues.
Among the other notable trends revealed by the survey: RIAs are devoting more time to managing existing clients' portfolios and spending less money on marketing; and an increasing number of RIAs have shifted from strategic to tactical asset allocation. In response to the mutual fund stale pricing scandal, almost half the advisors surveyed advised clients to pull money from tainted mutual funds, though most said they will continue to use mutual funds in the future. The RIAs surveyed are paying more attention to transition and succession planning, suggesting there will be a continued focus on mergers and acquisitions.
Following are some specific findings of the fifth annual AdvisorBenchmarking survey, which was conducted online and via telephone surveys with 1,023 RIAs between March 2003 and June 2004.
Assets and Revenues Rebound
Following a three-year decline in which the median assets under management fell from $87 million in 1999 to $71 million in 2002, RIAs saw assets make up the three-year drought in one fell swoop during 2003, with median assets under management returning to $87 million. With assets back to 1999 levels, the gain in AUM actually outpaced the Standard & Poor's 500 Index, which lost ground during the same period (see top chart on page 97). Firms are also charging higher percentage fees to smaller accounts. Accounts with less than $250,000 are being charged a median asset management fee of 1.45%, as compared to the largest accounts, $3 million and more, which are being charged just 0.75% for the same service. This is no doubt due to discounts for larger accounts as well as RIAs' move to elevate minimum account sizes.
Revenues showed the same resiliency. Following three straight years in which they declined from $902,000 in 1999 to $795,000 in 2002, revenues regained ground last year, coming in at a median of $917,000 (see second chart on right). This represents a 15.35% increase in revenue, though it sharply trailed the 22.54% growth in AUM in 2003.
One explanation for the disparity between AUM and revenues is that asset management fees made up a smaller portion of RIAs' total revenue picture. Although more than four percentage points higher than in 2002, the 78.65% of revenues culled from asset management fees was smaller than the three previous years. The increase in assets also did not match the market's upswing in 2003. Financial planning fees comprised 20.15% of revenues, almost double the percentage in 1999, while commissions made up just over 1% of revenues–the smallest percentage since Rydex started conducting this survey five years ago.
Less Bang for the Buck
In the midst of these rising asset levels and revenues, profit margins not only failed to keep pace with such growth, but actually declined. The median 2003 profit margin for advisors in the survey was 25.85%, 55 basis points smaller than in 2002 (see bottom chart at right). This marked the fifth consecutive decrease in the bottom line since 1999, when profit margins were a much healthier 31.6%.
An interesting observation is that the size of the advisor's practice played an important role in profit margins, with the smallest and largest practices performing best. Practices with $500 million or more in assets had a median profit margin of 31.2%, while the profit margin of practices with less than $50 million in assets under management was 28.28%. Faring worst were those in the middle: practices with between $100 million and $200 million in assets reported profit margins of only 21.25%.
One possible explanation for the disparity is each practice's economy of scale. The smallest practices served 122 clients on average with just one principal and two employees. The mid-sized RIAs had two principals and eight employees compared with a median of three principals and 11 employees in the largest practices. While the median numbers of personnel of the larger two groups were similar, the number of clients they served differed dramatically. Mid-sized practices served a median of 198 clients, while the largest firms had almost double the client load. These results indicate that mid-sized practices are either gearing up for an increase in business or may be overstaffed (see top chart on page 98).
More Compliance, Less Marketing
As for advisors' expenses, they have risen every year since 2000, when median expenses were $575,000. In 2003, expenses increased 10.76%, to $710,000. Not surprisingly, compliance and other legal expenses jumped during 2003, increasing a brow-raising 152.92% from 2.4% of every expense dollar to 6.07%. Two other categories–travel and entertainment, and research and publications–also increased substantially, perhaps due to the end of the bear market and a stronger focus on staying abreast of changes in the industry.
One expense that fell dramatically was advertising and marketing, with 2003′s totals accounting for less than one-third of 2002′s percentage of 9.87%. Also, after the number of clients in 2002 rose to 275 from only 226 the year before, the median number of clients per firm leveled off to 272 last year. This renewed focus on growing from within may have contributed to the drop in advertising and marketing dollars.
Another notable increase in expenses was the 4% average rise of total firm expenses for compensation of staff members. With staff levels remaining constant from the prior year, this increase may reflect RIAs' desire to reward staff following some lean years (see middle chart on page 98).
Money wasn't the only thing that was stretched over the past year. Time spent serving clients and managing their portfolios also increased in 2003. According to the study, RIAs spent 35.5% of their time on client service, up from 30.84% in 2002, while the percentage of time spent on portfolio management increased from 15.87% to 19.2%. Mirroring the drop in expenses, RIAs also spent less time marketing: 16.5% compared to 20.76% in 2002 (see bottom chart on left).
Interestingly, the largest firms dedicated the most time to client service–40.09% for firms with $500 million or more in assets under management compared to only 24.5% for firms with between $50 million and $100 million in assets. Conversely, smaller practices spent more time managing their clients' portfolios. The largest RIAs committed just 10% of their time to portfolio management, compared to 23% for firms with between $50 million and $100 million in assets under management.
