The 2008 to 2009 market downturn was the most tumultuous period in U.S. financial history since the Great Depression. It was also a wake-up call for financial advisors, who faced declining revenue and eroding profits as they worked longer and harder to meet the demands of those challenging days. And the challenges may not be behind them. Lesson learned: Nothing is static. One must always be prepared for change.

Many advisors have responded to these times by looking closely at how their businesses are run, where expenses are going, how teams can be more effective, what operational efficiencies can be gained and what changes to business practices must be made to ensure sustainability and long-term success. They are coming to recognize, more than ever, that their own business success is driven by the same principles espoused to clients: establishing clear goals, analyzing options, making ongoing performance assessments and periodic adjustments-all to be executed with discipline to promote a positive long-term outcome.

The Quantuvis Best Practices: Business Performance Study 2009, sponsored by Genworth Financial, provides the relevant empirical benchmarks advisors are looking for. The results will be published in Financial Planning as a four-part series. The study provides a broad view of business performance that will help advisors effectively navigate the days ahead. As the study series continues, we expect a rich pool of information across business disciplines.

A Broader View

Our inaugural study had 1,006 participants, representing early, emerging and mature firms across all business, affiliation and practice models. This is the first study to separate silo-style practices from ensembles and report on each type, based on our experience that the strategy, cost structures and goals of these firms vary, and therefore warrant individual review. Business models represented included investment advisory, investment management, insurance, financial planning, insurance, and wealth management. An equally diverse participant mix is reflected in the affiliation models, with participants across: Independent broker-dealer (IBD)-only, IBD with insurance, IBD with planning RIA, primarily RIA, RIA, regional brokerage firm, national brokerage firm and bank/trust company.

A New Class of Top Performers: 1QA

One of the goals of this study was to provide a performance comparison relevant to advisors across every practice, service and affiliation model. With this in mind, we created a new category of business performance: 1QA. This stands for first-quartile advisors or the top quartile of advisors based on total owner income (comprising owner compensation, bonuses and benefits, plus operating profits). Counting both compensation and profits in this way accounts for the disparities in the methods advisors use to divide their income between labor compensation and profit distributions.

By definition, of course, one would expect 1QAs to outperform non-1QAs (the remaining 75% of the population), but what is striking is the size of the performance gap. As noted in Median Performance by Practice Model, at left, performance far exceeds that of their peers. For instance, 1QA revenue, income and profits significantly outpace those of non-1QAs, with 1QAs showing 5.1 times greater revenue, 5.1 times greater operating profits and 4.8 times more owner(s) income. Even accounting for multiple owners in silos and ensembles, with a median of two owners and three advisors, 1QAs' median income per owner of $417,000 is still nearly four times greater than non-1QAs' income per owner of $113,000.

A breakdown of performance ratios between 1QA firms and non-1QA firms, as shown in the charts on page 60-Median Expenses, Operating Profit and Fee-Based Assets Per Client-further highlights the magnitude of this performance gap, which is nearly a chasm.

This led us to explore the reasons for such enhanced performance. Among our findings was that 1QAs spent significantly more per client than non-1QAs: $3,181 versus $1,000. This suggests that those firms that invest in staff and infrastructure are better equipped to grow and drive increased revenue, income and profits.

A closer look at the role of the client base of 1QA firms provides further insight.

As noted in Service Model, shown at left. as firms move into the top quartile, they tend to shift their practices into wealth management. The broader range of services they provide result in the higher expense per client-the business development, service offering and staffing model required to support a wealth management practice is deeper and, of course, pricier. Part two in the study series, which will be released in spring 2010, will report on correlations between business development practices and enhanced business performance.