© 2020 Arizent. All rights reserved.

After setting records, what can advisory firms do for an encore?

Register now

Last year won't be an easy act to follow for financial advisors.

Firms grew their client base by 7.8% at the median in 2017, a record high for the industry. Median assets under management per client also rose an impressive 6.8% to nearly $1 million, according to the 2018 FA Insight Study of Advisory Firms, TD Ameritrade's annual industry benchmarking study.

Firm AUM soared 20%, compared to 12.5% in 2016 and revenue increased 16% last year, twice 2016's rate.

RIA owners were also confident enough to make significant reinvestments in their businesses, spending more last year than in previous years on office space, technology, marketing and business development. Those increases, coupled with higher labor costs, did, however, result in narrower profit margins, which fell to 20% last year from 24% in 2016.

To maintain momentum, advisory firms should focus on strategic planning, says Vanessa Oligino, director of business performance solutions at TD Ameritrade Institutional.

"Owners should anticipate their needs and adjust accordingly," Oligino says. "If you're thinking of bringing on talent, hire six months in advance of the actual need. That way, new hires have time to be trained and will be ready when you need them. Hiring at the 11th hour can result in a lot of frustration and is not the best scenario."

Since advisory firms are showing little inclination to move away from charging clients a percentage of assets under management, firms must emphasize the value they provide for the price, Oligino says.

Despite a slight dip in the amount of revenue generated on every dollar in AUM (71 bps last year compared to 78 bps in 2016), two-thirds of RIAs have not made pricing changes in the past two years, according to the FA Insight study. What's more, 84% of firms surveyed have no plans to change pricing models in the next two years, despite creeping fee pressure.

"A target market should be more specific than just one attribute," says Vanessa Oligino of TD Ameritrade Institutional.

As a result, conveying value is critical, Oligino says, especially to prospects and new clients.

"Retention rates remain strong, and advisors have developed a relationship with current clients, who understand the firm's value," she explains. "But a value conversation is much more important with new clients. Firms need to prove how they add value to the clients' lives. They need to get better at this, absolutely."

Strategic thinking about a firm's client base is also crucial to future success. The narrower a firm's niche target market, the better, Oligino says.

"Very narrow targeting can drive growth at much higher rates than average," she says. "A target market should be more specific than just one attribute. Targeting doctors isn't narrow enough. It should be a specific type of doctor, such as a specialist in a hospital system in your region. Women as a category is too broad, but divorced high-net-worth women is more specific."

The benefits, according to the FA Insight study, are considerable.

Firms serving target markets reported 35% higher annual client growth than other firms, along with revenue growth that was 25% higher and 17% higher profit margins.

Advisors should also consider diversifying their client demographics, the study recommends.

Nearly two-thirds of RIA clients are 55 years of age or older, according to the study. In addition to the sheer numbers resulting from the baby boom, these clients are typically more profitable, the study found.

However, advisory firms serving younger clients are growing at double the rate of other firms, the study found.

"A baby boomer client base is not sustainable," Oligino says. "The more diverse your client base is, the better growth prospects you'll have. A younger clientele may be less profitable now, but a healthy demographic base is key to a healthier long-term future."

For reprint and licensing requests for this article, click here.