2023 InvestmentNews Advisor Benchmark Study: Three top challenges for advisor firms

This year’s InvestmentNews Advisor Benchmark Study¹ gave us a lot to be optimistic about. However, three systemic challenges emerged that reinforce conversations we’re having in our practice management consulting and community:

1. As a profession, we’ve got growing pains.
2. Advisory teams are at (or beyond) capacity.
3. Who do you want to be when you grow up—an advisor who happens to be a business owner or a business owner who is a financial advisor?

Before jumping into the data, it’s important to provide some perspective on the survey and its respondents. The survey is based on self-reported pricing, profitability, and compensation data from 2022, provided by over 100 advisory firms. The majority (61%) of respondents are RIAs, 18% are hybrid, and 21% are affiliated with a broker-dealer. Participating firms tend to be large; their average assets under management (AUM) as of December 31, 2022 was $952 million. The median AUM was $419 million. On average, firms generated $6.7 million in revenue (and $3.2 million median in revenue). They have a median of 366 clients.  

Challenge 1: As a profession, advisors have growing pains.

Issues with organic growth isn’t news. However, last year’s market underperformance amplified how bad organic growth really is. The punchline, on average advisor firm’s net new AUM grew by 3.6% excluding marketing performance (it was -7.4% including market performance).

I hope you caught “net new” AUM growth in the paragraph above, which accounts for inflows and outflows. This is an important point, because historically, firms experience 4% to 6% outflows annually from lost clients and client distributions.

When we dig into gross organic growth (7.4%) the largest driver was “new assets from existing clients.” The second largest driver of growth was client referrals, which accounted for 1.8% of new AUM growth.

The good news: there’s likely opportunity to grow from your existing clients. This is what I’d consider low-hanging fruit. How would you change your client communications, meetings, and discovery if you knew you could grow your AUM by over 3%? If you’re not intentionally seeking to uncover opportunity to grow with your clients, this may be a strategy to incorporate into your development efforts.

The bad news: You may have a systemic growth problem, which, if not addressed, may get worse as you (the owner or “rainmaker”) age out of the practice. Don’t fret, there are tried and true methods to grow organically.

Three steps for organic growth:

1. Have a plan to help you avoid jumping to tactics too quickly.
2. Set and track goals for your team and individuals. A small percentage of survey respondents said they have individual goals for those responsible for the business development.
3. Leverage the “Get More Leads” or “Get Referrals” toolkits in the Growth Lab to help you build a marketing and referral plan based on best practices.

Challenge 2: Advisory teams are at (or over) capacity.

I’ll get straight to the point—you likely need to do more with less. This is probably not what you want to hear. Sorry! The top-performing firms, based on profitability and productivity metrics, have figured this out. They consistently serve more clients, manage more revenue per professional and staff member, grow their revenue, and have significantly higher profitability while managing their direct (professional compensation) and overhead expenses (everything else).

As managing consultant and expert Peter Drucker is famously quoted, it’s time to “innovate or die.”

Top strategies to boost advisor firm efficiency

Based on the study, respondents see “defining or refining processes and workflows” and “new technology” as the top two strategies to gain efficiency and scale (these also ranked in the same no. 1 and no. 2 spot last year).

Advisor firms are investing in operations

Another interesting trend is the rise of the operations role. Based on the study, we see firms investing in operations through an increase in operational compensation and promotion, which is not the case for advisor roles.

We believe there are three key drivers of growth and scale to lean into:

1. Specialization: Both client and technical specialization.
2. Partnership: Focusing internally on your greatest skills and value, and seeking external partners to help with everything else.
3. Integration: Leveraging process, operations, and technology

Three steps to gain capacity

1. Invest in your operational-focused staff.
2. Lean into the three drivers of growth and scale. Specifically, build a strong infrastructure by defining processes and operationalizing them as workflows. We have a number of toolkits in the Growth Lab to help you scale with technology, operations, and your talent.
3. Be adaptable. Accept that what got you here is not likely to take you to the next level. You can then open your firm to new thinking and changing outcomes.

Challenge 3: Who is the advisor you'll decide to be?

Will you be an advisor who happens to be a business owner or a business owner who is a financial advisor?

There isn’t a right answer to this question. However, it’s important to understand what you want and how you currently function in the business.

Based on the InvestmentNews study, top-performing firms maintained a high operating profit margin (43.5%) versus all others (19.1%). In general, we advise firms to target a 25% to 35% operating income.

One glaringly obvious difference between top-performing firms and all other firms were how their direct expenses changed from 2021. Top performers’ direct expenses increased very little from 2021 to 2022 as a percentage of revenue and actual dollars spent (1%). All other firms’ direct expenses increased significantly in comparison from 2021 to 2022. Based on actual dollars, all other firms’ direct expenses increased by 18%.

How are you managing your expenses and making the most of your investments? These are common activities that owners engage in to ensure that their business is a well-oiled machine.

Why does it matter? If you are looking to build enterprise value, well-run advisor businesses demand higher multiples regardless of their size.

If you consider yourself a business owner that happens to be a financial advisor, ensure you're doing these three things:

1. Review key business metrics at least annually, such as profitability, productivity, and growth metrics. Don’t forget to include your next gen leaders and other leaders in the process.
2. Review and manage your expenses. While you may have a bookkeeper, watch your expenses closely.
3. Get a professional valuation to understand what your firm’s worth (especially if you’re considering a business transition) and what’s driving the valuation. FP Transitions is a SEI strategic partner who provides firm valuations, as well as other business transition consulting services.  

I’d love to share more data and insights from the study, but I’ll stop here and ask you to consider which of the three trending challenges resonates and what you’re going to do about it.

Important information

¹“2023 InvestmentNews Advisor Benchmark Study,” InvestmentNews, investmentnews.com