Benchmarking For Growth, What’s Right For You

The start of a new year can be seen as a time of reckoning. For independent advisors and registered investment advisors this could mean it’s time to benchmark their practices and set new profit-margin targets. But before resolving on a good benchmark to track performance and establish new goals, advisors should take into consideration that profit margins in the independent space vary greatly by market. In fact, independent advisory practices’ profit margins (before owners’ draw) range from under 20 percent to over 80 percent, according to a recent study by the Financial Planning Association (FPA). With such a wide profit-margin range, how can firms identify the best benchmark for their business?

The start of a new year can be seen as a time of reckoning. For independent advisors and registered investment advisors this could mean it’s time to benchmark their practices and set new profit-margin targets. But before resolving on a good benchmark to track performance and establish new goals, advisors should take into consideration that profit margins in the independent space vary greatly by market. In fact, independent advisory practices’ profit margins (before owners’ draw) range from under 20 percent to over 80 percent, according to a recent study by the Financial Planning Association (FPA). With such a wide profit-margin range, how can firms identify the best benchmark for their business?

Comparing your practice to national standards can be problematic and misleading says the FPA study. The findings of the study were the result of a new benchmarking tool for independent advisors called the FPA Practice Management Scorecard, provided by industry compensation and consultant firm McLagan Partners. On one hand, the FPA says relying solely on national benchmarks may cause you to set the bar too low and underestimate your practice’s true potential. But setting your benchmark based solely on regional data can be tricky too. What’s good for one firm in one location might not be good for another. You might end up under-compensating employees, which can cause higher turnover and increased workplace dissatisfaction.

“Some of what we came up with is going to confirm what some people already can speculate about, which clearly is that New York is going to have a different cost structure than, say, Tulsa,” says Todd Crowley, head of broker productivity and compensation at McLagan Partners. “So that is nothing new, but the scorecard can put a number behind that.”

In fact, the location of an advisor’s practice is a big factor when it comes to revenue ranges, payout and opportunity for asset growth according to the results of the FPA benchmarking survey of practice performance. For example, in the Northeast revenue ranges from about $800,000 in New York City to under $300,000 in smaller and more rural markets, the study says. New York City also boasts a high (68 percent) effective payout (which the FPA survey defines as a practice’s profit margin before the owners’ draw) compared to 45 percent in the Dallas-Fort Worth area. The authors of the survey explain that it’s because markets with high-net-effective payout—such as the New York tri-state area, Virginia and North Carolina—have a combination of higher productivity levels, low overhead rates and low professional costs. But places such as Washington D.C., and San Francisco, which have higher costs and lower-net-effective payout rates, also offer greater opportunities for growth. Take Washington D.C.: The survey found that financial advisors in this market brought in new assets at an average rate of $9 million during 2006, putting it in second place for this measure. New York City, Long Island and Fairfield County come in first place in terms of the rate of asset growth per advisor at $9.3 million in 2006.

There are some advisors who say that using regional benchmarks doesn’t make sense. “If you’re in Westport or Manhattan or San Francisco or Denver, you should be running the same margins,” says Marty Resnick, managing director of RIA Resnick Investment Advisors LLC in Westport, CT (located in the tri-state area). He’s been benchmarking his practice for 17 years. “You shouldn’t make less because you are somewhere else,” he says. Many firms do business nationally—or in a number of different states—as well as overseas, so an investor in Denver is basically looking at the entire country when he is searching for an advisor.

Resnick says the best way to raise profit margins is through improving the efficiency of the practice’s systems accounting and employees. “A business is a constant feedback loop,” Resnick says. “If you raise production and you are serving the clients properly, you are going to raise the cost of serving the client, and hopefully keep a constant margin. What is good for the margin is good for the client: it provides greater efficiency, it enables you to monitor the accounts more closely, you have better systems, better reporting.”

While some advisors might profit from utilizing tools like the Practice Management Scorecard, others don’t feel the need to benchmark at all. “They probably think if they price things fairly, if they’re making a living, if their clients are happy and yet they’re able to walk away with a nice profit then great; they don’t need to know what someone down the street is doing,” says Crowley. However, he says firms that are able to benchmark to other local practices can see what firms are doing to handle the same types of cost structures, rents, and salary concerns that they have, and whether they are behind or ahead on these different metrics.

Top Five Markets By New Assets Per FA*

Market New Assets per FA ($ mm)
NYC/Long Island/Fairfield County 9.3
Washington D.C./Bethesda/Baltimore 9.1
Northern New Jersey 8.0
Philadelphia/Atlantic City/Wilmington 8.0
San Francisco/Oakland/San Jose 7.5
Source: FPA Practice Management Scorecard

Top Five Markets By 2006 Profit Margin Before Owner’s Draw

Market Profit margin before owner's draw
NYC/Long Island/Fairfield County 68 percent
Northern New Jersey 65 percent
Virginia/North Carolina 60 percent
Philadelphia/Atlantic City 58 percent
Boston 56 percent
Source: FPA Practice Management Scorecard
* Survey of practice performance ended on December 31, 2006.
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