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What factors contribute to the growth of financial advisors?

by Jul 24, 2019UpClose

What factors contribute to the growth of financial advisors?

by Jul 24, 2019UpClose

Research findings from the PriceMetrix study “The State of Retail Wealth Management 2018” identify key trends and success factors for “high-growth financial advisors.”

Independent financial advisors faced several distinct challenges in 2018:

  • A turbulent market environment, ending with one of the worst fourth quarters in modern history.
  • The unknowns of U.S. trade policies and their impact on the economy and companies’ earnings.
  • Uncertainty around the Federal Reserve’s path for interest rates in 2019, especially important in an aging equity bull market and lengthy economic expansion.
  • The impact of changing demographics for both the advisor community and its client base.
  • Increased competition from digital companies, including automated “robo-advisors,” and from “mega” advisory firms and national financial-services brands.

Within this environment, independent financial advisors needed to effectively communicate their firm’s value proposition for prospective clients and drive their firm’s growth.

Many did just that, very successfully. Others struggled in dealing with 2018’s changing environment.

The State of Retail Wealth Management 2018

Proactive Advisor Magazine thanks PriceMetrix, a leading research, data, and consulting firm focusing on the financial advisor segment, for their permission to highlight some of the key findings from their comprehensive study, “The State of Retail Wealth Management 2018.”

The April 2019 PriceMetrix study, which includes data through December 2018, is based on information from North American wealth-management firms with $6 trillion in assets under management (representing over 12 million retail investors).

The study presented five major findings:

  1. Advisor revenues reached record highs in 2018, despite a market-driven drop in assets.
  2. The number of new client relationships established per advisor increased.
  3. The proportion of fee-based revenues and assets for financial advisors experienced another annual increase, with further growth in discretionary accounts.
  4. The drop in fee pricing appears to have found some stabilization, though significant variations exist in aggregate between the highest and lowest fee levels.
  5. Further inroads were made in developing “next-generation clients,” and there are signs that development of younger financial advisors has turned a corner.
Advisor revenues reached record highs in 2018, while assets fell

According to PriceMetrix, median revenues per advisor grew by 6% to a record $694,000 in 2018. Yet median assets managed per advisor declined 7%, primarily due to market conditions, says PriceMetrix.


Source: PriceMetrix, “The State of Retail Wealth Management 2018,” April 2019

Advisors continue to grow new clients and deepen client relationships in 2018
The average advisor developed 8.1 new household relationships in 2018, breaking a recent pattern of similar year-over-year new household relationships.

Source: PriceMetrix, “The State of Retail Wealth Management 2018,” April 2019

In addition to adding more new client relationships, says PriceMetrix, advisors continued a recent trend of deepening existing relationships:

“In 2018, several key relationship depth indicators hit record levels: the proportion of multi-account households, median accounts per household and the percentage of households with retirement accounts. These important indicators, all linked to client retention, point to continued improvement in the depth and quality of advisor/client relationships.”

Source: PriceMetrix, “The State of Retail Wealth Management 2018,” April 2019

Advisor growth driven by recurring fee-based revenue

PriceMetrix says that another key driver of advisor revenue growth was “the continued proliferation of fee-based accounts.” Revenues from fee accounts grew by 17% in 2018 over 2017.

PriceMetrix reports,

“52% of client relationships now contain at least one fee-based account, up from 31% in 2015. Fee-based revenue now represents a record two-thirds of advisor revenue, and fee-based assets grew from representing 33% of all assets in 2015 to now representing 47% of all advisor assets.”
The study also notes that “fee assets are more productive than transactional assets. Average revenue yield (revenue over assets) for fee accounts was 0.91% in 2018 compared to 0.37% for transactional accounts.”

Source: PriceMetrix, “The State of Retail Wealth Management 2018,” April 2019

Advisors continue to slowly attract the next generation of wealth

PriceMetrix sees a quantifiable opportunity for advisors who are actively seeking to add younger individuals and families as clients of their firms. The study notes that assets for next-generation clients (those born after 1965) have grown by 6.1% since 2015, compared to 3.5% asset growth over the same period for older clients.


Source: PriceMetrix, “The State of Retail Wealth Management 2018,” April 2019

The study also found that “advisors themselves are showing evidence of a youth movement. After a multi-year trend in which average advisor age increased by 6 months per year, in 2018 the average age stabilized.”
Rate of fee compression slows down
Is price stabilization on the horizon? PriceMetrix sums it up this way:
“In recent years, there has been a precipitous decline in the price charged for wealth advice. Increased transparency brought about by regulatory changes and new competitive entrants continue to challenge the traditional advice model. While some advisors have responded by extending the breadth and depth of their services, others have chosen to lower their prices. “In 2018, fee pricing continued to decline; however, the rate of decline slowed. For households with $1 million to $1.5 million invested, fee account pricing dropped 2 bps (from 1.08% in 2017 to 1.06% in 2018), compared to a drop of 5 bps the previous year.”


Source: PriceMetrix, “The State of Retail Wealth Management 2018,” April 2019


Source: PriceMetrix, “The State of Retail Wealth Management 2018,” April 2019

The trend toward ‘larger producers’
While many of the findings in this study point to very positive trends, PriceMetrix has identified one trend that can have both favorable and unfavorable consequences:

“One of the results of more advisors finding the right growth formula is that the industry is seeing more ‘big producers.’ The percentage of FAs who gross more than $2 million in production has grown from 6.1% in 2015 to 8.4% in 2018, and the assets controlled by these top producers have increased from 21.1% to 26.4% in that same time period.

“However, with more big producers than ever before, firms are more exposed to one of the biggest threats to growth—the size of advisors themselves. When advisors achieve a certain size, many choose to stop growing—in essence, they achieve ‘enough.’ If not managed, this inertia can have a dramatic impact on the performance of wealth management firms overall.”


Source: PriceMetrix, “The State of Retail Wealth Management 2018,” April 2019

What factors distinguish ‘high-growth advisors’?
PriceMetrix says that there was a large gap in 2018 in the revenue growth of the highest-performing advisors and the poorest performing:
“The top quartile of advisors grew by an impressive 26%, while the bottom quartile experienced a year over year revenue decline of 7%. There is significant value to be unlocked by firms that can identify and replicate the behaviors of top performers, across their entire advisor base.”

Source: PriceMetrix, “The State of Retail Wealth Management 2018,” April 2019

The study found that one of the distinguishing factors of faster-growing advisors was the successful focus on next-generation clients:
“Advisors in the top quartile have 37% of their clients born after 1965. For bottom-quartile advisors, the figure is 12%. Interestingly, the two advisor groups have similar revenues on average, but the advisors with younger books are growing at a faster rate than those with older books, reinforcing the impact that Next Gen clients can have on growth.”

Source: PriceMetrix, “The State of Retail Wealth Management 2018,” April 2019

Implications for advisor growth

PriceMetrix believes that the trends identified in 2018 have direct implications for advisory firms and individual financial advisors seeking improved revenue growth moving forward. Their findings include the following:

  • “Wealth management leaders will need to deeply understand the product and service preferences of next generation clients, to adapt and ensure they can continue to attract these important clients in the years to come. Advisors with younger books are growing at a faster rate than those with older books, reinforcing the impact that next generation clients can have on growth.”
  • “The most common way for new advisors to enter the wealth management industry is by joining an established team: 68% of advisors under 40 years of age work as part of a team. Working as part of an established team allows new advisors to build experience and expertise. And the team benefits as well: teams with next generation advisors grow at a faster rate, add more clients, and lose fewer clients than their counterparts.”
  • “Clearly, advice in wealth management is not a commodity. Even today, when pricing is more transparent than ever, some clients are just as satisfied paying double what others pay. Premium propositions, with premium price tags, resonate just as well as cheaper ones. The challenge for advisors (and the firms they work for) is to ensure that the value they deliver aligns with the price they charge.”
  • “Advisors who are large, and who continue to grow, have a higher proportion of revenues from fees, service larger clients, and charge higher rates. Even at these very large book sizes, advisors can make decisions that will lead to continued growth. Perhaps the bigger challenge for firm executives is managing the desire for continued growth amongst their top producers.”
  • “The reward for firms that help their advisors make informed choices about pricing and demographics is worth a substantial investment. Firms can impact their revenue growth rate by 3 to 5% by encouraging advisors to pursue new next generation client relationships. Programs that help advisors price with confidence can add 5 to 7% in additional revenues.”


The study concludes, in part,

“Just as pricing and demographics are choices, so too is growth itself. For wealth management firms to grow, they need their advisors to know how to grow, and they also need their advisors to want to grow. That means finding the right advisors, investing in their capabilities with practice management analytics and coaching, and shifting the compensation model from rewarding the results of growth to rewarding the drivers of growth.”
The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. These opinions are presented for educational purposes only.

David Wismer is editor of Proactive Advisor Magazine. Mr. Wismer has deep experience in the communications field and content/editorial development. He has worked across many financial-services categories, including asset management, banking, insurance, financial media, exchange-traded products, and wealth management.

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