COVER STORY
Too Much Of A Good Thing ?
High profits are going to force the RIA culture to change in unsettling ways .
BY PHILIP PALAVEEV
T
HE PROFITABILITY OF INDEPENDENT financial advisory firms is higher than it ’ s ever been . But it ’ s reaching levels that are unsustainable and can create self-destructive trends in the industry .
The “ True Ensemble Data Insights ” study , conducted by the Ensemble Practice LLC and BlackRock , surveyed 240 independent financial advisory firms on their operating results in 2023 , also looking at their compensation and plans for that year . The results show an amazing return on investment for the owners of the firms — but also showed slow growth and a dangerous increase in employee turnover . The results suggest that mergers and consolidation in this industry will only speed up and intensify as the high profits drive high valuations , which make internal transitions of ownership to employees difficult , if not impossible . What ’ s more , considering that clients tend to stay with their advisors , the slow growth on one hand and the profitability on the other will encourage firms to poach one another ’ s advisors . That could damage the firms ’ culture and the industry ’ s collaborative spirit .
The truth is that what ’ s driving advisory firms ’ outstanding profitability is the client households that were added many years ago . Those clients have quietly doubled and tripled their portfolios and fees while over time asking for less service as their relationships travel smoothly “ on the rails ” of financial plans that were created 10 years ago ( and need only regular updates ). The attractive results come from a combination of factors : a recurring revenue pricing method , our high client retention and our up-front investments in those relationships ( which became easier to service over time ). For those results to be sustainable , though , we will need to keep adding clients . And that will require perhaps more capacity than we currently have .
Those are big statements . Let ’ s support them with some data .
Amazing Profits
The average operating profit of a firm participating in the “ True Ensemble Data Insights ” study was 36.4 %. That figure is higher than any other we ’ ve seen in similar surveys . ( See figure 1 on the following page .)
IMAGERY VIA GETTY IMAGES SEPTEMBER 2024 | FINANCIAL ADVISOR MAGAZINE | 33