FA Magazine September 2024 | Page 36

Small firms ( those with assets under management of less than $ 500 million ) had a 38.0 % profit margin . Medium-sized firms with AUM between $ 500 million and $ 1 billion had a profit margin of 41.4 %. Large firms with over $ 1 billion in AUM had operating profit of 34.8 %.

Consider a similar study conducted by Investment News and Moss Adams LLC in 2013 that found the average profitability was 18.1 % for the participating firms . The smallest firms in that study had a profit margin of 27.4 %, while the largest ones saw 17.1 %. Medium-sized firms were operating at 19.1 %.

In other words , as the size of the average advisory firm has increased by nearly 70 % ( the average firm had revenue of $ 3.4 million in 2013 and $ 5.2 million in 2023 ), the profit margin has also nearly doubled . This great result was not driven by economies of scale , though . It simply came from the great productivity of the teams .

Amazing Productivity

In 2023 , a relationship manager ( an experienced advisor or senior advisor responsible for a client relationship ) was generating between $ 765,000 in a small firm and $ 1,131,000 ( I ’ m rounding here ) in a large firm . Mediumsize firms saw $ 927,000 per advisor . ( See figure 2 .)

The same relationship manager was paid between $ 160,000 and $ 335,000 in total compensation , including salaries and bonuses . Those were the median total compensation numbers for senior advisors and advisors . This means that the gross margin — the revenue minus the professional compensation for the relationship managers — is anywhere from 70 % to 80 % ( one minus either $ 160,000 /$ 765,000 or $ 335,000 /$ 1,131,000 ). This is where profitability comes from . When you start with an 80 % gross margin you can certainly expect to end with 35 % or more in net profit , especially since advisor compensation is the largest expense .

The average advisor in the average firm is working with approximately 120 clients . In large firms the number increases to 138 clients and in medium-sized firms the number is lower at 117 clients per relationship manager .

FIGURE 1

Average Operating Profit Margin

By firm size category .

While different studies use different methodologies , it appears that the number of clients has not increased dramatically in the last 10 years .

The big difference is that the clients we had 10 years ago are generating a lot more revenue than before .

Amazing Revenue Per Client

The average client of the typical advisory firm paid $ 11,000 in fees in 2023 . At large firms , the average revenue per client household was $ 14,864 , while small firms saw $ 5,390 . Midsize firms generated $ 9,897 . ( See figure 3 .)

You can clearly see one of the equations that define an advisory firm .

Revenue Per Client x Number Of Clients = Total Revenue

$ 11,000 Revenue Per Client x 120 Clients Per Advisor = $ 1,320,000 In Revenue Per Advisor

This is the simple equation that drives all the profits . But there ’ s another equation to consider :

Hours Per Client x Total Number Of Clients = Total Hours Of Client Work

How many hours in a year do you need to service a financial advisory client ? This is an interesting question . If a firm spends on average 20 hours of the relationship manager ( advisor ) time on a client , then the relationship manager would need 2,400 hours for all the clients . That ’ s an unsustainable workload .

In fact , in our experience , a professional would not really have more than 1,600 hours to work with clients if they were to spend another 200 hours improving their own expertise and managing their team , plus 200 hours marketing and developing new business .

If that ’ s the case , then a relationship manager is spending on average about 13 hours per client and generating almost $ 15,000 in revenue , an outstanding “ billable rate ” of well over $ 1,100 per hour that most attorneys and CPAs would envy .

FIGURE 2

Median Productivity Measures

By firm size category .

■ Revenue Per Team Member

■ Revenue Per Relationship Manager

34 | FINANCIAL ADVISOR MAGAZINE | SEPTEMBER 2024 WWW . FA-MAG . COM