Business Strategy. Business Complexities. Technology. Work with Clients Vision. Pricing. Compensation. Culture Marketing. Hiring & Recruiting

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1 Business Strategy June 10, 2014 Jeff Pierce, Manager, Advisor Benchmarking This information is provided for institutional investors and registered investment advisors, and is not intended for public use. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Business Complexities Work with Clients Vision Ownership Succession Technology Pricing Hiring & Recruiting Compliance Culture Marketing Management Business Development Compensation Operations 1 1

2 More than a Scorecard The overuse of best practices Provides a window into performance Understand advisor s overall health Management tools 2 Dimensional Advisor Benchmarking Program Launched in the US in nd largest study in the industry Schwab: 1,025 participants Dimensional: 561 participants Moss Adams: 309 participants Fidelity: 308 participants Global benchmarking began in

3 Participant Distribution by Asset Size FIRM SIZE BY ASSETS UNDER MANAGEMENT 29% 26% 561 participants Representing $191B AUM 20% 11% 7% 7% $0 $50MM $50MM $100MM $100MM $250MM $250MM $500MM $500MM $1B $1B+ 4 Top Challenges Aside from growing assets, what is the biggest challenge advisory firms are facing today and expect to face in the future? Recruiting, hiring, and/or retaining employees 5 3

4 Top Challenges CHALLENGES < $250MM $250MM All Participants in Assets In Assets Generating new client leads 48% 50% 45% Recruiting, hiring, and/or retaining employees 31% 28% 41% Marketing 26% 28% 18% Planning for succession 24% 25% 23% Managing existing clients 24% 28% 12% Compliance 22% 26% 12% Technology 17% 15% 22% Systematizing workflow processes 17% 18% 13% Expanding ownership 15% 12% 25% Managing staff and their time 12% 10% 19% 6 Where is Time Being Spent? Current Desired 47% 45% 35% 22% 19% 12% 10% 9% Developing new business Meeting with existing clients Investment research Operations 7 4

5 Business Development Implications Current percentage of time spent on business development 40% % Time Business Development 30% 20% 10% 0% 30% 29% 9% 9% Above Avg. All Firms Above Avg. Firms > $250MM Below Avg. All Firms Below Avg. Firms > $250MM 8 Business Development Implications % Time Business Development 40% 30% 20% 43% 22% Current % of Time Spent on Business Development 3-Year Average Annual Growth Rate 21% 14% 50% 40% 30% 20% % Asset Growth 10% 10% 0% 30% 29% 9% 9% Above Avg. All Firms Above Avg. Firms > $250MM Below Avg. All Firms Below Avg. Firms > $250MM 0% 9 5

6 Current Client Servicing Implications Current percentage of time spent on current client servicing 75% 60% % Time Current Clients 45% 30% 15% 0% 21% 22% 51% 54% Below Avg. All Firms Below Avg. Firms > $250MM Above Avg. All Firms Above Avg. Firms > $250MM 10 Current Client Servicing Implications 75% Current % of Time Spent on Current Client Servicing 3-Year Average Annual Growth Rate 50% 60% 38% 40% % Time Current Clients 45% 30% 26% 23% 16% 30% 20% % Asset Growth 15% 10% 0% 21% 22% 51% 54% Below Avg. All Firms Below Avg. Firms > $250MM Above Avg. All Firms Above Avg. Firms > $250MM 0% 11 6

7 Growth Strategies Who are you? = Why should I choose you? 13 7

8 Which of the Following Items Influenced your Decision to Work with your Advisor? A. Educated d me about investingi 45% B. Demonstrated that he/she understood my needs C. Discussed typical investment performance of his/her clients D. Helped me understand the value he/she could bring to me/my family 69% 41% 57% From the Economics of Loyalty Survey funded in part by Dimensional Fund Advisors. Used with permission of Advisor Impact. 14 Which Firm or Personal Characteristics Contributed to your Decision when Selecting your Current Financial Advisor? Experience Experience in working working with clients with clients like you like you 55% Demonstrated client service process/philosophy Demonstrated Demonstrated investment investment performance performance 47% 46% Share values Share values 45% Compensation model Compensation model 30% Similar interests Age of advisor Similar interests Age of advisor Industry designations Industry held designations held Size of advisor s team Size of advisor s team 18% 18% 15% 12% What s important: Males firm had a recognized brand (49%) Females shared values (49%) Clients with >$5MM in assets shared values (59%) and age of advisor (33%) Clients 65+ age of advisor (25%) From the Economics of Loyalty Survey funded in part by Dimensional Fund Advisors. Used with permission of Advisor Impact. 15 8

9 Value Proposition 70% OF FIRMS HAVE A VALUE PROPOSITION Is your firm s message consistent? 77% 66% 57% 53% Can all employees clearly articulate your value proposition? Can your clients articulate your value proposition? 41% 36% Belief system Services and capabilities offered Desired client experience Costs to clients Evidence of value added Market and client profiles 16 New Clients What is the largest source of new clients? A. Advertising B. Client Referrals C. Marketing/Prospecting D. Centers of Influence (COIs) 17 9

10 Prospect Opportunities SOURCES OF NEW CLIENTS Client Referrals 51% One-quarter of firms have a process in place to ask for referrals. COI Referrals Marketing/Prospecting 5% 21% Firms that ask: Receive nearly twice as many referrals. Have a 63% closure rate. Advertising 5% Parent Co. Referrals 4% Employee Referrals 4% 18 Why Don t Clients Refer? 1. Never been asked. 2. Don t understand who my advisor wants to work with. 3. Don t know how to explain what they do. 4. Don t know how to make the introduction. 5. Too private. 6. Risk if relationship does not work out. 7. Haven t had a referable experience. Source: Dan Allison, Feedback Marketing Group

11 Marketing Strategies What percentage of firms have no marketing strategy? A. 2% B. 7% C. 12% D. 17% Firms with a marketing strategy grew assets 4 times faster. 20 What Are Your Marketing Activities? ACTIVITIES Newsletter/blog 58% Conduct client feedback surveys 57% Networking (local associations) 41% Events current clients 41% Social media 32% Sponsorship of community events 32% Educational seminars 29% Advertising (radio, print, internet) 29% Events prospects/referral sources 22% 21 11

12 Client Events FIRMS HOSTING EVENTS All participants < $250MM in Assets $250MM in Assets 60% Over the past 2 years, those hosting events: Added 76% more clients. Received 72% more client referrals. 41% 36% % hosting events for current clients 22 Putting Client Surveys to Work PURPOSE OF CLIENT SURVEYS Gauge overall client satisfaction 61% Identify and develop growth opportunities 17% Create loyalty and/or improve retention 14% Engage clients on additional needs and services 14% Advisors conducting client surveys: Lost 50% less clients. Received 25% more client referrals 23 12

13 Working with the Next Generation True or false? 50% of firms have a plan/strategy in place to work with the next generation of wealth holders. False: 40% of firms have a plan in place. 24 Few Firms Working with the Next Generation CLIENTS AGE RANGE 31% 50% 17% have communicated with the next generation. 45% of clients assets are retained when a parent dies and only 2% when the second parent dies. 1 6% 10% 4% Older than Younger than Other (e.g., years old 40 years old trusts) 1. Based on research by Merrill Lynch (

14 Changing Fees What percentage of firms have made a change to their fee schedule in the past 2 years? 22% changed fees: 16% increased 6% decreased 26 Fees on the Move 16% of firms report increasing fees over the past 2 years. Average increase was 15bps; client attrition rate has been 2.4%. 6% of firms decreased their fees. Average decrease was 12bps; client attrition rate has been 4.4%. 78% of firms have made Client attrition rate has no change to their fees. been 3.2%. Firms that increased their fees were already at, or within 5 bps of, the average fee schedule in 85% of cases

15 Managing Growth Through Human Capital and Financials Human Capital Costs True or false: Firms spend more than half of their revenue on human capital costs, including salaries, bonuses, benefits, and taxes? True: on average, firms are spending 55% of revenue on employees

16 Growth of Human Capital 60 Administrative Technical/Support Management Professionals Assets/FTE $100MM 50.5 Full-time equivalents (FTEs) $50MM Assets per FTE $0 $50MM $50MM $100MM $100MM $250MM $250MM $500MM $500MM $1B $1B $2B $2B+ $0MM 30 Human Capital Challenges As firms grow, human capital challenges become larger. Recruiting, managing, technology, etc. Human capital costs are on the rise. Cost of labor is dominating the income statement. Business development shortage. Lack of rainmakers stepping up

17 Leveraging Your Employees AVERAGE STAFFING RATIOS Professionals 3.1 Total overhead staff per professional: 1.2 Management per professional 0.2 Support staff per professional 0.6 Administrative staff per professional 0.4 Firms with at least 1 back office staff per advisor are servicing 113% more clients on per advisor basis. Average client size is $2.1MM vs. $1.4MM. PROFIT MARGIN 24.6% 21.3% 1 overhead staff per advisor < 1 overhead staff per advisor 32 Economics of Hiring Hiring support: $60,000 total compensation package (base, bonus, taxes, and benefits) Provides 2,000 hours of capacity How much revenue is needed to sustain 20% profitability? Compensation of new hire / (1 operating profit) $60,000 / (1 20%) = $75,000 Where does the revenue come from? Revenue / average client revenue $75,000 / $7,500 = 10 clients What would you do with the extra capacity? For illustrative purposes only. Not actual results

18 Who s Recruiting and Hiring? What percentage of firms with at least $100MM in assets have hired in the past 12 months or plan to hire in the next 12 months? 1. 25% 2. 45% 3. 65% 4. 85% 34 Aligning People with Growth FIRMS >$100MM HIRING ACTIVITY New hire past 12 months Replacement hire past Plan to hire in 12 months next 12 months Professionals 28% 11% 31% Management 7% 5% 3% 36% of new hires in the past three years are no longer with the firm. Top recruiting challenge is finding qualified candidates. Technical and Support 23% 17% 26% Administrative 18% 18% 25% 35 18

19 Target Margins If you were investing in a privately held company with key person dependencies, what would be your required rate of return? How much do you want to make on your business? 36 Dissecting the Income Statement TARGET MARGINS Direct expenses: Fair compensation for sales and labor Operating profit, 25% Overhead expenses, 30 40% Direct expenses, 35 40% Overhead expenses: Cost of supporting sales Operating profit: Risk/reward for being an owner INCOME STATEMENT BREAKDOWN Revenue 100% Direct expenses 40% Gross profit 60% Overhead expenses 35% Operating profit 25% For illustrative purposes only. Not actual results

20 Financial Performance Direct Expenses Overhead Expenses Operating Profit 35% 36% 36% 38% 41% 37% 27% 23% 27% e Questions? 20