Fee-Based Financial Advisors: A Comprehensive Overview of their Product Usage, Business Models, & Best Practices

Transcription

1 Tactical Issues Research Report Series Fee-Based Financial Advisors: A Comprehensive Overview of their Product Usage, Business Models, & Best Practices May 2005

2 INTRODUCTION & KEY FINDINGS The introduction, key findings, & executive summary of this report summarizes the entirety of the report and offers a set of useful summary facts. It also serves to address the report s objectives, Tiburon s research processes, and the report s target markets. Context Setting The purpose of this report is to provide readers with an initial understanding of the specific business practices of fee-based financial advisors (RIAs), the fastest growing financial services market or distribution channel. Information on this market has been scarce and vendors continue to struggle with how to offer value-added services. What products & services do fee-based financial advisors use? What custodians and technology do they use? How do they market to their clients? What are their profit margins? This research provides an in-depth look at how fee-based financial advisors manage their businesses and identifies key opportunities for vendors seeking to serve this market. A parallel report published by Tiburon addresses this market in a top-down way, outlining the size of the fee-based financial advisors market. This report goes a step further and specifically utilizes detailed survey data from Tiburon s 35-question feebased financial advisor benchmarking tool at (soon to change) to identify the product usage, business models, & best practices of leading feebased financial advisors. This is the second draft of Tiburon s research on this topic. Tiburon s first draft of this report was published in 2003; that draft was Tiburon s first attempt at analyzing the data from its fee-based financial advisor benchmarking tool. This is Tiburon s second draft of this report; this draft aligns the report s structure with that of other Tiburon research reports and includes a new introduction and a new synopsis. It is based on data from 298 fee-based financial advisors. Tiburon Research Process Readers should find this report to be both comprehensive and unbiased in its opinions. Tiburon is not a narrowly defined research firm and does not do research on speculation nor to earn substantial revenues selling research reports (all Tiburon reports are offered for sale at $5,000 each, which comes nowhere close to even covering the time invested). Instead, Tiburon conducts extremely detailed research to support critical strategic consulting assignments for its financial services industry clients. As part of Tiburon s traditional consulting efforts, before focusing on customized client analyses and to get thoroughly immersed in a business segment, Tiburon typically conducts more than a half-dozen research steps: Summarize & organize recent industry media coverage Incorporate proprietary learnings from Tiburon s benchmarking tools Review & incorporate learnings from all key industry firms web sites Conduct detailed news searches to round out company views Seek out research & analyst reports to compare and further develop findings Solicit opinions from Tiburon s executive program members Interview industry participants to confirm or revise findings Tiburon will update this report in three-to-six months depending on the evolution of the market and demand for such, so the firm welcomes readers to share any feedback, FBFAs B&BPs 2

3 input, or ideas by , phone, or in-person. If you send comments, Tiburon will be happy to send you a revised copy of the report. In accordance with Tiburon s traditional research process, future versions of this report will attempt to take this research further, including more detailed profiles of each firm and more opinions from other industry observers that can help further explain the conclusions. Tiburon Strategic Advisors Tiburon Strategic Advisors was formed in 1998 to offer market research, strategy consulting, & other related services primarily to financial services firms. Three of Tiburon's core clientele groups are the CEOs and other senior executives of large US financial institutions faced with difficult strategic decisions, leading executives of foreign financial institutions trying to understand and/or enter the US markets, and a long list of venture capital & private equity firms, and investment banks, making investments in, and executing transactions in, areas where Tiburon has developed proprietary insights. The firm has served over 300 corporate clients and completed over 1,200 projects since its founding, and today, its knowledge base includes mutual fund distribution, separately managed account programs, alternative investments, wealth management, insurance products, banking services, the fee-based financial advisor market, the CPA firm market, the family office market, and various international markets. Research Report Series This report is part of the Tiburon Strategic Advisors Research Report Series, which is comprised of a growing number of in-depth reports covering a wide range of topics in the banking, insurance, brokerage, and investment management markets. Tiburon s Research Reports are published in two series. One series is aimed towards Financial Institutions and the other towards Financial Advisors. The Financial Institutions Series reports are macro-industry reports that cover topics such as the mutual funds industry, the full-service brokerage industry, and the registered investment advisor industry. Reports in the Financial Advisors Series are more tactical reports, which include topics such as Fee-Based Financial Advisor Best Practices and Succession Planning & the Growing Acquisition Market. Research Report Access Program Many long-time Tiburon clients subscribe to the firm's research report access program, which allows unlimited online access to all of its research reports for all of a company's employees for an entire calendar year for just one $25,000 subscription. This service has helped numerous Tiburon clients share Tiburon research widely and consolidate their research purchases. Sponsored Research Reports Numerous Tiburon clients have sponsored research reports ($35,000), which entitles them to widely distribute the reports to their employees and/or clients. Tiburon also retains the rights to offer these reports for sale. Research Report Refund Policy Periodically (far less than 1% of the time after hundreds of purchases), Tiburon research report purchasers have sought refunds, which has caused hardship and wasted time for Tiburon, hence the following policy now exists for all Tiburon research report purchases. Tiburon is unable to make any financial refunds for reports. Both fulfilling reports and processing refunds take up Tiburon time, and given that the reports are written as a low cost accommodation service, Tiburon needs to manage its time well, prioritizing market FBFAs B&BPs 3

4 research & strategy consulting clients. Furthermore, given that reports are delivered electronically, returns are impractical. If it helps, Tiburon will attempt to send replacement reports (either the next version of the same report or another report all together) as long as invoices are paid promptly under the terms of the original order (net 30 days). That said, please observe three suggestions before ordering any Tiburon report: First, be sure to look at the summaries and attached table of contents for the report(s) of interest. These are created by Tiburon research staff to best represent the reports to potential purchasers. Sending specific pages is time consuming and unreasonable but the detailed table of contents show pretty clearly the topics covered. Second, please ensure that no other executive at your firm has ordered the same report; Tiburon is willing to allow the internal sharing of its reports by purchasers, but purchasers need to take responsibility to confirm any prior purchases within their firms as the growing complexity of financial services firms makes it impractical for Tiburon to track any firm's subsidiaries and their respective purchases. Finally, please remember that the totality of the report is the offering. If there is a graph that is unreadable because of the smaller font size required for printing, please bring it to the firm's attention and a full-size version will be sent, but please do not seek a refund on a report purchase that you have received. Contacting Tiburon Strategic Advisors Tiburon Strategic Advisors is located in Tiburon, California (just over the Golden Gate Bridge from San Francisco) and can be reached at (415) Feel free to contact any of us. Best of luck to all! Pablo Perez Senior Research Manager Tiburon Strategic Advisors Chip Roame Managing Principal Tiburon Strategic Advisors FBFAs B&BPs 4

5 Key Findings Below is a list of summary facts from this report: Benchmarking: A Detailed Review of Over Fifty Key Business Practices of Fee-Based Financial Advisors This chapter outlines a detailed review of over fifty key business practices of fee-based financial advisors. Business Background & Industry Position This section outlines business background & industry position. The average fee-only financial advisor is 45 years old (born in 1958), started or joined his/her current business 13 years ago (in 1990), became an RIA two years later (in 1992), and joined his/her current custodian seven years ago (in 1996) Given the target market of this survey, it isn t surprising to learn that an RIA is the most popular designation (67%); it is more surprising to find the great number of series 7 license holders (52%) The majority of advisors who completed the fee-only advisor survey did meet the definition of being fee-only financial advisors (64%); another 17% are fee + commission financial advisors The largest portion of fee-only financial advisors claim to be strategic asset allocators (44%) and growth equity managers (36%) Fee-only financial advisors come from a wide variety of backgrounds, with stock brokerage (21%) and life insurance (19%) being the most popular sources Schwab IMPACT is the most popular conference for fee-only financial advisors (44%) The FPA is by far the most popular trade group among fee-only financial advisors (42%) None of the informal advisor groups is popular, with TAN having the largest membership (7%) Fee-only financial advisors read a wide variety of publications, led by the Wall Street Journal (74%), Investment Advisor (62%), Financial Advisor (58%), and Financial Planning (58%) Schwab (20%) and Morningstar Advisor (19%) have the most popular web sites Clients & Marketing Strategies This section outlines clients & marketing strategies. Three-quarters (74%) of fee-only financial advisors have a minimum account size and the average is $332,590 Fee-only financial advisors have almost all consumer households as clients; most are high net worth ($1 million+ of Investable assets) (43%) or moderate net worth ($100,000-$1 million) (33%) Retirement plan rollovers (44%) and other sources of new money (19%) account for about two-thirds of all new advisor assets More than half of all new advisor assets come from client referrals (54%), with passive referrals (43%) being the main source The most popular seminar materials amongst fee-only advisors are from Ibbotson (12%) Loose Change is the only third-party newsletter mentioned repeatedly by fee-only financial advisors (4%) FBFAs B&BPs 5

6 AdvisorSquare and Lightport (16% each) are the two most widely used web site developers by fee-only financial advisors Surprisingly, more advisors have brochures (72%), toll-free telephone numbers (62%), and even newsletters (58%) than have web sites (56%) Investment & Insurance Products Used This section outlines investment & insurance products used. No-load mutual funds in fee-accounts (61%) are the most popular product used by advisors and fee-accounts overall account for almost all assets (85%) Janus is still the most widely used mutual fund family (60%); however it has been losing share rapidly; other leaders are Vanguard (45%), Invesco (44%), and Fidelity (43%) Across mutual fund companies, fee-only financial advisors are most satisfied with fund family performance (8.4) The utilization of turnkey asset management programs (TAMPs) amongst feeonly financial advisors has been growing rapidly; SEI (27%) and Lockwood (25%) have now each penetrated about a quarter of the market Although it is a new question just recently added to this survey (and hence data is limited), State Street Global Advisors (9%) is the leading separate account manager thus far The former American Skandia (now Prudential) (41%) is the most popular annuity company amongst fee-only financial advisors Although a fairly new question to this survey (and hence data is limited), thus far it appears that fee-only financial advisors use no insurance company substantially; leaders (each at 4%) include John Hancock, Prudential, WRL, and Zurich/Kemper While exchange traded funds (9%) and separate account managers (7%) are getting some use today, private equity (20%) and hedge funds (18%) may be the new investment products of the future Back Office Processes & Technology Use This section outlines back office processes & technology use. The largest share of the fee-only financial advisors who have completed the survey utilize Schwab as a custodian (134 of 298) None of the independent broker/dealers is used widely by fee-only financial advisors; leaders include Royal Alliance (2%), Financial Services Corporation (1%), and Mutual Service Corporation (1%) Pershing (6%) is the most widely used clearing broker amongst fee-only financial advisors None of the specialized trust companies are used by even 1% of fee-only financial advisors; Capital Trust Company, Santa Fe Trust, and American Guaranty & Trust all do receive some mentions Across custodians, fee-only financial advisors are most pleased with technology offerings Oddly, Morningstar (68%) and Quicken (29%) are the most widely used financial planning software by advisors Morningstar (61%) is also the most popular asset allocation software utilized by fee-only financial advisors There are few widely utilized data & research services; Morningstar (76%) is dominant amongst advisors FBFAs B&BPs 6

7 Portfolio Center (33%) and Advent (25%) are the two most popular portfolio management software programs amongst advisors No third-party reporting firm is used substantially; Advent (Tech Fi) leads with less than 1% market share Outlook (22%) and ACT (20%) are the most popular contact management softwares, with Goldmine (8%) trailing in third place The Quicken products are the most popular amongst accounting software packages; QuickBooks Pro (33%) leads the way followed by Quicken (26%), QuickBooks (24%), and Peachtree (9%) Fee-only financial advisors utilize the web for a variety of activities, including researching investment opportunities (80%), communicating with clients (74%), and downloading custodian forms (62%) Cell phones (83%) are the most popular of the advanced technology devices Business Economics This section outlines business economics. The average fee-only financial advisor who has completed the survey has 1.2 partners and 4.1 employees for a staff of 5.3 people The staff consists of 1.2 partners, 0.4 professional staff, 0.5 financial analysts, and 3.2 administrative support people Employees outnumber partners 3.5:1.0 which is pretty good leverage for building a small business The average advisory firm hired 2.2 employees in the prior year Aside from partners ($157,000), portfolio managers ($124,000) and advisors/planners ($116,000) are the highest paid roles The average advisor in the survey receives over 90% (92%) of his or her revenues from investment advisory fees A careful analysis of the business economics suggests that the average fee-only financial advisory firm is a profitable small business The average fee-only financial advisor serves 248 clients The average fee-only financial advisor manages $124 million AUM The average fee-only financial advisor generates revenues of $918,000 The average fee-only financial advisor has expenses of $573,000 The average fee-only financial advisor earns $345,000 in pre-tax profits Two key financial ratios help reveal the economic drivers of a financial advisory business The average fee-only financial advisor generates 74 basis points of revenues on assets The average fee-only financial advisor earns a pre-tax profit margin of 38% The average account size is $500,000 The average client generates $3,697 of revenues Advisors earn $1,567 of pre-tax profits on the average client, a number which increases with client size The average advisory firm serves 206 clients per partner The average advisory firm manages $103 million AUM per partner The average advisory firm generates $765,000 of revenues per partner The average advisory firm earns $287,000 of pre-tax profits per partner The average advisory firm serves 47 clients per employee The average advisory firm manages $23 million AUM per employee FBFAs B&BPs 7

8 The average advisory firm generates $173,000 of revenues per employee The average advisory firm earns $65,000 of pre-tax profits per employee The average advisor has grown his/her client base 7% per year, with larger advisors adding clients more quickly The average advisor has grown his/her client assets 29% per year, with the smallest advisors exceeding the average The average advisor has grown his/her revenue base 19% per year, with growth rates steady across firm sizes The average advisor has grown his/her pre-tax profits 8% per year, with larger advisors faring better Business expenses for the average advisor total $573,000 and consist of staff compensation (36%) and a variety of other expenses For the average advisor, staff compensation totals $206,000 For the average advisor, rent or mortgage expenses total $74,000 For the average advisor, marketing & advertising expenses total $34,000 For the average advisor, research, subscriptions, & publications expenses total $34,000 For the average advisor, travel & entertainment expenses total $29,000 Business Policies & Industry Views This section outlines business policies & industry views. Being one s own boss (8.9) is the most common reason for becoming a fee-only financial advisor Retaining clients (9.1) passed the growth-oriented goals that have been the primary goals of advisors in past surveys (increase assets under management at 8.7, increase revenues at 8.4, and increase profits at 8.2) Most advisors believe that the fee-only financial advisors business is better (58%) or about the same (35%) as it was one year ago Advisors do not perceive many threats to their businesses; the ability to manage increasingly complex firms appears to be the biggest concern (the need to work both on and in business simultaneously at 7.1 and the ability to manage multiple tasks at 6.8) Advisors think that about half (48%) of their clients met with another advisor in the process of shopping Pricing on fee-accounts ranges from 188 basis points to 50 basis points, depending on the account type and size The average hourly fee, charged by advisors who do charge an hourly fee, is $154 Advisors spend about a third (32%) of their time with clients Almost 30% (28%) of advisors intend to retire in the next fifteen years but many plan to be around a long time (22% don t plan to ever retire) More than half (53%) of advisors intend to sell their businesses upon retirement, with selling to an existing partner or employee (27%) being the most popular planned exit strategy S corps (44%) and C corps (23%) are the most common legal business forms for advisors About two-thirds (64%) of advisors have written business plans; other business documents are less popular (e.g., succession plans at 42%, executive policies & procedures manuals at 38%, employee manuals at 24%) FBFAs B&BPs 8

9 Although it is a new question to the survey (and hence has limited data), only three financial advisor coaches are thus far reportedly used by fee-only financial advisors Bill Good, Mark Tibergien, and Paul Williams Fee-Based Financial Advisor Benchmarking Conclusions This chapter outlines fee-based financial advisor benchmarking conclusions. Best Practices: Building a Successful Business Based on the Key Learnings from Leading Fee-Based Financial Advisors This section reviews the best practices of building a successful business based on the key learnings from leading fee-based financial advisors. -- Vendor Feedback & Tips for Better Serving Fee-Based Financial Advisors This section reviews vendor feedback & tips for better serving fee-based financial advisors FBFAs B&BPs 9

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