In Practice December 18, 2006

Profit Growth Lagging Revenue for Adviser Firms

The past five years may have been kind to advisers in some respects, but their financial picture may be starting to darken, a new study found.
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A news release from Seattle-based accounting firm Moss Adams LLP said its 2006 Moss Adams LLP Financial Performance Study of Advisory Firms found that margins are under pressure, owners’ income has stagnated, and growth is slowing.

 

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“This is the first time we’ve seen such dramatic growth in the top line (revenue) without a corresponding improvement in Key Performance Indicators that measure profitability and productivity,” said Mark Tibergien, principal of Moss Adams, in the news release.

 

 

To service larger numbers of clients in a more demanding environment, practices have added more staff. Moss Adams researchers found that the leverage from these new hires has boosted the top line across the industry, but the cost of doing so has wreaked short-term havoc on the economics of many practices that has yet to level off in the form of long-term profitability.

 

 

But Tibergien cautioned firms against interpreting these findings as an indication that they need to trim back their staff. “The problem isn’t that firms have too much staff,” he said. “It’s that their growing staff needs better management.”

 

 

Strong Revenue Growth

 

 

According to the survey, advisory practices are now growing at rates not seen since the early 1980s.The 119 firms that have participated consistently in Moss Adams surveys since 2001 posted averaged revenues of $777,927 for fiscal year 2000 but practically doubled that top line by 2005, with $1,356,018 in revenue, according to the firm.

 

 

Meanwhile, AUM for all firms in the survey has grown steadily on average, at better than 20% per year during the past three years.

 

 

But income growth has not kept up. At the same time that advisory firms were increasing AUM and revenues at notable rates, their owners saw a less appreciable rise in firm-derived income.

According to Moss Adams, in 2000, principals in these firms collected on average $253,010 in pre-tax income per owner (compensation plus firm profits).But by 2005, income per owner had grown to $272,761 – an 8% increase “for what was five years of tremendous effort and commitment to grow their firms 74% in terms of revenue,” the study said.

 

 

Wrote the Moss Adams researchers: “This is a period of reinvestment for the industry in order to ratchet up to the next level of growth.It is a period when good management, more than ever, will distinguish profitable firms.”

 

 

More than 1,000 firms completed the online survey.

 

 

The 2006 Moss Adams LLP Financial Performance Study of Advisory Firms can be purchased for $145 at www.mossadams.com/surveys/advisorstudy/2006.htm or by contacting Dan Inveen at 206.302.6521.

 

 

Compliance December 18, 2006

Spitzer Says UBS Defrauded Clients Through Brokerage Program

In a lawsuit filed earlier this month, New York Attorney General Eliot Spitzer’s office charges UBS Financial Services, Inc. with leading inappropriate clients into its InsightOne brokerage program by falsely promoting services not offered.
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According to a December 12, 2006 news release from Spitzer’s office, UBS moved thousands of clients from regular brokerage accounts into InsightOne – a “wrap’ account charging an asset-based fee that the attorney general’s office considers inappropriate for investors who rarely trade securities or hold significant amounts of cash, no-load mutual funds, or other similar assets. UBS lured these clients into the program with false promises, such as the promise of an advice-based account, the news release said.

The lawsuit also charges UBS kept many unsuitable investors in the brokerage program by encouraging brokers to engage in additional trading in their clients’ InsightOne in order to surpass the minimum trading requirement. According to the news release, one broker wrote to a supervisor in an August 2004 e-mail regarding this practice, known as churning, “[N]ow we have to trade heavy or light to stay within guidelines to keep insight one alive …. How Wrong is that? You are not looking at the best interest of the client. CONFLICT is all over this.” Another broker explained in an e-mail to a senior manager in October 2003 that “increasing transactions for the sake of increasing transactions (not for the benefit of the client) is called churning.”

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In addition, Spitzer’s office said UBS created a conflict of interest for its brokers by giving them a financial incentive to enroll and keep investors in InsightOne even when the program was ill-suited for those investors.

The news release said InsightOne customers paid tens of millions of dollars more in fees than they would have paid in traditional brokerage accounts as a result of UBS’ fraudulent conduct. The release included several examples of clients who paid exorbitant fees, including a 91-year old customer charged more than $35,000 for just four trades over two years – around $33,000 more than she would have paid in a traditional brokerage account.

The lawsuit charges UBS with violations of state anti-fraud laws, common law fraud and breaches of fiduciary duty, and seeks from UBS disgorgement, damages and restitution, and injunctive relief.

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