Data & Research August 29, 2016

RIAs Need to Focus on Efficiencies to Drive Growth

After explosive profits in 2014, they declined sharply in 2015.
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More than two-thirds of registered investment adviser (RIA) firms said they will emphasize operational efficiency to drive future growth and improve the bottom line, according to “The FA Insight Study of Advisory Firms: Growth by Design,” published by TD Ameritrade Institutional.

After explosive growth in 2014, key performance metrics declined sharply last year, and RIAs expect the same for 2016. Assets under management (AUM) grew 10.6% in 2014, but AUM growth dropped off to 4.7% in 2015—a 56% decline. After very healthy revenue growth rate of 14.4% in 2014, this metric fell to 7.3%. RIAs enjoyed a client base growth rate of 7.1% in 2014, but it was only 6.0% last year. And RIAs’ median operating profit was 26% in 2014, but only 20% in 2015.

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TD Ameritrade said that the squeeze on profitability means that rather than relying on the markets to generate growth, RIAs need to proactively plan for their futures.

“After 2014’s record profitability and explosive growth, advisers now must be more disciplined—and that’s not a bad thing,” says Vanessa Oligino, director of business performance solutions at TD Ameritrade Institutional. “Firms need growth plans that go deeper than just riding the market tide if they expect their success to carry through different cycles.”

TD Ameritrade found RIAs in the top quartile converted 40% to 50% more owner income per dollar of revenue. They also spent a much lower percentage of revenue on overhead expenses, resulting in greater profitability and higher income per owner.

Fifty-six percent of standout firms said that client experience is a key growth driver, versus 41% of their peers. Standout firms also said it is important to deliver consistent, high-quality client service and onboarding.

Only 34% of firms in 2015 had increased their pricing in the past two years, compared to 42% in 2014. TD Ameritrade said this may be misguided—if RIAs clearly articulate and demonstrate the value they deliver, they can command higher fees.

Twenty percent of RIAs point to mergers and acquisitions as a key driver of recent growth, with the most common transaction being the acquisition of a solo practictioner.

The report is based on a survey of 325 advisers. More information is available online at www.fainsight.com. 

Compliance August 26, 2016

Financial Planning Coalition Stands With DOL in Court Battle

The Financial Planning Coalition filed a “friend of the court” brief supporting the Department of Labor in its ongoing court battles over the new fiduciary rule. 
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The Financial Planning Coalition, comprising the Certified Financial Planner Board of Standards, Inc. (CFP Board), the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (NAPFA), filed an amicus brief in the U.S. District Court for the Northern District of Texas, supporting the Department of Labor’s (DOL) fiduciary rule and opposing efforts to stop the rule from taking effect.

In its amicus brief, the coalition specifically notes their “strong opposition to the current attempt to stop the rule through a court challenge.” The coalition submits that the experiences of its professionals and their clients show that a broadly applicable fiduciary standard represents a win-win for the industry and the public. In short, the coalition argues that the business success of its members, who are generally held to very strict standards of conduct in terms of conflicts of interest, prove in advance that the stricter fiduciary paradigm will not in itself stifle innovation or quality service. 

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“The current regulatory framework … fails to align advisers’ interests with investors’ by leaving open significant loopholes that allow for the sale of financial products that may not be in the best interests of the investor,” the coalition writes. “The Department of Labor’s strengthened fiduciary rule is therefore necessary and appropriate to protect the public.”

The brief centers around three critical points of argument. First, the coalition argues, investors currently suffer from a lack of complete, truthful disclosures, and this is having a measurable negative effect on retirement outcomes. Second, “empirical research and the coalition’s own practical experience confirm that middle income investors will retain ready access to professional financial advice under a fiduciary standard of conduct.” And finally, based on CFP professionals’ experience under internal standards similar to those required by the Best Interest Contract Exemption, the coalition argues the rule provides “a workable solution to allow for advisers to receive transaction-based compensation while providing advice that is in the best interests of the client.”

“The coalition’s experience—involving nearly 80,000 financial-planning professionals of all business models and sizes—offers a reality that starkly contrasts with the speculation from the rule’s opponents, and provides the court with a unique perspective on the issues in this case,” the amicus brief states. “Thousands of CFP professionals and FPA and NAPFA members across the country currently provide fiduciary-level services to investors with business models requiring no or very low minimum assets under management.”

The full brief, which offers considerable detail on the success of advisers working under the auspices of the Financial Planning Coalition, is available in full online. 

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