Market forces aligned in favor of advisory firms for the past few years.  By many measures, 2014 was nearly as impressive for advisory firms as 2013, when nearly every major business indicator achieved a record best.

Indeed, based on recent findings from The 2015 FA Insight Study of Advisory Firms: People and Pay, the typical advisory firm has clearly enjoyed unprecedented success in recent years, but there are no guarantees that this will continue. In particular, the long-running bull market for securities appears to have run its course.

While client growth rates are expected to increase slightly in 2015, a significant anticipated slowdown in AUM growth is poised to affect revenues.  These performance trends and others, excerpted from the seventh annual FA Insight study, are detailed ahead.

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Source: The 2015 FA Insight Study of Advisory Firms: People and Pay.

FA Insight defines a client as a single household or institution the firm had meaningful contact with during the year. At the close of 2014, the typical firm served 204 clients.  A diminishing wave of baby boomers and the emergence of automated advice providers is yet to dampen the growing client base of the typical advisory firm.  While client growth slipped a half percentage point in 2014 relative to 2013, firms expect 2015 growth will surpass the record-setting pace of 2013.  

At the close of 2014, the typical firm managed $189 million in client assets. Growth in firm assets under management is a function of adding new clients, gaining more assets from existing clients, and appreciating investment portfolios. 

Clients have been a steady contributing factor to asset growth over recent years but security markets have had greatest influence on the variability of asset growth.  Market appreciation cooled in 2014 to a rate about one-third of what was achieved during a hot 2013 before stalling completely in 2015.  Consequently median firm AUM growth has constricted accordingly in terms of what was experienced in 2014 as well as what is expected by the close of 2015.

Source: The 2015 FA Insight Study of Advisory Firms: People and Pay.

During 2014 the typical FA Insight study firm grossed $1.4 million in revenue.  Given that changes in firm revenue tend to lag trends in AUM, much of the strong 14.0% revenue growth in 2014 was aided by AUM increases in 2013.

Based on the slowdown in security market appreciation, the opposite will likely occur in 2015 and beyond. Potential revenue increases through growth in clients, offering additional services, or setting higher fees are unlikely to supplant the effects of stagnant security markets on revenue growth. 

Source: The 2015 FA Insight Study of Advisory Firms: People and Pay.

Productivity measures suggest that firms are getting an increasingly good return on their people. Strong growth in firm revenue, combined with efficiency gains, caused productivity to rise at a rate faster than compensation for many advisory firm positions. From 2011 through 2014 productivity with respect to median revenue per professional grew at a compound annual growth rate of 3.0%. 

Source: The 2015 FA Insight Study of Advisory Firms: People and Pay.

Growth in business and worker productivity prompted advisory firms to consistently increase the size of their teams as well. The typical firm grew to a record 6.8 full-time equivalents (FTEs) in 2014. FTEs, including working owners, were up 13% over 2014, with firms expecting to expand personnel higher still in 2015.

For more comprehensive information, the complete People and Pay study is available for order. The 2015 FA Insight Study of Advisory Firms: People and Pay analyzes data from more than 350 firms, offering detailed insight into the best practices related to organizing, motivating, developing and retaining people. Financial Planning readers can purchase a specially priced copy at Click on Order and enter the discount code FPREADER to receive a 30% discount off the $250 price of the study.

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