As the largest firm in the custodial services arena, Schwab has seen many smaller rivals attempt to lure their advisory clients away. However, advisor anger over the moves by Schwab's retail arm to offer their own advisory services seems to have subsided. During a town hall-style meeting at the Schwab Impact conference last October, advisors questioned Schwab executives about a variety of mundane housekeeping details, like the number of 529 plans and variable annuities available. But there was virtually no carping expressed about Schwab's retail moves.
Efficient business practices are becoming increasingly vital in the advisory business, observers say. Fidelity Institutional Brokerage Group (FIBG) recently commissioned a guidebook by Moss Adams outlining how advisors can improve their bottom lines (see related article on page 69). "We think our clients are being challenged in ways they haven't been challenged before," says Jay Lanigan, executive vice president in charge of RIA services at FIBG. "Advisors have to spend more time with clients in trying times. But RIAs are still incredibly well-positioned to enjoy impressive growth in the next decade."
Fidelity continues to flesh out its Practice Advantage program, offering advisors who use its custodial services discounts on everything ranging from compliance consulting service to technology support to periodical subscription discounts from AOL TimeWarner. The profitability guidebook makes some far-reaching suggestions to advisors about how to align a firm's practice management and human capital tactics with their business strategy, Lanigan explains.
Several studies, for example, have found that the average advisory business saw an increase in revenues last year-but only through the sheer force of bringing in new clients. The downside of the tactic is that servicing more clients raised operating costs. As a result, profit margins were on average down in 2002.
That has put fee-based advisors to the test when it comes to the operational side of their businesses, says Ramy Shaalan, vice president of AdvisorBenchmarking.com, which specializes in RIA marketplace research.
In a survey of 163 advisors last year, AdvisorBenchmarking.com found that advisors increased their client bases by an average of 8.18% and their assets under management by 21.61% from a year earlier. This resulted in a 5.97% increase in revenues.
Yet the survey also found that profits declined by an average of 4.59%, primarily because operating expenses grew by 9.46%.
Similar findings were contained in the 2002 Financial Performance Study of Financial Advisory Practices recently released by the Financial Planning Association (FPA). That study found that while revenues increased 6.9% from 1999 to 2001, the average operating profit declined from $97,184 to $69,938, and that the squeeze on margins was chiefly a result of higher operating costs.
The study, conducted by Moss Adams LLP in Seattle, also found that advisors seemed to be providing more services for the same fees.
"Advisors are learning, the hard way, that one of the downsides to a fee-based model is declining revenues in a declining market," says Shaalan.