Sometimes looking at statistics is a bit like looking at a Rorschach test-what you see depends a bit on whether you're a glass half empty or glass half full kind of person.

No doubt about it, RIA assets surged last year after the equity markets bounced back from their profound March 2009 nadir. The 456 advisories participating in Financial Advisor magazine's 2010 RIA survey saw their total assets balloon 23.3% in 2009, to $307.3 billion from $249.2 billion the year before, a growth trend that almost mirrored exactly the S&P 500's surge for the year. And 210 of the firms in the survey saw assets grow even more than that: 50 of the firms reported 50% growth or more and 13 firms reported 100% asset growth or more.

Assets per client grew as well. Mean assets per client grew by 11.27% to $2,167,232 from $1,947,743. And 28% of the firms saw their assets per client grow more than the S&P 500's 23.3% rise.

These are welcome reverses from 2008, when the S&P 500 lost 38% and RIA assets declined in kind. Moreover, higher account values have been accompanied by a continuing windfall in new client relationships. The average number of clients among RIA participants in the survey climbed more than 11% to 522 from 470 in 2009; 129 firms logged growth of 10% or more in client relationships, while 70 firms reported growth of 20% or more and 19 firms saw growth of 50% or more.
Yet even though assets perked up, many firms in the RIA universe continued to struggle with revenues-a still-throbbing hangover from 2008 caused by lower asset bases and higher expenditures. Indeed, revenue at the median RIA firm fell by 11% in 2009, according to a Schwab study.

RIAs are still "revenue challenged," says Stephen Onofrio, a managing director at SEI Advisor Network, which does consulting with some 6,000 RIAs. "All of their income was down. 2009 brought some of it back, but they're still down [almost] 30% from November 2007. Expenses didn't decrease, but their revenues decreased significantly so their profit margins were squeezed."

Take Convergent Wealth Advisors in Rockville, Md., a firm that had an inarguably great year, its assets under management rising almost 95% to $10.237 billion from $5.254 billion. The firm not only saw tremendous growth after picking off a Smith Barney advisor team in November of 2008, but later scored another coup, says CEO Steven Lockshin, when the firm's appearance in Barron's top advisor list prompted a cold call from a family with $2 billion in liquid assets that wanted to ditch their Goldman Sachs advisors and haul their largesse to Convergent.

But even with all that great press and new assets, Convergent still had to contend with revenue problems last year, because it does most of its billing in advance and had to start the year running up from the trench.

"It's a combination of two things," Lockshin says, "It's billing in advance, and it's starting from a lower base. You bill for your fourth quarter using the September 30, 2008, numbers." And from there it was all downhill, he says. "If you remember in January-February [of 2009], the S&P was down 20%. It was down 11% through the first quarter. So your actual fiscal numbers for Q1 and Q2 of '09 are going to look pretty poor. And while you're going to see an increase in Q3 and Q4, most advisors were starting from a significantly lower base than they did in the beginning of '08."

And as firms continued to smart from those lower revenues, many continued to lop off staff in 2009. The mean number of employees at firms with $1 billion or more in assets under management fell to 53 from 58 (almost 8%). At those firms with $500 million to $1 billion, staff numbers fell to 22 from 23; at firms with $300 million to $500 million they fell from 15 to 14; and at firms with $100 million to $300 million the mean number fell from 9 to 8.

"Like everybody else I had to look at my expenses and tighten the belt," says Jeff Hamburger, the owner of New Century Financial Group in Princeton, N.J. "I had to let go of one person on a staff of seven"-an administrative person whose chores were handed over to other staff members. But then things perked up, he says, and now she's back.

Even Convergent had to cut head count, which it did in a pre-emptive second half 2008 strike, cutting the lowest 10% in hopes of strengthening from the bottom, as General Electric does, says Lockshin.

"Anytime you have to make those decisions it's painful," he says. "We're a small company with 100 odd people. We had over 100 people at the time and we value everybody here. It's no fun having to make those decisions, and I think the environment commanded that kind of decision. But I never want to be in that position again if I don't have to."

The revenue hassles meant less money for marketing at some firms, fewer dinners, fewer magazine subscriptions. Even the fresh cut flowers in the lobby sometimes had to go.

"We used to have TVs in the lobby that would show the news," says Steve Burnett, president of Hanson McClain, which runs both an RIA and broker-dealer in Sacramento, Calif. "That came with a cable bill, so we said, 'Is that really a necessity?'" The old TV/VCR hybrids were tossed, he says, along with the plant service.

Fastest Growers
Among the fastest growers with $1 billion or more in assets were Convergent, as well as Evercore Wealth Management in New York; American Portfolios Advisors Inc. in Holbrook, N.Y.; Mariner Wealth Advisors LLC in Leawood, Kan.; Telemus Capital Partners in Southfield, Mich; and United Capital Financial Advisers in Newport Beach, Calif.

Evercore leapfrogged into the big leagues with $1.5 billion in assets by the end of the year. The firm comprises a group of former executives from U.S. Trust, including CEO Jeffrey Maurer, who spent more than 30 years at that firm catering to the needs of blue bloods with fat accounts. His new firm launched at the end of 2008, and last year the team took along some U.S. Trust clients with them, says partner Christopher Zander. The firm also has a sister trust company. It deals with clients that have at least $5 million in assets and prides itself on giving its tony clients more inside access to asset managers. Maurer has said in the past he wants to reach $5 billion by 2013 in organic growth alone.

"I'm a founding partner," says Zander. "I headed the multifamily office for U.S. Trust and most of the partners here are ex-U.S. Trust senior professionals. We've just grown through clients being attracted to our model as a wealth management boutique." He says the team followed Maurer because it wanted to work in a smaller format and an entrepreneurial atmosphere.

American Portfolios Advisors, meanwhile, lured in 175 new reps to its B-D last year, and firm President Tom Wirtshafter says about half of those reps also do wealth management and have brought accounts to the RIA platform as well. The firm offers an open architecture so advisors can work with it in different ways, as IARs, as their own RIAs, or as reps for its broker-dealer.

"One of the reasons that we are growing is we've created a model that's pretty flexible," he says. "We allow assets not only to be held at Pershing but at outside custodians, and we allow for outside RIAs to hold their assets either at Pershing or away from us. What we're able to do is capture the transaction no matter where the transactions are taking place and do our part in supervision and surveillance on the trades. ... So that open architecture is both for letting the reps choose the custodian but also choose whether they want to be with their own RIA or part of American Portfolios' RIA.

Other fast-growing firms, such as Mariner, are aggressively hiring advisors from the wirehouse channels to bring in new accounts. Mariner went from 250 households to about 800, and its assets grew about 218% to $4.235 billion.

"A lot of the recruiting probably happened before the end of '08, but most of those clients came in that '09 time frame as people transitioned their book of business from their former firms," says Martin Bicknell, Mariner's CEO. The firm brought five wirehouse reps into the organization at the end of 2008, including two from Wells Fargo (which at the time was still Wachovia), two from Smith Barney and one from UBS. "I would tell you that without the financial debacle of 2008, I would not have recruited any of those people," Bicknell says. The firm is also continuing to court people from other RIAs and trust companies as part of its grown plan. Mariner is bifurcated into two entities-one is an open architecture wealth management family office firm and then there is a money management firm that provides different asset-class managers offering stocks, bonds, quantitative investing and things like MLPs for other RIAs, trust companies and small independent B-Ds.

"We're a fairly young firm," says Bicknell. "We just had our fourth-year anniversary on May 11. We started with about eight people and roughly $300 million under management in May of '06, and today we're up to 115 employees. That growth from '08 to '09 was wirehouse producers that we recruited over in addition to an asset management acquisition that we made locally."  

Fighting For Clients
Despite the growth overall in clients in the survey, some 89 firms reported losing them in 2009, either a sign of continuing market uncertainty or a Darwinian struggle for clients in a time of cataclysm when nobody knew who to trust, lots of money was in play, and nervous investors were trying to shake off their torpor and return to the markets after being paralyzed.
The $2 billion family that came over to Convergent Wealth had previously been with Goldman Sachs.

"If I had to pick one thing [that made the family look elsewhere], it would be having products shoved down their throat," Lockshin says. "These guys were sold every deal under the sun that Goldman would sell. And again, I don't think these firms are ill-intended, but there's no such thing as bad projections and it's hard when you've got a conflict not to push that product."

The family was mainly looking for "objectivity," Lockshin says, "someone who understood they're a taxable client, and somebody who understood their complex issues, which included alternatives, concentrated public stock positions, Section 216 issues, estate planning and obviously overall asset allocation and manager selection."

Onofrio, the SEI consultant, says that more than anything, new client acquisition is going to be the name of the game for RIAs. He said that in the middle of the past decade, it was easy to cruise along. But that's over.

"I think over the years with increased appreciation and more of a passive growth process, they were comfortable. You had a little bit of market appreciation, some passive growth through passive referrals. Now that the market appreciation is down from 2007, it directly impacted fee-based advisors' bottom lines because you couldn't take fees on the market. So their proactive growth programs haven't been as engaged as they've been in the past."

That has forced many advisors to make decisions like layoffs, even though the smaller firms, because of loyalty to workers, might not do it. So instead they focus on their top line.

Onofrio suggests the situation is more dire than the numbers would say. He says that typically an advisor with, say, $100 million and a 10% growth plan is going to lose some $10 million as clients unwind their assets, and the advisors will have a hard time catching up.

"If you have $100 million, we know that every year typically the advisor will lose 10% of that market value to their client income and distribution needs," he says. "So $100 million becomes $90 million right away. That's going to happen throughout the year." Even if there is 6% appreciation, they need $14 million to get back to the $110 goal. That's 28 new clients worth $500,000 apiece. If there is no market appreciation, they'll need $20 million to reach their growth goal and 40 new accounts.

Getting that many new clients will be hard, as the survey shows. SEI holds training sessions teaching its advisors how to capture new names-mostly by developing centers of influence among CPAs, estate attorneys or even heads of human resources at corporations to find people who are retiring or leaving early.

Another problem, he says, is that advisors often refer to a new account as a new client, even if it's not a new name. That doesn't expand the network, he argues, or allow the advisor to cast a wider net.

"We do networking exercises with advisors where we actually have them put down their networks-both professional centers of influence as well as client networks, their clients-and we go through that and when typically we're done, that list gets
expanded fivefold. Because they don't think of some of their networks, and that in itself identifies targets of opportunity to increase their business," he says.

"But our experience," he adds, "is that [RIAs] do generally overestimate the number of new-name clients they receive a year because it's not something that they focus on that the sales manager would in a public corporation, for instance. They're not counting them that way. They're more [asking]: 'Is my business growing?' And it's more of a feel than it is a science for a lot of advisors."