The average firm in our annual RIA survey grew revenue 25% last year.
Think your firm did well last year? Maybe so. But if
assets grew by less than 25%, you fell behind the average of
independent registered investment advisors participating in Financial
Advisor's second annual Top RIA Survey. That's right. The mean growth
in assets among the 471 firms in the survey was an impressive 25%. The
robust overall gains confirm that independent advisors remain on a
powerful expansion track set in place roughly two decades ago. They
still reign as the most dynamic sector of the financial services
industry, continuing to grow much faster, for example, than the mutual
fund industry, which expanded assets by 16% in 2006.
One of the more impressive characteristics of the
advisory business is how broad-based its growth is. While the mean
growth rate was 25%, the median firm in this survey wasn't far behind,
growing at 22.1% in 2006.
While it seems that a rising tide is lifting almost
all ships, some independent advisors are emerging as "supergrowers."
This group comprises the roughly one in ten firms adding assets under
management by 50% or more in 2006. Many are intent on leveraging their
organizations and vaulting themselves out of the group of local and
regional providers of advice into the ranks of national-class
businesses. Increasingly, they are reaching out beyond the traditional
business model of independent advisors and taking advantage of
strategies that can distinguish them in the marketplace and help them
achieve the critical mass of scale that is now seen as a long-term key
to success in this industry. A few examples of approaches being taken:
Growth through consolidation. Garnet Group LLC
emerged last year from the consolidation of Smith Rapaez LLC of Boston
and Mosaic Wealth Management of Bethesda, Md. The merger, plus strong
organic growth, helped the combined firms' assets under management grow
threefold to $124 million last year. Garnet's four principals, all
women, are busy using their expanded resources and bigger geographic
footprint to build a much larger business. Garnet Group ranked third in
growth rate this year among firms with $100 million to $300 million in
assets.
Growth via the Internet. Index Funds Advisors Inc.
of Irvine, Calif., helps generate interest in index fund investing
through its extensive and sophisticated Web site devoted to that topic
alone. Assets under management doubled last year to $703 million and
had further swelled to $930 million by late May. More than 60% of the
firm's new clients are index-fund aficionados attracted by its Web
site, with an average relationship size of $900,000 at year's end.
Index Funds Advisors placed third in the growth rates among firms with
$500 million to $1 billion in assets.
Growth from highly scalable activities. Symmetry
Partners of Glastonbury, Conn., was a "supergrower" for the second year
in a row. The firm leveraged its expertise in index fund investing by
creating a turnkey asset management program now widely distributed
among other advisors and independent broker-dealers. The program offers
balanced portfolios using index funds provided by Dimensional Fund
Advisors. Assets under management soared by 70% last year to $2.6
billion. Symmetry Partners took second place in terms of growth among
the largest firms, those with $1 billion or more in assets.
Growth from focusing on the wealthiest.
Ballentine, Finn & Co. of Wolfeboro, N.H., and Waltham, Mass., is a
multifamily office serving ultrahigh-net-worth clients. For such firms,
adding even a few client families can dramatically alter the scale of
their organizations. That was the case last year for Ballentine, Finn,
which came close to tripling in size to $1.9 billion in assets as its
roster of client relationships increased by about 50% to 172. The need
to bring on high-level talent to serve the megawealthy has prompted the
firm to hire a full-time human relations director who specializes in
recruiting. Ballentine, Finn took first place in terms of growth among
the largest firms.
Those examples illustrate some of the approaches
used by "supergrowers" to reach the top of our rankings. However, as
noted, last year even "average" meant strong growth. It didn't hurt
that advisors had the wind at their backs, as healthy stock and bond
markets contributed to the increase in existing client assets. The
stock market, as measured by the Standard & Poor's 500 Index,
posted a total return of 15.7% in 2006. Balanced portfolios typically
favored by advisors returned 11.3% for the year, using the average
performance of Morningstar's conservative allocation category as a
benchmark. The excess growth of advisor assets over market returns
reflects strong flows of money from new clients. The number of client
relationships jumped by 15% among firms in our listing, to an average
of just under 400.
As the independent advisor industry matures, assets
are becoming more concentrated among the largest firms, a trend that
our latest Top RIA Survey confirms. Their larger scale makes it easier
to take on more clients and to provide a wider range of services. The
biggest firms ($1 billion and up) experienced almost the same
percentage growth rate (23.90% on average) as the entire group. The
fastest-growing segment (up 26.58%) was the group of firms between $500
million and $1 billion in assets. The smallest firms, those with less
than $100 million under management, lagged the group with a growth rate
of 22.60%.
Ballentine, Finn and Symmetry Partners were the only
$1 billion firms that grew by 50% or more. Six firms in the next asset
tier ($500 million to $1 billion) topped that hurdle, led by Sunnymeath
Asset Management Inc. of Red Bank, N.J., and Telemus Capital Partners
of Southfield, Mich. Whitnell Co. of Oak Brook, Ill., and PFG Financial
Advisors Network of State College, Pa., headed the six "supergrowers"
in the next tier of firms with $300 million to $500 million in assets.
There were 19 "supergrowers" among firms with $100 million to $300
million in assets, topped by Ariba GLB Asset Management of Arlington,
Va., and Capital Ideas Inc. of Dallas. Integrity Financial Advisory of
Fountain Valley, Calif., led the smallest (under $100 million) firms by
growing its assets elevenfold. Placing second was 21st Century Wealth
Management LLC of York, Pa., with a fourfold increase in assets under
management.
The biggest firms don't just have more assets but
wealthier clients, too. The mean relationship size at the
billion-dollar firms was $9.08 million, versus the overall average
relationship size of $2.34 million. For firms under $100 million, the
average relationship was $1.27 million. The power of scale in this
industry is evidenced by the fact that the largest firms (those with
more than $1 billion) averaged $131 million in assets per professional
while the smallest ones (under $100 million) could muster only $57
million per professional.
Remarkably, older firms continue to expand almost as fast as newer
ones. Asset growth for firms at least five years old averaged 24.45%,
lagging the 34.20% growth rate for firms under five years of age but
remaining robust nonetheless. The top states for asset gains among the
advisory firms in the survey were Virginia (162%), New Jersey (109%)
and New Hampshire (63%). The laggards were Vermont, Kentucky and Rhode
Island, with gains of 2%, 3% and 9%, respectively.
Merger activity helped some firms advance in our
rankings. Mergers offer an opportunity to vault ahead in scale, and in
the case of Garnet Group, to widen the firm's geographic footprint as
well. And while talk of mergers in the industry is being sparked by
high-profile deals such as the acquisition of Lydian Wealth Management
of Bethesda, Md., by City National Bank of Los Angeles, no merger gold
rush has begun yet. One in ten firms reports some merger activity over
the past three years, roughly the same activity level reported in last
year's Top RIA Survey. However, advisors as a group seem to be less
dismissive of the idea than last year. They say they are slightly less
likely to reject a merger proposal in the next 12 months than they said
they were last year.
Firms that decide to merge will find that
consolidating organizations is a complex process that takes time, says
Annette Simon, a principal and co-founder of Garnet Group. "We've been
working slowly through different parts of the business to try to
coordinate our efforts," says Simon. "There's still a lot of activity
that goes on separately in the two offices, but we're heading toward
operating as a single firm in all areas." Her advice for others
considering a merger? "You can't spend too much time getting to know
the other people and talking about everything beforehand."
Well represented among the largest of the
"supergrowers" in this year's Top RIA Survey are multifamily offices
such as Ballentine, Finn. Others include Highmount Capital of New York
City, BBR Partners of New York City, Quintile Investment Advisors of
Los Angeles and Vogel Consulting of Brookfield, Wis. Multifamily
offices tend to have high investment minimums, typically at least $10
million, and offer a comprehensive array of integrated services to
multigenerational client families. One big challenge to their growth is
the intense competition they face in signing new clients. That was the
case last year for Ballentine, Finn, says Roy C. Ballentine, president.
"We had several very large situations where we were competing. These
were rigorous searches, very expertly run by very sophisticated people.
They narrowed the field and narrowed the field and so forth. And I
think we won them all." As a result, staff at the firm grew from 30 to
43 last year to accommodate the new business. "That's a lot of people
to hire," says Ballentine.
Independent advisors traditionally have been both
cautious and low-key in their marketing efforts, and for obvious
reasons. The Securities and Exchange Commission puts restrictions on
advertising activity by advisors, and those rules are not exactly a
model of clarity. Better to keep a low profile than risk problems with
the regulators, many advisors have concluded over the years. Moreover,
the need for marketing has been limited.
Most new business typically comes from referrals
anyway, so why spend big bucks to advertise? Yet, with the Internet,
this may be starting to change. Index Funds Advisors uses its Web
site-which might be described as a "category killer" for information
about index investing-as a funnel to attract assets. The typical new
client is a 45-year-old, Web-savvy engineer, lawyer or doctor, says
Mark T. Hebner, president. They want passive management, but coupled
with advice. "These people are willing to do a little homework to
figure out what's best for them," says Hebner. "When they discover my
Web site, they think they've died and gone to heaven."