In an industry made competitive by pressure on fees, a laser focus may be just the weapon firms need
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As fee pressure comes down on the entire financial-services industry, it’s becoming more important than ever for advisors to demonstrate real value to their clients. But that doesn’t mean they have to be everything to everyone; in fact, being selective may be the best approach.
According to the 2018 FA Insight Study of Advisory Firms released by TD Ameritrade, US advisory firms saw healthy growth in 2017. The headline numbers stood at 15.8% year-on-year median growth in revenue, 19.9% median growth in assets under management, and a record high of 7.8% median annual client growth, the metric most indicative of business expansion.
Arguably the most interesting trend was one of outsized growth and profitability at firms with a specific target market compared to other firms. Those who say at least half of their client base meet their ideal client criteria saw median operating profit margins that were 18% greater than their non-focused peers; median annual client growth was 35% greater.
They may not be casting as wide a net as others in the industry, which some would argue results in a smaller opportunity set of prospective clients. But as the report notes, firms that stay laser-focused on their target clients can realize greater efficiencies in servicing and marketing, which leads to reduced costs and increased opportunity for growth.
But keeping that focus isn’t easy; 63% of firms have a definition of their ideal client, but exceptions are often made, which waters down the benefits of a focused strategy.
“The result is that, for many firms, a small share of clients generates a larger and disproportionate share of revenue,” the report noted. “In fact, across all study participants, half of all revenue is generated by the top 20% of clients.”
The opportunity to reduce costs through specialization may be worth considering as one in six firm owners cite pricing pressures as among the top challenges to their firm’s future growth. Price erosion continues to be a concern as new entrants at lower price points, changing investor preferences, and challenges in articulating value undermine advisory firms’ pricing power.
“The strongest signal of eroding pricing power emerges when assets managed are compared with actual revenue collected,” the report noted. “Study participants report that for every dollar in AUM, 71 basis points in revenue was generated in contrast to the recent peak of 78 basis points.”
