BENCHMARKING THE FINANCIAL PERFORMANCE OF …

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BENCHMARKING THE FINANCIAL PERFORMANCE OF ADVISORY FIRMS

IN PARTNERSHIP WITH SPONSORED BY

ACKNOWLEDGMENTS

Acknowledgments

InvestmentNews

InvestmentNews is the premier provider of news, data, research and events to the financial advisory industry. Through our weekly newspaper, website, data centers, benchmarking reports and conferences, we provide industry-leading tools and resources that allow financial advisers to learn more about their businesses, clients and competition.

About this study

The survey was conducted between March 27, 2018 and June 25, 2018. The data collected was analyzed and assessed by the teams at InvestmentNews Research and The Ensemble Practice. In total, qualified data was used from 385 firms who supplied detailed financial information for their organizations, including data on clients, assets under management, revenue, profit & loss statement, growth strategy, marketing, fees, staffing, and recruiting, as well as compensation information for newly hired or promoted staff members.

Disclaimer and Copyright

The data reported in this study was provided directly by participants to InvestmentNews Research. InvestmentNews Research was not engaged to and did not audit or review this information and, accordingly, does not express an opinion or any other form of assurance on it. The data contained in this report may not be a statistically valid representation of the entire market of financial advisory firms; rather, it is representative of the firms that elected to participate in this survey.

The material in this report is copyrighted by InvestmentNews. No portion of this report may be reproduced or distributed without the express written consent of InvestmentNews.

InvestmentNews Research

The mission of InvestmentNews Research is to provide financial advisers with the industry's most informative practice management studies and benchmarking reports.

Our benchmarking studies are a leading source of market intelligence for advisory firms and industry partners, such as custodians, broker-dealers, service providers and professional organizations.

In 2009, InvestmentNews acquired two bellwether benchmarking studies from Moss Adams LLP -- the Adviser Compensation & Staffing Study and the Financial Performance Study of Advisory Firms. We continue to improve and expand these two critical industry studies, while we have also introduced new studies on technology and succession planning that support the growth and development of financial advisory firms.

Led by VP and InvestmentNews Publisher Suzanne Siracuse, Associate Publisher Mark Bruno, Senior Manager of Research & Data, Matt Sirinides, and Research Associate James Gallardo, our studies are supported and driven by a team with over 40 years of combined experience and exposure to the ever-evolving financial advisory business.

In addition to our research studies, InvestmentNews Research also produces regular webcasts and regional workshops that arm advisers with actionable insights. Our events allow advisers to hear directly from some of the industry's leading experts - and also network with other advisers who are looking to improve their practices and grow their businesses.

Custom research: One of the core capabilities of InvestmentNews Research is providing custodians, broker-dealers and RIAs with custom benchmarking reports and white papers that leverage our deep data and analytical expertise. For more information about custom research requests and InvestmentNews Research, please contact Mark Bruno at 212-210-0116 and mbruno@, or visit research.dashboard.

? 2018 InvestmentNews Research

ACKNOWLEDGMENTS (CONT'D.)

Pershing Advisor Solutions LLC

BNY Mellon's Pershing and its affiliates provide a comprehensive network of global financial business solutions to advisors, broker-dealers, family offices, hedge fund and '40 Act fund managers, registered investment advisor firms and wealth managers. Many of the world's most sophisticated and successful financial services firms rely on Pershing for clearing and custody; investment, wealth and retirement solutions; technology and enterprise data management; trading services; prime brokerage and business consulting. Pershing helps clients improve profitability and drive growth, create capacity and efficiency, attract and retain talent, and manage risk and regulation. With a network of 23 offices worldwide, Pershing provides business-to-business solutions to clients representing more than 6 million investor accounts globally.

Pershing LLC (member FINRA, NYSE, SIPC) is a BNY Mellon company.

The Ensemble Practice

The Ensemble Practice LLC is the premier business consulting firm for the financial advisory industry. It is committed to helping independent financial advisers create multi-professional ensemble firms with strong organic growth and sustainable profitability. The Ensemble Practice works with the top wealth management firms in the country. The firm also hosts the "G2 Leadership Institute"--a training program for the future leaders of advisory firms. The firm is founded and led by Philip Palaveev, a highly regarded industry expert, thought leader and author of the book "The Ensemble Practice."

For more information visit .

Acknowledgments

? 2018 InvestmentNews Research

TABLE OF CONTENTS

Table of Contents

Executive Summary ........................................................................................................3 Figure 1: Average Revenue of All Participants vs. Super Ensembles Over the Last Five Years ............................................................................................. 3 Figure 2: Median Revenue Growth Rate Over the Last Five Years .................................. 4 Figure 3: Percent of Firms Hiring Advisers by Position in 2017 and 2018 ...................... 4 Figure 4: Median Year-Over-Year Revenue and AUM Growth by Firm Category ............... 4 Figure 5: Competitive Source of New Clients ................................................................ 5 Figure 6: Average AUM Growth From Acquisitions by Firm Category.............................. 5 Figure 7: Average AUM per Client and Revenue per Client by Firm Revenue Size ............ 5 Figure 8: Average Pre-Tax Income per Owner Over the Last Five Years .......................... 6

The Trends Shaping the Industry...................................................................................7 Revenue and Income Growth ................................................................................................7

Figure 9: Median Revenue Growth Rate Over the Last Five Years .................................. 7 Figure 10: Average Pre-Tax Income per Owner Over the Last Five Years ........................ 7 Profitability and Productivity ..................................................................................................8 Figure 11: Average Operating Profit Margins Over the Last Five Years............................ 8 Figure 12: Percent of Firms Hiring Advisers by Position in 2017 and 2018 ..................... 9 Figure 13: Revenue per Staff and per Professional Over the Last Five Years................... 9 Sources of Growth .......................................................................................................... 9 Figure 14: Sources of AUM Growth in 2016 and 2017 .................................................... 10

Growth and Growth Strategies .................................................................................... 11 Revenue and AUM Growth .................................................................................................. 11

Figure 15: Median Revenue and AUM Growth in 2017 by Firm Category.......................... 11 Sources of Growth .............................................................................................................. 12

Figure 16: Sources of AUM Growth in 2017.................................................................... 12 Figure 17: Competitive Source of New Clients ................................................................. 12 Figure 18: Average AUM Growth From Acquisitions by Firm Category .............................. 13 Growth Strategies ............................................................................................................... 13 Figure 19: Growth Tactics Implemented Over the Last Two Years..................................... 13 Figure 20: Business Development and Marketing Activities.............................................. 14

Pricing and Services..................................................................................................... 15 Fee Trends .......................................................................................................................... 15

Figure 21: Percent of Firms That Changed Fee Schedule In the Last Two Years, Top Performers vs. All Participants ................................................................................. 15 Figure 22: Direction of Fee Change at Top Performers..................................................... 15 Typical Pricing Structures .................................................................................................... 15

Figure 23: Percent of Firms Using Fee-based Pricing Models .......................................... 16 Advisory Fee Clients ............................................................................................................ 16

Figure 24: Average Advisory Fee Percentage on Assets, by Client AUM ........................... 16 Figure 25: Median Percent of Total Firm Clients by Client AUM, Top Performers vs. All Others......................................................................................... 17 Figure 26: Percent of Firms Including Service in Standard Fee, Top Performers vs. All Participants ................................................................................. 17 Figure 27: Median Operating Profit per Active Client, Top Performers

vs. All Other Participants................................................................................ 19

The Advantages of Size ................................................................................................ 19 The Client Advantage........................................................................................................... 19

Figure 28: Average AUM and Revenue per Client by Firm Revenue Size ........................... 19 The Productivity Advantage.................................................................................................. 19

Figure 29: Median Productivity Ratios, by Firm Category .................................................20 Figure 30: Pre-Tax Income per Owner by Firm Revenue Size ...........................................20 Figure 31: Operating Profit Margin and Overhead as Percent of Revenue by Firm Revenue Size.....................................................................................................20 The Recruiting Advantage....................................................................................................21 Figure 32: Median Starting Compensation for Lead and Service Advisers by Firm Category ...........................................................................................................21 The Growth Advantage ........................................................................................................21 Figure 33: Median Revenue and AUM Growth in 2017 by Firm Category .........................21

Super Ensembles ..........................................................................................................23 Profitability .......................................................................................................................... 23

Figure 34: Operating Profit, Direct expense and Overhead Expenses of Top-Performing vs. All Other Super Ensembles ...............................................................23 Productivity .........................................................................................................................23 Figure 35: Productivity Ratios of Top-Performing vs. All Other Super Ensembles .............. 24 Figure 36: Staffing Structure of Top-Performing vs. All Other Super Ensembles ............... 24

Enterprise Ensembles .....................................................................................................25 Growth................................................................................................................................25

Figure 37: Median Revenue Growth Rates of Top-Performing vs. All Other Enterprise Ensembles .................................................................................25 Figure 38: Average Revenue and Operating Profit of Top-Performing vs. All Other Enterprise Ensembles .................................................................................25 Profitability .......................................................................................................................... 26

? 2018 InvestmentNews Research

TABLE OF CONTENTS (CONT'D.)

Table of Contents

Figure 39: Operating Profit, Direct expense and Overhead Expenses of Top-Performing vs. All Other Enterprise Ensembles ................................................................................26 Figure 40: Average Operating Profit Margins by Firm Category ........................................26 Productivity and Capacity.....................................................................................................26 Figure 41: Median Productivity of Top-Performing vs. All Other Enterprise Ensembles.......27 Figure 42: Median AUM and Revenue of Client Relationships For Top-performing vs. All Other Enterprise Ensembles .................................................................................27 Figure 43: Capacity (in Terms of Clients per Professional and Clients per Staff) of Top-Performing vs. All Other Enterprise Ensembles.........................................................27 Figure 44: Perception of Adviser Capacity at Top-Performing vs. All Other Enterprise Ensembles ..........................................................................................................................28 Future Super Ensembles? ....................................................................................................28 Figure 45: Median AUM and Revenue of Client Relationships at Enterprise Ensembles and Super Ensembles ....................................................................................................28

Ensembles .....................................................................................................................29 Growth................................................................................................................................29

Figure 46: Average Assets Under Management for Ensembles Over the Last Three Years..............................................................................................29 Figure 47: Median AUM per Client and Revenue Yield on Assets For Top-Performing vs. All Other Ensembles .................................................................................................29 Profitability .......................................................................................................................... 29 Figure 48: Operating Profit, Direct expense and Overhead Expenses of Top-Performing vs. All Other Ensembles .................................................................................................30 Staffing...............................................................................................................................30 Figure 49: Staff Structure and Headcounts by Annual Revenue For Ensembles ................30 Productivity .........................................................................................................................30 Figure 50: Revenue per Professional and Clients per Professional of Top-Performing vs. All Other Ensembles .................................................................................................31 Figure 51: Revenue-based Productivity Ratios by Ensemble Category ..............................31

Solo Practices..................................................................................................................32 Owner Income ....................................................................................................................32

Figure 52: Median Pre-Tax Income per Owner For Top-Performing vs. All Other Solo Practices ............................................................................................32 Figure 53: Clients per Professional For Top-Performing vs. All Other Solo Practices..........32

Staffing...............................................................................................................................33 Figure 54: Median Total Staff Headcount of Top-Performing vs. All Other Solo Practices ..33

Productivity .........................................................................................................................33 Figure 55: Revenue per Professional and Revenue per Staff For Top-Performing vs. All Other Solo Practices ............................................................................................33 Figure 56: AUM per Client and Revenue per Client For Top-Performing vs. All Other Solo Practices ...........................................................................................33

Growth................................................................................................................................34 Figure 57: Median Revenue and AUM Growth in 2017 by Firm Category..........................34

Profitability .......................................................................................................................... 34 Figure 58: Median Operating Profit Margin by Firm Category in 2016 and 2017...............34

Appendix .......................................................................................................................35

Glossary ........................................................................................................................36 Income Statement Definitions ..............................................................................................36 Position Classification Definitions and Descriptions ...............................................................38 Other Terminology ...............................................................................................................40

Average Common-Sized Income Statement - Fiscal Year 2017 All Participants ................................................................................................................. 41 Top Quartile Performers vs. All Others ...............................................................................43 All Firms by Affiliation Model................................................................................................45

Practice Profile - All Participants ? Business Profile.................................................47 Clients, Assets Under Management, and Revenue ................................................................49 Growth Strategy ..................................................................................................................51 Business Development and Marketing..................................................................................53 Services and Pricing............................................................................................................55

? 2018 InvestmentNews Research

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