Market Overview

Independent Advisory Firms Invest in the Future Amid Record Client Growth, TD Ameritrade Institutional Study Finds


Latest FA Insight Growth by Design study shows independent advisory
firms increased spending on talent amid high asset and revenue growth

A rising tide may lift all boats, but it takes a skilled crew and a
charted course to successfully navigate more challenging waters. And so
it follows that independent financial advisors appear to be capitalizing
on their recent growth by making investments that will help sustain
their firms for the long term, according to new advisory firm industry
benchmarking research from TD
Ameritrade Institutional1

The research is available in a new report, 2018
FA Insight Study of Advisory Firms: Growth by Design
which reveals that median annual client growth, the growth mechanism
most indicative of business expansion, last year hit a record high of
7.8 percent. Median assets under management (AUM) per client climbed 6.8
percent in 2017 to nearly $1 million.

Firm AUM increased by 19.9 percent, compared to 12.5 percent in 2016 and
nearly on par with 2009's record of 20.4 percent. Revenue increased by
15.8 percent in 2017, twice 2016's rate.

Staffing Up to Meet Demand

Though rising financial markets in 2017 gave registered investment
advisors ("RIAs") a boost, the FA Insight study reveals that other
factors contributed to firm growth. A record number of clients brought
with them new investable assets, which drove revenues and required many
firms to staff up to meet demand.

According to the study, firms added team members at a record pace. The
typical firm increased headcount from five to six full-time equivalents
to support current growth and in anticipation of future needs.
Productivity, measured as revenue per team member, rose 12 percent to a
record high after a decline in 2016.

The findings also suggest that optimistic firm owners were making
reinvestments in their businesses that may have been put on hold during
less robust times. Firms spent more last year on office space,
technology, marketing and business development — investments that may
have been deferred in previous years when growth was more sluggish.

The increase in overhead expenditures, in addition to increased
compensation for revenue roles, led to a decline in profit margins, or
revenues after overhead and direct expenses. In 2017, the median
operating profit margin dropped to 19.7 percent from 24.4 percent in

"Advisors reported spectacular growth in 2017, but I'm especially
pleased to see that many firms used some of these gains to improve their
operations with an eye to increasing revenue and profitability for the
long term," said Vanessa Oligino, director, business performance
solutions at TD Ameritrade Institutional. "Though they may have
proceeded cautiously in prior years, many firms saw 2017 as an
opportunity to invest in themselves."

Pricing Power Erosion

The 2018 Growth by Design study found that one in six firm owners said
pricing pressures were among the top factors that may challenge future
growth. Some firms may already be facing this pressure: on average,
firms generated 71 basis points of revenue on every dollar in AUM,
compared to the recent peak of 78 basis points in 2015.

Despite the dip, most firms are unwilling to adopt alternative pricing
approaches other than the AUM-based fee, preferring to wait and see.
Two-thirds of firms have not made pricing changes in the past two years
and 84 percent have no plans to do so in the next two.

"Changes to the industry landscape are causing many investors to rethink
how they define an advisor's value," said Oligino. "The issue of price
is not going away, yet we believe independent financial advisors can
compete and win by delivering a superior client experience. Firms also
need to better articulate all the services they provide and demonstrate
how they generate value for their clients."

According to the study, the typical firm indicated that 98 percent of
clients are charged exclusively based on AUM, and this fee includes
advice for areas outside investment management. The challenge for firms
that continue to bundle and charge for their services this way will be
to convey their value: clients may not fully comprehend the true value
of all that a firm does, giving competitors a potential toehold into
discussions around costs.

Forward-Looking Plans

Although the study found a fair number of firms with strategic plans,
firm owners can do more to engage staff to implement these plans.
Currently, just 60 percent of firms link individual team member goals to
strategic plans. Plans should include details on tactics and timelines
for completion and should assign accountability in order to be
meaningful and yield the desired results.

Advisors can start getting strategic about their growth by concentrating
on serving specific targets or niche markets. The study found that it is
easier to serve and attract clients – and ultimately easier to achieve
sustainable growth – by focusing on a certain type of client.

Serving a particular client type can allow a firm to tailor its
messaging and its offering for its desired niche and develop prospects
into clients. In fact, firms that truly serve target markets reported
client growth that was 35 percent higher than others, with revenue
growth that was 25 percent higher, and profit margins that were 17
percent higher.

Forward-looking plans should also address demographic trends that are
likely to impact firm growth and profitability over the long term. Right
now, 64 percent of firm clients are 55 years of age or older, and for
good reason: they typically are more profitable than younger clients.

In firms where at least half of clients were under the age of 55, the
typical profit margin was 14 percent, about two-thirds the level of
firms serving older clientele. According to FA Insight, the silver
lining for advisory firms serving younger clients is that they are
growing at double the rate of other firms.

Though many younger clients may be less profitable for firms today,
older clients will soon draw down assets. Advisors may better sustain
growth down the road with less risk of asset attrition by working with
the next generation today.

"It's critical for advisory firms to have a growth strategy that takes
into account the age and stage of their existing client base," said
Oligino. "While younger clientele may be less profitable now, a healthy
demographic mix is key to a healthier long-term future."

To download the executive summary of the report, 2018 FA Insight
Study of Advisory Firms: Growth by Design,
click here.

FA Insight is a product of TD Ameritrade Institutional, division of
TD Ameritrade, Inc. FA Insight is a trademark owned by TD Ameritrade IP
Company, Inc.

About TD Ameritrade Institutional
Ameritrade Institutional
is a leading provider of comprehensive
brokerage and custody services to more than 6,000 fee-based, independent
RIAs and their clients. Our advanced technology platform, coupled with
personal support from our dedicated service teams, allows investment
advisors to run their practices more efficiently and effectively while
optimizing time with clients. TD Ameritrade Institutional is a division
of TD Ameritrade, Inc., a brokerage subsidiary of TD Ameritrade Holding

About TD Ameritrade Holding Corporation
TD Ameritrade
provides investing
and education
to more than 11 million client accounts totaling more than $1.2 trillion
in assets, and custodial
to more than 6,000 registered investment advisors. We are a
leader in U.S. retail trading, executing an average of more than 780,000
trades per day for our clients, more than a quarter of which come from
mobile devices. We have a proud history
of innovation
, dating back to our start in 1975, and today our team
of nearly 10,000-strong is committed to carrying it forward. Together,
we are leveraging the latest in cutting edge technologies and one-on-one
client care to transform lives, and investing, for the better. Learn
more by visiting TD Ameritrade's newsroom
or read our stories at Fresh

Brokerage services provided by TD Ameritrade, Inc., member FINRA/SIPC.

1 TD Ameritrade Institutional is a division of TD Ameritrade,
Inc., a brokerage subsidiary of TD Ameritrade Holding Corporation.

Source: TD Ameritrade Holding Corporation

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