It’s not unusual for small to mid-size financial advisory firms to have tremendous growth potential while feeling constrained by capacity for it. Why would this be? If you’re in this predicament, let’s start with a good look at your profit and loss statements. Sure, you might feel like you’re making money but if you have employees, you might be surprised by what you find. Looking at how your firm compares with industry averages helps to zero in on the areas which may be holding you back. 

Let’s start with expenses. The recommended expense percentages in a Registered Investment Advisor’s (RIA’s) Profit and Loss (P&L) statement can vary depending on a number of factors, including the size of the firm, the services provided, and the type of clients served. However, there are some general guidelines that can be followed.

Several industry surveys and reports are available, providing valuable insights into the financial performance of RIA firms. These reports and surveys are typically conducted by organizations, such as InvestmentNews, Cerulli Associates, and Schwab Advisor Services, among others.

In addition, RIA firms are required to file Form ADV with the Securities and Exchange Commission (SEC), which provides detailed information about the firm’s operations and finances. Collectively, this information can be used to calculate the percentage breakdown of expenses.

The major expense categories and their approximate percentage breakdown for an average US-based RIA firm’s P&L statement are as follows:

1. Compensation and Benefits: This category includes salaries, bonuses, health insurance, retirement plans, and other employee benefits. It typically represents around 50-60% of the firm’s revenue.
2. Occupancy and Equipment: This category includes rent, utilities, maintenance, and equipment costs such as computers, phones, and furniture. It typically represents around 5-10% of the firm’s revenue.
3. Professional Services: This category includes legal, accounting, and consulting fees. It typically represents around 5-10% of the firm’s revenue.
4. Technology and Communications: This category includes expenses related to software, hardware, internet, and telephone services. It typically represents around 5-10% of the firm’s revenue.
5. Marketing and Advertising: This category includes expenses related to advertising, public relations, and promotional activities. It typically represents around 1-5% of the firm’s revenue.
6. Travel and Entertainment: This category includes expenses related to business travel and client entertainment. It typically represents around 1-3% of the firm’s revenue.
7. Other Expenses: This category includes all other expenses that do not fall into the above categories, such as insurance, licenses, and permits. It typically represents around 1-3% of the firm’s revenue.

Since compensation and benefits (employee costs) represent such a large percentage of total revenue, the employee costs to revenue ratio is especially important to look at closely when considering the company’s capacity for growth. In a healthy RIA firm, it usually ranges from 50-70%.

The percentage of employee costs to revenue for a healthy RIA firm can vary depending on several factors, such as the firm’s size, the complexity of the services offered, the level of expertise and experience of the employees, and the cost of living in the geographic location where the firm operates. For example, a larger firm offering more complex and specialized services in an expensive geographic area will likely have higher employee costs to revenue ratio than a smaller firm offering a simpler service model in a less expensive geographic location.

It is important to note the obvious. Employee costs are a necessary expense for a growing RIA firm, as they are responsible for providing the services that generate revenue. However, it is also important to manage employee costs effectively to ensure they are aligned with the revenue generated and do not negatively impact the firm’s profitability.

In addition, the Financial Planning Association (FPA) conducts an annual study of RIA firms that provides information on key financial metrics, including revenue per employee. According to the FPA’s 2021 RIA Benchmarking Study, the median revenue per employee for RIA firms was $328,000. However, this figure can also vary widely depending on similar factors as noted earlier.

Levels of service, service fees, operational efficiencies, and other factors can impact employee cost-to-revenue ratios and revenue-per-employee metrics in several ways. If an RIA offers higher levels of service to clients, it may require more staff to provide that level of service. Further, if the firm offers highly tailored services, the support employees will be perpetually on a learning curve and unable to develop efficiencies gained through repetition. Moreover, it may also require more technically skilled employees, costing the firm more in salaries and overall compensation. This also makes it more difficult and costly to replace them if they leave. All of these factors will likely increase the employee cost to revenue percentages significantly.

On the other hand, higher levels of service and more tailored services can also justify higher fees which can increase revenue per employee since clients may be willing to pay more for it. The problem is often advisory firms do not fully appreciate the value of what they’re delivering and therefore may not be charging the clients appropriately. It’s also common to see advisors adding volume and complexity to their services over time not realizing it, just feeling they need to do so in order to compete. Before they realize it, the value-to-fee ratios get out of whack and everyone suffers the consequence, the employees, clients, advisor(s) and the firm. The key is to find out from the best clients what they value most. Then focus on excellence and efficiencies in those areas while charging appropriate fees.   

Operational efficiencies can also reduce the employee cost-to-revenue percentage by enabling an RIA to generate more revenue with fewer employees. For example, if an RIA can automate certain processes or streamline workflows, it may be able to provide the same level of service with fewer employees. Additionally, operational efficiencies can enable an RIA to serve more clients with the same number of employees. This is why focusing on delivering fewer high-value services can pay off exponentially as you’re able to lower costs through efficiencies of repetition versus high customization and also charge more. 

Other factors, such as investment in technologies to improve marketing, business development, the planning process and even regulatory compliance can also impact employee cost-to-revenue percentages and revenue-per-employee metrics. For example, if an RIA invests heavily in planning software, it takes fewer hours to prepare for meetings. If an RIA invests in digital marketing strategies to displace some live events, it may be able to attract more clients at a lower cost, thus improving revenue per employee.

If you are starting to feel some burnout and stretching your support to capacity, my first recommendation is to look at your gross profit margins, the difference in your fees and cost of delivery.  Once your gross profits are in a healthy place, expand on that by looking at other expenses and creating broader organizational efficiencies.

With your time already stretched, it can be much easier having a process.  A complimentary 30-minute clarity session may be all you need to get the ball rolling and set yourself up for next level growth.  For some immediate breakthrough perspective shifts, just click the button below to find a convenient time to connect.