“The end of the year is often a good time for advisors and their clients to discuss the tax implications of investing, but with the looming fiscal cliff on many investors’ minds, it’s no surprise this is a popular topic of conversation”
When asked to compare their initial expectations for ROA growth in 2012 with actual growth, nearly half (49 percent) of the respondents said they didn’t see the kind of growth they anticipated. Twenty-one (21) percent reported that their ROA grew more than expected, and 28 percent of advisors reported that their ROA grew less than expected.
On average, survey respondents said that they expected to see 7.6 percent growth in ROA and only realized 7.2 percent growth in 2012. Looking to 2013, respondents were more optimistic about growth compared to the previous year, reporting an expectation of 8.4 percent growth in ROA on average. Two-thirds (67 percent) of respondents said the current ROA on their books of business is 80 basis points or less.
“Return on assets is one important metric for goal-setting around business growth, alongside other key indicators such as recurring revenue, total revenue per client, AUM per client and clients per full-time employee. ROA provides valuable insight into the revenue efficiency of the advisor’s asset base,” explained Sam Ushio, practice management consultant for Russell’s U.S. advisor-sold business. “Based on our research, we believe that a reasonable aspirational ROA level is around 70 – 90 basis points on the overall business. If an advisor is earning less, it may indicate that they are still using a transactional business model. At a deeper level, a lower ROA may reflect an advisor’s tendency to discount the value they deliver to clients, which often correlates with confusion on the competitive landscape.”
Ushio added that he is pleased to see respondents (62 percent) focusing on deepening client relationships to help grow ROA across their businesses. More than half (58 percent) of advisors also indicated they are proactively seeking out new clients to grow ROA, as well as asking for referrals (53 percent), moving clients into fee-based relationships (43 percent) and moving client cash off the “sidelines” (32 percent).
"In our practice management coaching, we see a higher degree of success when advisors approach clients with the intention of strengthening overall relationships rather than simply offering new products or concepts,” said Ushio. “The survey results reinforce that many advisors are indeed seeking organic growth through meaningful client relationships but those relying on prospecting to drive ROA should be cautious, as the incremental effort can often outweigh the benefits to an advisor’s business.”
Advisors’ ROA growth expectations and strategies vary by client segment
When asked which of their client segments they expect to see the most ROA growth from in 2013, 64 percent of advisors pointed to clients nearing or very near retirement.
Among those advisors expecting most growth from clients 5 – 20 years from retirement, 53 percent said their strategy for increasing ROA is asking for referrals, while 52 percent say they plan to move clients to advisory-based relationships. For advisors expecting most growth from clients less than 5 years from retirement, the most popular strategy for increasing ROA is focusing on client service and deepening relationships (60 percent).
Ushio explains that many high-net-worth investors try to diversify by working with more than one financial advisor, but by strengthening client relationships an advisor can encourage their clients to consolidate their assets. “This has obvious benefits for the advisor in asset gathering, but it can benefit a client for their advisor to have the full picture of their financial situation. Particularly for investors approaching or in retirement, it can be very valuable to have one, strong advisory relationship and one outcome-oriented plan centered around their goals and potential risks.”
Advisors and clients talking taxes as 2013 approaches
Throughout 2012, both advisors and their clients have increasingly chosen the tax implications of investing as a topic of conversation. In the latest survey, taxes were the top subject of advisor-initiated conversations (36 percent of advisors) while 23 percent of advisors say clients are bringing up the topic. Advisors also pointed to generating income from portfolios (30 percent) and clients running out of money in retirement (30 percent) as the issues they are most often bringing up to clients.
“The end of the year is often a good time for advisors and their clients to discuss the tax implications of investing, but with the looming fiscal cliff on many investors’ minds, it’s no surprise this is a popular topic of conversation,” said Ushio. “Helping to manage tax efficiency can be a great way for advisors to demonstrate the value they deliver to clients. Advisors should try to refocus client questions about the fiscal cliff into meaningful conversations around potentially maximizing after-tax wealth and helping to improve the odds of meeting their long-term financial goals.”
Additional resources for advisors
Russell Investments’ Helping Advisors site has a wide range of tools to help advisors with their businesses, including the Advisor Health Index, an online tool that examines five strategic business measures (including ROA): http://www.russell.com/Helping-Advisors/YourBusiness/AdvisorHealthIndex.aspx
More about Russell’s Financial Professional Outlook
The current iteration of the FPO includes responses from more than 200 financial advisors working in 93 national, regional and independent advisory firms nationwide. The survey was fielded Oct. 24 – Nov. 9, 2012.
More information about the FPO survey, including a video and a full report of findings, can be found at: www.russell.com/Helping-Advisors/YourBusiness/FinancialProfessionalOutlook.asp.
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