Ep #373: XYPN’s 2023 Benchmarking Study Highlights LIVE
Nov 1, 2023
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Alan Moore and Michael Kitces discuss the highlights of XYPN's 2023 Benchmarking Study, including the growth rates of fee for service models, revenue expectations for new firms, the impact of interest rate volatility on advisory business models, the benefits of having a niche, and staff productivity in different types of advisory firms.
Focusing on the growth rate of client households provides a comprehensive understanding of fee-for-service advisory firms' success and economic health.
Examining the breakdown between new and existing revenue helps assess the effectiveness of subscription-based business models and the value provided to clients.
Having a niche focus is crucial in the scaling phase, leading to faster growth and higher revenue per advisor.
Deep dives
Client Household Growth Rate vs. Revenue and AUM
The podcast episode discusses the importance of looking at the growth rate of client households rather than just focusing on revenue or assets under management (AUM) when evaluating the success and health of fee-for-service advisory firms. While revenue and AUM are commonly used metrics, they may not accurately reflect the growth and economic health of fee-for-service firms. By focusing on the growth rate of client households, it provides a more comprehensive understanding of how firms are attracting new clients and expanding their client base.
Revenue Growth and Financial Planning
The episode highlights the necessity of examining revenue growth and differentiating between new revenue from new clients and revenue growth from existing clients. While revenue growth is an indicator of a firm's overall performance and growth, understanding the breakdown between new and existing revenue is crucial. It allows firms to assess the effectiveness of their subscription-based business models and the value they provide to clients. Moreover, it emphasizes the importance of distinguishing revenue growth from market-related factors, such as market performance, and focusing on the growth generated through acquiring new clients.
Early Years of Building an RIA
The podcast episode delves into the challenges faced by fee-for-service advisors in the early years of building their Registered Investment Advisor (RIA) firms. It provides insights into the typical revenue progression and growth trajectory experienced by advisors starting from scratch. It showcases that the first year is often the most challenging, with advisors generating around $10,000 to $20,000 in gross revenue. However, by the third year, revenue increases to over $80,000, demonstrating the importance of perseverance and setting realistic expectations for building a successful and sustainable RIA firm.
The importance of niche focus in scaling phase
In the podcast episode, it is discussed that having a niche focus becomes crucial in the scaling phase of a business. While in the implementing and building phases, revenue growth does not significantly differ between firms with or without a niche focus, in the scaling phase, firms with a niche focus experience much faster growth. The reason behind this is that having a niche allows for streamlined processes and efficiency as the firm focuses on a single client type or challenge. This allows them to avoid being a generalist and instead specialize in their area of expertise, attracting more clients and referrals.
The correlation between revenue growth and niche specialization
The podcast episode highlights the correlation between revenue growth and niche specialization. In the early years, having a niche may not have a significant impact on revenue growth as advisors are primarily focused on gaining clients and building their reputation. However, as advisors hit capacity and have a substantial client base, serving clients outside their niche becomes challenging and inefficient. On the other hand, firms with a clearly defined niche experience exponential growth in revenue. This is because they become more referable, attracting clients who specifically need their specialized services and benefiting from cross-referrals within their niche community. Firms that have successfully scaled with a niche focus consistently show higher revenue per advisor compared to those without a niche.
What does it look like to scale your RIA and how long does it take? How big of an impact does it really make to have a niche? When should you start hiring, and who should it be when you do?
Co-Founders Alan Moore and Michael Kitces met onstage this year to review the highlights of the seventh-annual Member Benchmarking Study in this episode of XYPN Radio. Every year, the study gathers information from XYPN member participants to get an accurate picture of how advisors are doing in their firms.
