Financial-advice firms see record 2015 earnings yet slowest growth since crisis, study shows

Independent financial-advice firms produced record earnings last year, but their growth rate dropped off the most since the financial crisis, according to an annual benchmarking study by InvestmentNews research.

Revenue rose to a record $3.89 million while operating profit margins of 24.7% were the highest since at least 2005, according to research data tied to the 2016 InvestmentNews Financial Performance Study. Last year’s 8.2% jump in revenue was the smallest annual increase since the decline seen in 2009, when firms were struggling through the aftermath of Lehman Brothers Holdings Inc.’s collapse.

The annual study, which was sponsored by Pershing and done in partnership with Ensemble Practice, examined the performance of 222 independent broker-dealers, registered investment advisory firms and hybrid companies that use both business models. The participants represented a median $215 million of assets under management, with some reporting more than $1 billion.

While the record results are a positive sign for the firms, their growth is slowing just as they face rising regulatory costs. The wealth-management industry has been particularly focused on making investments needed to comply with the Labor Department’s new fiduciary rule, which Republican lawmakers are now trying to repeal due in part to the liability risk it places on financial-service firms.

“Compliance costs are a big deal to the industry,” which may start to see earnings flatten out as result, said Steven Giacona, chief executive officer of Round Table Wealth Management, a registered investment advisory firm with about $900 million of assets and offices in New York and Westfield, N.J.

“In our industry you can never just depend on markets” for growth, he said. Over the past four years Round Table has been investing in marketing and business development to continue to attract clients, a decision that might not be instinctive to advisers who left a large, “big brand” brokerage firm to create a boutique practice, he said.

Firms participating in the InvestmentNews benchmarking study saw a 12.5% compound annual growth rate in revenue over the past decade. The rate declined to 9.7% over the past five years, and 8.8% in the past three, according to research data tied to the study.

While firms posted a record $961,427 of operating income last year, markets did little to boost growth, leaving firms focused on business development efforts to build assets and earnings, according to the financial performance report.

“While the results were not necessarily poor, they disappointed the ambitions of more than half the industry,” according to the executive summary of the study. Fifty-four percent of firms participating in the study said they missed their growth goals last year.

The slowdown comes ahead of technology investments needed to demonstrate they’re meeting the demands laid out in the more than 1,000 pages of the Labor Department’s fiduciary rule released in April. The law, which requires advisers who make recommendations for retirement accounts to act in the best interests of their clients, takes effect next year. Full implementation is required by January 2018.

House Financial Services Committee Chairman Jeb Hensarling, R-Texas, introduced on Sept. 9 a bill that includes a provision that would kill the DOL rule, according to spokesman Jeff Emerson. The House financial panel was expected to begin debating and voting on the bill on Tuesday.

As the industry steps up investments in compliance officers and systems, Mr. Giacona continues to emphasize the value of putting money behind marketing and resources aimed at attracting new clients.

“In a good year, the markets are going to help business development,” he said. “In a bad year, business development is going to hopefully keep you flat.”