The wealth management industry still has a “growth problem,” and it may be getting even worse. In 2024, firms reported only 4.1% in assets from new client relationships, net of markets, while losing 2% due to client departures, according to a new study conducted by Ensemble Practice and ActiFi. That compares to net organic growth of 5.7% in 2023.
Yet, independent advisory firms reported record profitability in 2024. On average, revenue growth was 15.3%, largely driven by market appreciation, the study said. Revenue per client reached a record average of $11,942 for the firms surveyed. Revenue per team member was nearly $460,000, also a record, while revenue per advisor was nearly $1.3 million in 2024.
Those productivity gains translated to a record 39.2% profitability margin for the average firm. That compares to a 25% profit margin in a typical year, said Ensemble Practice CEO Philip Palaveev.
Palaveev said the data indicates we’re in a period of “prosperous stagnation,” with high profitability and slow growth. It’s not necessarily a problem now, but this could become a big problem for the industry in the future.
“It will become a problem because someday those clients will leave. It will become a problem because our young people want to grow their equity, their income, their responsibilities. It will become a problem because the market will not be so good all the time. In other words, this lack of growth should be alarming us,” he said. “If you put a frog in boiling water, it will try to jump out right away. But if you gradually increase the temperature, it just doesn’t understand that it’s being boiled. … We don’t feel the pain, but eventually we will. And a lot of our businesses are now owned by private equity, partially or fully. Private equity certainly expects growth in order to justify the high valuations. A lot of our younger people have been retained and recruited with stories of equity and growth, and we need to grow and to justify those valuations.”
Despite the growth in new client assets, existing clients contributed 5.2% in assets in 2024, the study found. Palaveev said he’s never seen contributions exceed new assets; in fact, new assets from new clients typically exceed contributions by a factor of three.
The reasons? Corporate executives have been redeeming restricted stock units. Business owners have been cashing out on private equity-acquired businesses. And retirees have done well in the markets.
“In other words, anyone who’s invested in business has done very well, especially in the last three years. And as a result of that, their appetite for investing has increased. In other words, if they had some money sitting on the sidelines, they brought them into the market, and they also earned a lot, particularly corporate executives that receive equity-based compensation.”
At the same time, he said, the good markets have encouraged people to spend. And the data showed distributions were at 4.2% last year, higher than ever.
The study also found that the average firm’s direct expenses, or compensation to the advisors, were 30% last year. That compares to about 40% normally. That gap provides an opportunity for firms to invest back in the business, Palaveev said.
“That’s money that we could be investing in, developing advisors, recruiting advisors or compensating existing advisors,” he said. “This is where competition, in my mind, will go. If it’s hard finding clients, then I am going to go and recruit advisors and try to see if I can get the clients to come with them. This is why I think the next step is going to be inevitably recruiting wars. We are going to start fighting for advisors, and we’re going to start paying them more and more and more to recruit them, especially if we can somehow get them to move their book of business.”
These recruiting wars are already happening with the wirehouses, which are paying high bonuses to move. But Palaveev said we’re likely to see this happen on the independent side, too.
The study also points to an inverse relationship between profitability and growth. Faster-growing firms tend to spend more money on growth and be more aggressive with recruiting, and they tend to have lower profit margins.
“The opposite is true. Firms that are very profitable sometimes are underinvesting in growth, and sometimes they don’t even have the capacity to grow,” Palaveev said. “The call to action to me would be, ‘Hey, we are making quite a bit of money. Let’s spend some of it on growth and some of it on people because we are going to need both.’”
#Wealth #Management #Industry #Faces #Growth #Challenges #Record #Profits