Profit Growth Lagging Revenue for Adviser Firms

A news release from Seattle-based accounting firm Moss Adams LLP said its 2006 Moss Adams LLP Financial Performance Study of Advisory Firms found that margins are under pressure, owners’ income has stagnated, and growth is slowing.

“This is the first time we’ve seen such dramatic growth in the top line (revenue) without a corresponding improvement in Key Performance Indicators that measure profitability and productivity,” said Mark Tibergien, principal of Moss Adams, in the news release.

To service larger numbers of clients in a more demanding environment, practices have added more staff. Moss Adams researchers found that the leverage from these new hires has boosted the top line across the industry, but the cost of doing so has wreaked short-term havoc on the economics of many practices that has yet to level off in the form of long-term profitability.

But Tibergien cautioned firms against interpreting these findings as an indication that they need to trim back their staff. “The problem isn’t that firms have too much staff,” he said. “It’s that their growing staff needs better management.”

Strong Revenue Growth

According to the survey, advisory practices are now growing at rates not seen since the early 1980s.The 119 firms that have participated consistently in Moss Adams surveys since 2001 posted averaged revenues of $777,927 for fiscal year 2000 but practically doubled that top line by 2005, with $1,356,018 in revenue, according to the firm.

Meanwhile, AUM for all firms in the survey has grown steadily on average, at better than 20% per year during the past three years.

But income growth has not kept up. At the same time that advisory firms were increasing AUM and revenues at notable rates, their owners saw a less appreciable rise in firm-derived income.

According to Moss Adams, in 2000, principals in these firms collected on average $253,010 in pre-tax income per owner (compensation plus firm profits).But by 2005, income per owner had grown to $272,761 – an 8% increase “for what was five years of tremendous effort and commitment to grow their firms 74% in terms of revenue,” the study said.

Wrote the Moss Adams researchers: “This is a period of reinvestment for the industry in order to ratchet up to the next level of growth.It is a period when good management, more than ever, will distinguish profitable firms.”

More than 1,000 firms completed the online survey.

The 2006 Moss Adams LLP Financial Performance Study of Advisory Firms can be purchased for $145 at www.mossadams.com/surveys/advisorstudy/2006.htm or by contacting Dan Inveen at 206.302.6521.