Financial Planners and Investment Advisors
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Industry Overview
About 25,000 US companies with combined annual revenue of about $115 billion provide financial planning and investment advice to individuals and businesses. Large companies include Ameriprise Financial, BlackRock, and units of diversified financial services companies such as Morgan Stanley. The industry is concentrated: the 50 largest companies account for about half of revenue. A large local firm may have 30 employees and generate $10 million in annual revenue.
Competitive Landscape
Demand is driven by consumer income and wealth and demographics. The profitability of individual firms depends largely on effective marketing. Large companies have some advantages in providing expertise in a wider range of investment options, and they may be able to charge lower fees. Small companies can compete successfully by providing better service and advice.
Products, Operations & Technology
Financial planners help customers put together a plan to manage their financial resources; investment advisors suggest specific investments. About 70 percent of industry revenue comes from providing services to individuals. Financial planners help individuals form a plan that may include debt, asset, college, retirement, estate and tax planning, and may periodically check with the client to see how well the plan is being followed. Much of the planning revolves around an income and spending budget, with advice about the types of financial investments suitable for the client. For wealthy individuals, and for organizations such as trusts, estates, and charitable foundations, financial planners offer more comprehensive and detailed planning, often of a tax-sensitive nature, and frequently recommend specific investments, in which case they function as investment advisors.
Investment advisors recommend specific investments, sometimes to individuals but most often to managers of investment funds such as mutual funds. Investment advice is usually based on research, which can be of many kinds. Many advisors develop methods of research and analysis that are unique to their firm. Large firms operate like brokerage houses, with large numbers of general-knowledge advisors backed by a research and support staff. Advisors may be paid a flat fee (typically much higher than for basic financial planning); a fee based on the size of the assets under management (from half a percent to 5 percent of assets); or a performance fee based on the success of the investment advice. In some cases, compensation is indirect, through commissions received from brokering investment transactions. Some advisors have authority to invest on their clients' behalf.
