Financial Planners and Investment Advisors

Industry Overview

About 10,000 firms in the US provide financial planning and investment advice to individuals and businesses, with combined annual revenue of $15 billion. Large companies include Value Line, Morningstar, and units of financial services companies. The industry is concentrated at the top, with the eight largest firms accounting for a quarter of industry revenue, but is otherwise highly fragmented. A large local firm may have 30 employees and generate $10 million of 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 may charge lower fees. Small companies can compete successfully by providing better service and advice. In small and large firms, annual average revenue per employee is about $200,000.

Products, Operations & Technology

Financial planners help customers put together a plan to manage their financial resources; investment advisers suggest specific investments. About 60 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 like 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 advisers 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 advisers develop methods of research and analysis that are unique to their firm. Large firms operate like brokerage houses - with large numbers of general-knowledge advisers backed by a research and support staff. Advisers 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 1 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 advisers have authority to invest on their clients' behalf.

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