One way to understand indus- try issues and trends is to review the performance of all advisory firms as a group. As valuable as aggregate reporting is, though, it does not provide the most relevant comparison for an individual firm looking to evaluate its own performance. A better way is to look at key practices by business model, affiliation model and practice model. Our recent study does just that.

BUSINESS MODELS

A business model defines the type of firm by the services it provides. We identify five primary business models in the financial advisory business:financial planning, investment advisory, investment management, wealth management and other. Each business model has its strengths and struggles, and any model can be successful if effectively built and managed.

Financial planning firms primarily provide personalized financial planning services, and investment advisory firms provide investment strategy and selection advice. Investment management firms provide investment recommendations and discretionary investment management, while wealth management firms provide holistic advice, including tax, estate, financial planning and investment management.

Financial performance. The primary difference between these business models can be seen in their revenue streams. While each model has similar first-year and recurring trail commissions, investment management and wealth management firms significantly outperform other business models in fee-based revenue. This promotes better financial performance overall; firms using these business models have nearly twice the total revenue than other business models (see "Business Model," below).

If these business models deliver better financial performance, why would advisors choose to use different ones? For one, greater revenue does not automatically result in higher profitability, as investment and wealth management firms show significantly higher expense structures, driven largely by investments in staff and infrastructure. Investing in and managing these resources require time and effort, and not all advisors want to move beyond a lifestyle practice. Philosophies around commissions and fees also prompt some advisors to build fee-only practices. While the study did not ask why a firm chose a business model, this is as much a personal decision as a professional one, one that numbers alone cannot answer.

Client information. Wealth management firms reported the highest revenue and assets per client. Investment management firms have the highest number of clients, which explains their greater total fee-based revenue, even though revenue performance and assets under management (AUM) per client are lower than wealth management firms. In addition to a larger fee-based client base, wealth management firms have the highest AUM per client, leading to greater revenue per client than the other categories by a significant margin.

All business models saw growth in clients from 2006 to 2008. However, from 2007 to 2008, wealth management firms saw slightly slower growth in their client base, with year-over-year growth in clients decreasing from 8% to 4% in 2008. Investment advisory firms maintained a 3% growth rate over the same time period, and financial planning and investment management firms saw client base growth of 13% and 12%, respectively.

Findings indicate some business models were more prone to client losses in 2008, with investment management firms experiencing the largest number of lost clients. This is not unexpected given their niche service offering and tie to market performance. To offset these losses, investment management firms gained more clients than the other business models. Financial planning firms showed the most consistent client base performance, with clients gained holding steady at 10 per year from 2006 to 2008.

Growth trends. Asset trends for each business model accurately reflect 2008 market performance. On average, each business model saw decreased AUM in 2008 compared with 2007. However, wealth management firms reported the smallest decrease in assets during this time at 4%. This is likely due to their broader service offering, which tends to deepen client relationships and define success beyond market returns, generally resulting in high client retention rates in all markets.

Even with decreased assets in 2008, all business models expect double-digit revenue growth over the next three years. Expected growth in 2011 ranges from 10% to 15%.

AFFILIATION MODELS

An affiliation model defines how the firm conducts and processes business. The primary models are independent broker-dealer (IBD) and registered investment advisor (RIA). For both IBD and RIA, our study explored variations of these models, including IBD-only, IBD with insurance, IBD with planning RIA, RIA-only and primarily RIA. In addition, we included regional and national brokerage firms, bank trust companies and "other" as affiliation models.

Financial performance. Translating revenue sources into total revenue numbers, the primarily RIA, RIA-only and IBD with planning RIA affiliation models had the highest total revenue. These models also have the greatest direct and indirect expenses, however. As a result, the operating profits for these firms are in line with other affiliation models (see "Affiliation Model," above).