The advisory industry is rewriting the 40/40/20 rule

InvestmentNews, in a report on the advisory industry's cost structure, walks back through the arithmetic that governed the business for a generation. A firm running a 20% profit margin typically put 40% of client revenue toward the advisors who found and bound the client, and another 40% toward overhead — the staff who minded the relationship and ground through the paperwork.

That split descended from an older rule of thumb: revenue from a new client divided into quarters among the people who find, bind, mind, and grind. At a firm with a 20% margin, those quarters net out to 40/40/20 — a label popularized by Mark Tibergien, the practice-management consultant.

The ratios were not folklore. Tibergien and Moss Adams substantiated them with benchmarking studies run through the 1990s and 2000s, an era when a 'large' advisory firm held about $100 million in assets and a 'mega' firm was still shooting for $1 billion. Those benchmarks describe the minor leagues of today's market.

Large firms now count their assets in the billions, and the mega tier runs into the tens of billions, growing toward $100 billion and beyond. The gap between the old arithmetic and the new scale turned the overhead line into the industry's main financial project.

The 2010s were the aggregator decade. Consolidators combined firms with duplicative overhead, harvested cost synergies, and used size to spread fixed expenses across more revenue. The ambition, according to InvestmentNews, was to push the overhead share of revenue from 40% down to the low-to-mid 30s.

More recently, the focus has shifted from spreading overhead across a larger base of advisors to building internal and proprietary technology. Where the aggregators used scale, the emerging approach uses software.

The distinction matters. The aggregation model kept the cost structure intact and distributed it more thinly across more revenue. Proprietary technology represents an attempt to change that cost structure directly, rather than simply distribute it. The aggregation playbook spread the overhead; the technology playbook is aimed at reducing what needs to be spread. Whether it works is an open question; the direction is clear in the report.

The next benchmark study, whenever it arrives, will be measuring firms that look nothing like the ones Tibergien first studied.