How Far, and Fast, Are RIA Firms Growing?

We admit we’re a bit biased, but we feel it has everything to do with their 401(k) business.

Schwab’s latest RIA benchmarking study finds independent firms have maintained a 10-year growth trajectory, despite numerous and varied investment environments.

The study, titled (what else) Schwab’s 2016 RIA Benchmarking Study, “underscores the critical importance of the advisor/client relationship as the bedrock of firms’ strength and resilience, and as a driver of growth.”

The data also reveals that stable client relationships coupled with robust business fundamentals “is a recipe for success in firms of all sizes, as technology and human capital increasingly align to drive operational efficiency.”

“Despite the recent sideways market, advisors are delivering a compelling value proposition to clients,” Jonathan Beatty, senior vice president, sales and relationship management, Schwab Advisor Services, said in a statement. “It’s clear that some advisors are tackling the complexities of growing a business and have achieved continued success across a number of key metrics. The long-term trends remain positive and RIA firms work to evolve into enterprises built to last.”

Transformative Growth Anchored by Strength of Client Relationships

Over the past year study results show, the growth trajectory for firms’ AUM and revenues eased somewhat, but remained positive:

AUM rose to $588 million in 2015 from $365 million in 2011, at a median compound annual growth rate (CAGR) of 9.2 percent.
Revenues grew to $3.6 million in 2015 from $2.3 million in 2011, at a CAGR of 10.9 percent.
Solid relationships between advisors and clients have been central to driving this growth during tumultuous market environments. Independent advisors in the Study doubled down on existing client relationships in the past year, and subsequently benefitted from high client-retention rates and referral levels:
Average client size increased by nearly a quarter (22 percent), as advisors spent more time reassuring clients and expanding the scope of their relationships.
Additionally, client retention rates remained sky-high at 97 percent over the period of market turbulence, a testament to the trust advisors have built with their client base over time.
Meanwhile, last year roughly 75 percent of new clients [at firms with $100 million or more in AUM] came through referrals.

“A significant proportion of the growth that independent advisors have experienced can be attributed to deep advisor-client relationships, which is critically important in challenging investing environments,” said Beatty. “More recently, advisors have focused on serving existing clients, providing counsel in volatile markets, and as a result these advisors are entrusted with more assets.”

The intersection of technology and human capital

Increasing productivity and scale remains high on the list of goals for firm leaders, and this can translate into improved operating margins and increased profits:

A quarter (25 percent) of advisors reported that their top priority is improving productivity with new technology.
Firm profitability was up in the last year, rising 4 percent from the year prior and driven by continued improvements in operational processes and technology-driven efficiencies. This continues a longer term trend reported across these firms – profitability has jumped 27 percent in the past five years.

Firms are also focused on human capital, and are looking to strategically source the best talent to propel firm success:

At mid-sized firms with $500MM-$750MM in AUM, 61 percent plan to add relationship managers or investment professionals this year and 57% plan to add support staff.
Firms across peer groups strategically hire team members with unique qualifications:
83 percent of firms have at least one CFP on staff
55 percent have at least one CFA on staff
42 percent have at least one CPA on staff, and,
23 percent have at least one JD on staff.

Navigating future growth

While firms will continue developing their technology, talent, and client base organically, a notable portion is already also preparing for inorganic opportunities to catalyze growth in needed areas:

A third (33 percent) of firms that manage over $1 billion, and almost 25 percent of firms with under $1 billion in AUM, are actively looking to acquire. Study participants reported 208 instances of some type of M&A activity, and 149 instances of “join” activity, in the past five years.
Additional industry M&A data from Charles Schwabshows that last year alone, transaction volume among RIA firms reached a ten year high of 84 deals, up 56 percent from 2014.

“Top performers are firms that view growth—both organic and inorganic—as non-negotiable, but achieve this growth without sacrificing the depth and quality of their existing client relationships,” Beatty concluded. “They find innovative ways to streamline operations, seize opportunity and achieve scale by taking advantage of best practices and resources at their fingertips.”

John Sullivan

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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.