While market returns played an important role in the significant gains in AUM and revenues last year, a new report finds that RIAs have experienced nearly half of their growth in assets under management in other ways.
In fact, Schwab’s 2014 RIA Benchmarking Study notes that nearly half of that growth is the result of new client acquisitions and existing client share-of-wallet increases.
In 2013, RIAs showed record growth and the highest profitability of any year in the nine years of Schwab’s annual study. The median firm realized a 12.8% compound annual growth rate (CAGR) in AUM and 13.6% in revenues. This growth did not come at the cost of doubling the number of clients or significantly increasing the number of professionals or support staff. The median firm added 29% more clients since 2009 (from 257 clients in 2009 to 331 clients in 2013), or about 19 new relationships per year.
The report finds that the fastest growing firms are focused on generating and closing referred business, and that many are remarkably successful at bringing on more than their expected share of new clients — approximately 30% more than all other firms at the median. They also bring on larger clients, due mainly to their success with centers of influence, generating 3.6 times more organic growth than all other firms at the median.
Over the past five years, the median standardized operating margin increased 38%, reaching 25% at the median; revenue per professional jumped 37%, reaching $530,000 at the median. For firms that manage more than $1 billion in AUM, revenue per professional increased considerably to more than $637,000 at the median. However, this is not a result of managing more relationships per professional or spending more time per client — both remain consistent regardless of firm size. Not surprisingly, the data shows that larger firms serve clients with more assets.
How They Do It
Successfully adding new client relationships through effective execution of a referral marketing strategy remains the top way firms outperform in each peer group. The fastest-growing firms — top 20% of firms surveyed as determined by the 4-year net organic CAGR — added approximately 30% more new clients and experienced 3.6 times more organic growth than all other firms at the median in 2013. Significantly, the results of the study show that firm size is not correlated to a firm’s ability to successfully execute on its growth strategy.
Planning is now part of the fabric of most well-managed RIAs — 61% of firms have a written strategic plan, up from 52% last year. The report’s authors cite an inflection point with strategic planning as firms grow in size; for example, nearly 75% of firms with $500 million to $750 million in assets have a written strategic plan, compared with half of firms in the $250 million to $500 million peer group. One-third of firms across the study are focused on enhancing and executing their strategic business plan as a top initiative this year.
The percentage of firms that have a written succession plan continues to increase each year to nearly 50% in 2013, and Schwab notes that the majority of firms in the study plan to add or promote principals from within and are documenting the path to partnership to retain and incentivize their people. The report’s authors note that this path to partnership creates an owner-operated or shared ownership model that can supercharge a firm’s growth, and that it is one of the most important value drivers a firm can put into place to ensure continuity. Moreover, when it’s in place, Schwab says valuations can be higher for firms seeking third-party funding or participation in a merger.
However, only one-third of firms in the study report they are focused on implementing a client segmentation strategy.
Forty-seven percent of firms with more than $1 billion in assets have a chief operating officer to actively manage the day-to-day operations, affording firm principals the time and capacity to focus on managing clients and growing the business.
Technology is another important enabler of productivity and efficiency that continues to evolve into an essential part of the client and service experience, and the report notes that twice as many firms as in the previous year are investing in an online portal to share information with clients, and significantly more are investing in mobile account access.
Speaking of Strategy
Each year nearly all advisory firms rank “acquiring new clients” as their top strategic business priority, and the 2014 report is no exception; approximately 25% of firms in the study expect to double in size again over the next five years or sooner. Schwab says the fastest-growing firms are focused primarily on superior organic growth, while some — nearly 25% — are also looking to make opportunistic acquisitions.
With this prosperity, the report notes that many RIAs are more interested in building enduring businesses that identify next-generation leaders and owners from within.
The 2014 RIA Benchmarking Study is online here.
