A new report finds that independent advisory firms added a significant number of new clients over the past five years — between 28% and 50% more at the median – while average client size increased by 22% at the median over the same period.
Last year roughly 75% of new clients (at firms with $100 million or more in AUM) came through referrals, according to Schwab’s 2016 RIA Benchmarking Study. Client retention rates remained sky-high at 97% over the period of market turbulence, which the study authors said was a testament to the trust advisors have built with their client base over time.
The study found that in 2015, asset and revenue growth eased somewhat but remained positive. Assets under management rose to $588 million in 2015 from $365 million in 2011, at a median compound annual growth rate (CAGR) of 9.2%. Revenues grew to $3.6 million in 2015 from $2.3 million in 2011, at a CAGR of 10.9%.
Profitability Points
Despite eased growth, profitability — which grew by 27% at the median over the past five years — was driven by improvements in operational processes and technology-driven efficiencies, according to the report. Since the lows of 2009. more than half of firms in the study doubled their AUM, and one-quarter doubled their revenues.
Firm profitability was up in the last year, rising 4% 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% in the past five years.
Firms are preparing for organic and inorganic growth opportunities to drive future growth, and advisors are creating enduring businesses by investing in client relationships, technology, and talent. They are planning to do this via:
44% - Acquire new clients through client referrals
37% - Acquire new clients through business referrals
29% - Enhance strategic planning and execution
25% - Improve productivity with new technology
19% - Improve satisfaction for existing clients
17% - Recruit staff to increase firm's skill set/capacity
16% - Make changes to org structure and roles
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%) of advisors reported that their top priority is improving productivity with new technology.
Talent ‘Ed’
The report notes that firms are looking to strategically source the best talent to propel firm success; at mid-sized firms with $500MM-$750MM in AUM, 61% plan to add relationship managers or investment professionals this year. Firms are also focused on human capital, and are looking to strategically source the best talent to propel firm success. Firms across peer groups strategically hire team members with unique qualifications:
- 83% of firms have at least one CFP® on staff;
- 55% have at least one CFA on staff;
- 42% have at least one CPA on staff; and
- 23% have at least one JD on staff.
Inorganic Opportunities
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%) of firms that manage over $1 billion, and almost 25% 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 Schwab shows that last year alone, transaction volume among RIA firms reached a 10-year high of 84 deals, up 56% from 2014.
The 2016 study includes 1,128 RIA firms representing nearly three-quarters of a trillion dollars in AUM.
