Despite 2022 being a challenging year, the registered investment advisor (RIA) industry continues to be strong, with organic growth and client retention helping to lead the way, according to Schwab Advisor Services’ 2023 RIA Benchmarking Study.
While assets under management (AUM) decreased 7.1% for the median firm, assets from new clients and those from existing clients both reached their second-highest point in five years, the study reveals.
Client retention continued to be a testament to the industry, having stayed at 97% for the past five years. Moreover, client growth remained healthy, up 6.2% for all firms, which Schwab notes is in line with the five-year annualized growth rate.
For 2022, firms with under $250 million in AUM saw -5.1% decline AUM, but 6.2% in net organic growth. Firms with over $250 million in AUM saw -7.6% decline in AUM, but 4.1% in net organic growth. Meanwhile, the top performing firms—those that rank in the top 20% of the firm performance index according to 15 metrics—saw 0% in AUM growth, but 10.8% in net organic growth.
For all firms, referrals from clients and business partners remained the leading driver of growth, accounting for 70% of new clients and 69% of new client assets, the study further notes. According to Schwab, there is an opportunity for firms to develop referral plans. Across the study, only 34% have client referral plans and 25% have business partner referral plans documented.
Those with written referral plans saw 1.6 times more new clients generated from existing client referrals and four times more new clients generated from business partner referrals than firms without referral plans.
Meanwhile, inorganic strategies also continued to fuel growth. Nearly half of all firms pursued these strategies over the past five years, and half of all firms are seeking inorganic growth opportunities in the future. Firms with inorganic activity saw a five-year compound annual growth rate of 11.8% in AUM, compared to 8.3% for firms without inorganic activity. Among the reasons for doing so include creating scale, entering new niche markets, succession planning, talent acquisition and AUM growth, to name a few.
Now in its 17th year, the study—which explores the effectiveness of client growth and retention strategies, how firms are navigating the talent landscape, as well as personalization and investment trends—reflects data from over 1,300 advisory firms that represent more than $1.7 trillion in AUM. Advisors responded between January and March 2023.
Strategies to Create Productivity Gains
Additional findings show that firms are using digital tools, workflows, and client segmentation strategies to gain efficiencies, increase productivity, and create capacity so advisors can provide personalized services while scaling the business.
In fact, the top performing firms that more often use such tools and strategies spent around 20% less time annually per client on operations (13 hours) and about 10% more time per client (31 hours) on client service than the median firm in the study.
Client segmentation is also critical to long-term business sustainability, the study notes. It can help firms align revenue with cost to serve and free up capacity so advisors can focus more time on serving clients and generating new business. To that end, 55% of the top performing firms have a client segmentation strategy. Additionally, firms with a segmentation strategy manage more clients per professional than those without one.
Personalization Strategies
Personalization strategies can also give RIAs an edge, the study further suggests. For instance, advisors offer personalized investment strategies to help tie meaning to clients’ investing, beyond returns. Customized investing vehicles include direct indexing, value-based/impact investing, thematic investing, and separately managed accounts.
What’s more, by leveraging behavioral finance, advisors delivered more impactful client experiences by increasing client satisfaction. According to the findings, nearly half of firms reported using behavioral finance for more than 50% of client interactions and firms using BeFi saw 3.3 times more new assets from existing clients in 2022.
The top performing firms also use tactics to educate clients about financial planning and investment topics to help support client acquisition efforts. In this case, 70% of firms reported using tactics to engage the next generation of investors, building relationships to help secure them as long-term clients. The median firm in the study uses five tactics to educate their clients. Those include, for example, one-on-one education, engaging with the next-gen family member, social media, newsletters and articles for website, to name a few.
“As more investors choose RIAs, firms can manage growth by using scalable processes to create capacity for personalization strategies,” says Lisa Salvi, Managing Director, Business Consulting and Education at Schwab Advisor Services. “Personalization allows advisors to differentiate their offerings—in how they interact with clients, the services they provide, and their investment approach. Deepening the relationship in this way will help create enduring enterprises and lasting success.”
Talent Acquisition
Not surprisingly, as firms adapted to the current landscape, talent remained a top strategic priority (#2 ranked strategic initiative), with most firms (77%) reporting they hired in 2022, and 75% planning to hire in 2023.
To continue meeting client needs, 37% of firms recruited from colleges and universities—the highest in the study’s history. Firms also looked for more experienced talent from other RIAs (27%) and professional services firms outside the industry (21%), the study shows.
Firms are also focused on cultivating talent internally. Here, the study found that developing staff capabilities and skills moved up four spots in the ranking of strategic priorities from two years ago. Additionally, 75% of firms reported offering career path/progression opportunities to keep employees engaged.
