New Barrier to Growth Found in Schwab RIA Study

Schwab’ survey results indicated that 2010 ended with revenue and assets reaching all-time highs, which Schwab credits to strong asset recovery in 2009; the median firm posting over 18% growth after falling by 11% in 2009.

The study also found that advisers ended 2010 on a note of rising confidence and optimism, as nearly nine in ten firms (87%) plan to grow moderately or aggressively in the coming year, with referrals from clients and business partners continuing to top the list of advisers’ growth strategies.

“Despite the worst recession in 80 years, advisers’ commitment to serving the needs of their clients and to adopting best practices in expense management has shaped a stronger RIA industry,” said Bernie Clark, executive vice president and head of Charles Schwab Adviser Services.

Revenue and assets rebound  

RIA profits rebounded in 2010 with most firms ending last year with greater revenue and assets than in the six-year history of the survey, surpassing the year-end high for assets in 2007 and the 2008 high for revenue. The median firm in the study ended 2010 with $212 million assets under management (AUM) versus $176 million in 2007, before the market downturn. The median firm had $1.30 million in revenue in 2010, versus $1.22 million in 2008, the best previous performance.

Median standardized operating income recovered to 18.3%, up from 14.9% in 2009. This, combined with strong revenue gains, produced a surge in profits of 45% at the average firm. Organic growth enabled most RIA firms to surpass 2007 asset levels despite markets that haven’t completely recovered. The typical firm delivered net positive asset flows of 4.3% annually during the last three years.

Focusing on growth  

As seen in last year’s study, advisers are focused on accelerating growth with more than half (63%) placing growing the firm at the top of their strategic business initiatives and 86% of firms ranking such an initiative in their top three. The top enabler of growth is maintaining quality of client service while adding new clients, reported by 80% of firms, while over three-quarters (77%) identified closing new client business as a growth enabler. Additional growth enablers include:

• Delivering investment returns (70%)
• Implementing new technologies (69%)
• Maintaining efficient operations while adding new clients (63%)

However, firms continue to face familiar obstacles to growth. RIAs consistently report devoting sufficient staff time for business development as the biggest growth barrier (52%). One new barrier in this year’s survey is meeting and adapting to regulatory changes (21%). Additional top barriers to growth include:

• Following a well-thought-out marketing strategy (39%)
• Identifying new prospects (34%)
• Sufficient financial investment in marketing (32%)
• Hiring talent (28%)
• Implementing long-term strategic plans (25%)

Strengthening operational discipline  

While revenues in 2010 peaked, firms were managing 13% more clients than before the crisis. In part due to declines in revenue per client in 2010, RIA firms worked to control costs and increase efficiency as a way to manage profitability. At $7,300 revenue per client for the median firm, revenue was up from 2009 ($6,900), but down 13% from a 2007 high. With more clients representing fewer revenue dollars, many advisers found themselves working harder for the same money.

Discipline in internal operations and effective cost management helped reduce staffing-related expenses at the average RIA firm to 62% of revenue in 2010 from 65% a year earlier. To reinforce productivity, firms held the growth of staff and non-staff expenses below revenue growth, resulting in a lower percentage of revenue going toward both types of expenses. Specifically, the top areas of cost-savings as a percent of revenue were: non-owner professional staff compensation, owner compensation, benefits and payroll tax and rent.   

Productivity drivers  

RIA firms are using outsourcing and adopting technology systems as additional strategies to boost productivity, Schwab found in its survey.  Many back-office operational functions traditionally kept in-house, such as data management, performance reporting and invoicing, are increasingly being outsourced, with a more than 40% increase in outsourcing since only one year ago. Outsourcing may be especially helpful for small- to mid-size firms to gain scale quickly in areas where internal expertise could be difficult or expensive to develop, Schwab said. Most likely to be outsourced are information technology (IT) (75%), payroll (67%), compliance (38%, up from 27% last year), and benefits (32%).

The percentage of firms investing in technology to improve productivity continued to increase across the industry. The average firm was using 5.4 out of eight commonly used technologies in RIA offices, compared with 4.2 just three years ago. The most commonly used technologies are portfolio management systems (96%), customer relationship management (CRM) (84%), email archiving (83%), and document management (70%). The greatest technology growth of the past three years has been in trade order management and rebalancing software (66% increase), client websites (61% increase), and document management (35% increase). Investing in new technology is a top-3 priority for nearly one-quarter of firms, and the most important item outside of business development.

Client attrition stemmed  

Throughout the financial crisis, RIAs provided clients with close attention and frequent communication, a tactic that built client loyalty and paid off for firms: on average, RIAs slowed client attrition by 25% versus the previous year, holding on to 97% of their clients during 2010.

Firms also grew their client base by 4.4% in 2010 versus 3% in 2009, though this remains below the 8% median annual growth rate of the client base from 2003 to 2006. Client referrals continue to be a top initiative for advisers, with over half of advisers (54%) stating it as a top three strategic initiative for 2011. Despite the importance of client referrals to nearly all firms, however, 42% do not currently track client referrals as a success metric and 60% do not track client satisfaction in a systematic way.

Strategic planning key to aggressive growth  

Schwab added a new component to the study this year: strategic planning.  Schwab feels this is a crucial element of business development and its study reveals a range of opportunities RIA firms could pursue to promote growth more aggressively. While nearly two-thirds of firms indicated they go through a strategic planning or priorities process, only 42% have a written strategic plan in place, meaning 58% of firms do not.

“We’ve found that Best-Managed Firms follow a more rigorous planning approach compared to peers, using a longer time horizon and validating their results against the plan more often,” said Clark. “Firms should make strategic planning a priority if they want to see real, sustained growth.”

When it comes to succession planning, 40% do not have a succession plan in place, and those that do tend to be larger firms. When asked about the strategies they were considering for the succession of their firm, advisers strongly favored internal succession (80%) over merging with or acquiring another firm (28%), selling the firm (25%), or recruiting an external successor (21%). One third of firms indicated they were considering more than one strategy.

“With many advisers 50 years of age or older, having a plan in place for succession can instill confidence among employees and clients,” added Clark. “Planning what will happen to a business once it stops being an adviser’s full-time job is a critical business practice.”

Schwab’s annual RIA Benchmarking Study, focusing exclusively on RIAs, captures trends and best practices in the RIA industry based on the experiences of individual firms. This year’s study represents the views of 820 firms managing more than $300 billion in combined assets, with 75 of those firms managing $1 billion or more. The median participating firm has 186 clients, $212 million in assets under management (AUM) and $1.3 million in annual revenue.