According to the 2014 study results, more than one-third of participating firms (36%) have doubled both assets under management and revenues in the past five years. Schwab researchers say the best-managed firms examined for the study share a number of strategic and operational characteristics that amplified growth, business performance and profitability.
The most profitable firms have taken steps to institutionalize their businesses by applying more strategic management practices and establishing greater levels of operational diligence and discipline, Schwab says. Successful firms are also “relentlessly focusing on high-quality organic growth,” the study shows, driven primarily by referrals from key business partners and other professionals, such as accountants and attorneys. Schwab says these “centers of influence” are essential in relationship marketing efforts underlying sustainable organic growth.
Referrals emerged as a chief component of organic growth in the 2014 study, Schwab says, with 80% of firms citing acquiring new clients through referrals as a current strategy for growth. Forty-one percent of firms said acquiring new clients through referrals was their top strategy for growth this year (the strategy also ranked first for all firms in last year’s study), followed by acquiring new clients through business referrals (39%). Enhancing strategic planning and execution (29%) ranked third. Segmentation planning (28%) jumped into the top five in 2014, a marked increase from an 11th place ranking in 2013, Schwab says, which points to a stronger emphasis among firms looking to establish more efficiently run businesses.
The data illustrates that the fastest-growing firms added approximately 30% more new clients through referrals than their peers, using centers of influence as a primary source of referrals.
The most profitable firms have also created “cycles of opportunity” within their firms to attract and retain top adviser talent, Schwab says, including establishing pathways to equity and ownership for younger RIAs (see “Schwab Outlook Study Warns of Succession Challenges”). Researchers also point out that market performance has played an important and ongoing role in the growth of RIA-managed assets.
Getting more specific on growth figures, Schwab says the median RIA firm realized a 12.8% compound annual growth rate in assets under management (AUM) and 13.6% in revenues last year. The median revenue climbed to $3.3 million, the research shows, and one-third of these firms earned more than $5 million in revenues in 2013.
“Our benchmarking study shows that RIA firms are continuing to thrive,” explains Jonathan Beatty, senior vice president, sales and relationship management, Schwab Advisor Services. “Organic growth and a more strategic and disciplined approach to managing this growth emerged as noticeable trends this year.”
Robust new-client acquisition and expanded share of wallet with existing clients were key drivers of organic growth, Beatty adds. This type of growth underscores the power of the independent model and the continued demand for unbiased advice among investors, he says.
Schwab says growth among RIAs has been a prevailing theme over the past several editions of the annual benchmarking study, but it is becoming clearer what a firm must do to position itself on top of the growth and profitability rankings.
“We see a compelling correlation between firms that have established more structured business practices and growth strategies, and the performance results at those firms,” Beatty explains. “Notably, firm size is not a factor. We see firms in the study outperforming this way in every peer group.”
The study points to the benefits of well-documented business planning as a means to maximize growth and profitability. Data indicates an increase from last year in the number of firms that have executed a strategic plan (61%) and those that have a formalized succession plan in place (49% versus 44% in 2013). Institutionalizing client relationships—which Schwab defines as ensuring that clients are connected to the firm rather than to an individual adviser at the firm—and creating scalable operations were also cited by the best-managed firms as foundational to helping them establish legacy.
With the economy on a sounder footing, growth remains a focus for all firms in the 2014 study. Twenty-five percent of firms that doubled assets and revenues since 2009 also expect to grow at this same pace over the next five years, Schwab says. The fastest-growing firms cited strong organic growth (defined as the change in assets from existing clients, new clients and assets lost to client attrition) as the driver for achieving such encouraging levels of growth over the past year.
Top firms also excel at relationship marketing and in the practice of training their entire teams to recognize, create and capitalize on referable moments, Schwab says. Many firms are putting the structure in place to help them grow more efficiently by bringing on dedicated managers to run the daily business. Forty-seven percent of firms in the study with more than $1 billion in AUM reported having a chief operating officer to manage day-to-day business, affording principals more capacity to focus on serving clients and growing the business.
Investment advisers consider talent a strategic asset, and one that is critical to successfully growing a firm from a founder-driven practice into a lasting enterprise, Schwab says. While talent continues to migrate to the RIA channel from wirehouses and banks—as well as from industries such as accounting and law—the study reveals that 50% of new hires during the study period left one RIA firm to join another. In the face of such fierce competition for talent, firms are doing more to create long-term opportunities for advisers within their ranks.
“The RIA model is thriving and as it continues to evolve, it has seen an increase in competition and in the need for firms to differentiate themselves,” Beatty adds. “As this year’s benchmarking study shows, increasing numbers of investment advisers are making the necessary investments in their people and in their firms as well as making important strategic decisions about how they run their businesses. These decisions are putting them on the path toward becoming enduring businesses built to serve investors now and into the future.”
Since the inception of the study in 2006, more than 2,800 firms have participated, with over half being repeat participants. A total of 1,132 advisory firms, representing nearly $750 billion in AUM that custody their assets with Schwab, participated this year.
More information on the survey results is available here.