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Firms make strides in five areas, helping create enduring enterprises

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A120982
Submitted by john.lee on Mon, 09/17/2018 - 15:50
Jon Beatty, Senior Advisor Services Sales and Relationship Management

Firms make strides in five areas, helping create enduring enterprises

The RIA Benchmarking Study and Guiding Principles for Advisory Firm Success provide powerful insights as firms plan for their futures.

I’m pleased to report that results from the 2018 RIA Benchmarking Study highlight a positive trajectory for advisors. Firms with $250 million or more in assets under management (AUM) grew 16.2% at the median in 2017 versus 9.6% in 2016.1 For the first time, average assets per client crossed the $2 million mark.2 And revenues showed a strong uptick, growing by 11.9% in 2017 versus 3.6% in 2016 at the median, reflecting an increased number of clients and larger accounts.

Net organic growth (the change in assets from existing clients, new clients, and assets lost to client attrition) and investment performance are the two contributors to asset growth. While investment performance fluctuates with the markets, net organic growth is more controllable and can help position a firm for any market condition. Registered investment advisors (RIAs) have been growing their businesses organically alongside buoyant market returns. Client acquisition and retention are the major factors in organic growth, and the median firm’s client base was up 4.8% in 2017, compared with 3.6% in 2016.

 The fastest-growing firms3 in the study have a 5-year net organic compound annual growth rate (CAGR) that is almost quadruple that of all other firms—15.4% compared with 3.9% at the median.

Some firms demonstrate a substantial advantage when looking at organic growth. The fastest-growing firms3 in the study have a 5-year net organic compound annual growth rate (CAGR) that is almost quadruple that of all other firms—15.4% compared with 3.9% at the median. In 2017, these top-performing firms saw twice the assets from new clients ($48 million) as all other firms ($24 million).

As firms look toward the future, they continue to focus on organic growth factors. The top two strategic priorities for firms relate to acquiring new clients—through client referrals (40% of firms) and business referrals (30%). Firms also mentioned a desire to improve productivity through technology, enhance strategic planning and execution, and recruit staff to increase the firm’s skill set and capacity—all factors that can improve profitability as well as growth.

Guiding Principles for Advisory Firm Success

The findings reinforce the Schwab Advisor Services™ Guiding Principles for Advisory Firm Success, a foundational framework we introduced to help RIAs address the complexities of growing their firms and creating enduring enterprises. Based on years of benchmarking data and working hand in hand with RIAs, the principles help advisors strategically approach key decisions and identify new ways of operating in order to stimulate growth. The five principles focus on essential elements that help create a clear path forward including strategic planning, client value, operational excellence, reputation and brand, and talent strategies.

Effective planning and execution is a leading indicator of success

Most well-managed RIAs that engage in strategic planning are better able to achieve their growth goals in retaining and gaining clients. Benchmarking data can help firms develop a plan and a shared vision for the future—one that staff can execute and articulate to help generate profits and referrals. In the words of one advisor,

“I don’t think you can get the full value of the Benchmarking Study without a strategic plan, and I don’t think you can execute an effective strategic plan without benchmarking data.”

Value is defined through your clients’ eyes

Firms thrive when focusing on the client experience. Delivering a differentiated value proposition based on the wants and needs of the ideal client helps firms earn and retain business. Firms that have documented their ideal client persona and value proposition earn 26% more new clients and 41% more assets from them than those without these strategies, according to the RIA Benchmarking Study.

Operational excellence creates greater capacity for clients

 The study shows that RIAs are focusing on a variety of tactics to protect their firms and clients from cybersecurity threats.

Thriving firms create operational discipline by institutionalizing their businesses—typically by leveraging technology and developing standardized processes to maximize scalability. Operational excellence is also about managing risk and protecting the firm. Having a strong culture of compliance and a robust cybersecurity program can help safeguard the trust advisors have built with clients.

The study shows that RIAs are focusing on a variety of tactics to protect their firms and clients from cybersecurity threats. For example:

  • 90% offer employee training
  • 58% have cybersecurity insurance
  • 52% offer client education to mitigate cyber threats

Your reputation is your brand

Growing RIAs recognize that every aspect of the firm should amplify their reputation within the community they serve, thus helping to drive referrals and generate new business. The RIA Benchmarking Study found that fastest-growing firms are leveraging a broad set of outreach strategies to achieve strong results. Consider:

  • Fastest-growing firms saw a 9.1% growth in assets from new clients in 2017, versus a 4.2% growth in new client assets for all other firms.
  • These fast-growing firms earn more clients through business partner referrals and other marketing.
  • Only about 40% of new client assets for fastest-growing firms came from existing client referrals. For all other firms, about 50% of new client asset growth came from existing client referrals.

People are your most important asset

Creating a cycle of opportunity to attract and retain top talent helps ensure continuity of a firm’s people, culture, and values as RIAs prepare for the future. With 73% of RIAs planning to hire additional staff in 2018, competition is likely to be keen, and firms are taking measures to attract and develop the best talent. A comprehensive compensation strategy is critical to finding and retaining key staff. The compensation portion of the RIA Benchmarking Study indicates that at the median firm, base salary represents only 62% of total cash compensation for the Senior Client Account Manager/Senior Relationship Manager role, with incentive pay and profit distributions making up the rest. Developing a strong compensation strategy is a sound investment for all firms.

Guidance for growth

These results and more are delivered to firms participating in the RIA Benchmarking Study through a customized report comparing their performance on hundreds of measures, including organic growth, with that of their peers. Those who also participate in the compensation section of the study receive a customized compensation report and access to Schwab’s online compensation tool. This year’s findings include details on base salary, incentive compensation, benefits, and ownership information representing 10,266 employees across 27 roles typically found at RIA firms.

These reports can provide critical insights to inform firms’ strategic planning. One advisor stated his goal for the study like this:

“The Benchmarking Study really helps us to be intentional about staying focused and making sure we’re thinking about our client wisely.”

That’s our goal too.

What the RIA Benchmarking Study can do for you

 1,261 advisors participated in the 2018 RIA Benchmarking Study, representing just over a trillion dollars in AUM. Learn more about the study.

Participating in Schwab’s annual RIA Benchmarking Study can give you the insights you need to chart a course for your firm. Each participating firm receives a customized Benchmarking Peer Report. And those firms that participate in the compensation portion of the study also receive an in-depth Benchmarking Compensation Report along with access to Schwab’s online compensation tool. These personalized reports provide a side-by-side comparison of your firm’s data against that of other similar firms. This information can help you define where you are, where you’re headed, and what getting there looks like.

The RIA Benchmarking Study is part of Schwab’s Business Consulting and Education offer, which provides a wide range of programs to help you grow and manage your business. Contact your Schwab Advisor ServicesTM Relationship Manager to take advantage of these resources, or visit our benchmarking resource page to learn more about the study and hear advisors share why they participate.

The 2019 RIA Benchmarking Study will open in January. To participate or to learn more about it, speak with your relationship manager or visit schwabadvisorcenter.com/benchmarking.

 

1Data represents results for firms with $250 million or more in AUM. Results are from the 2018 RIA Benchmarking Study from Charles Schwab, fielded January to March 2018. Study contains self-reported data from 1,261 firms.

2Highest median account value for firms with $250 million or more in AUM since Schwab’s RIA Benchmarking Study began in 2006.

3Fastest-growing firms are the top 20% of firms with $250 million or more in AUM based on 5-year net organic CAGR.