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Schwab’s Jon Beatty: Power of the independent advice model

Submitted by mark.mcdermott on April 18, 2018

Jonathan Beatty, Senior Vice President, Sales and Relationship Management

It wasn’t that long ago that Registered Investment Advisors (RIAs) disrupted the advice industry and forever altered investor expectations by scaling the delivery of high-touch, personalized advice. Today, I’m happy to report that RIAs are continuing to win in the marketplace, as more and more high-net-worth investors seek out the services of RIAs. This success demonstrates the continued power and appeal of the independent advice model.

The results from the 2015 RIA Benchmarking Study from Charles Schwab represent the culmination of more than five years of strong performance by RIAs. And it is very exciting that we see this to be true across all assets under management (AUM) peer groups, reminding us that firms of all sizes are achieving strong business results. Across the board, advisors reached new heights in revenue, profitability, and clients served. This was fueled in large part by strong investor demand, investment returns, and the scalability of the independent model.

Scale, efficiency, and organizational discipline are all hallmarks of maturing businesses, and firms in the RIA industry are no exception. To this end, more and more firms are adopting best practices, showing operating discipline, and using benchmarking data to help ensure their success. As they grow, RIAs are working hard to attract and develop talent and are establishing a strategic transition of leadership as they strive to build strong and enduring enterprises.

Whether I look at AUM growth, rising profitability, strategic hiring, or the transition of more and more employees into owners, I see key markers that highlight advisors’ success.

Firms reap benefits of prioritizing growth

Year after year, advisors identify acquiring new clients as their top strategic priority, and the result is that advisors have reported growing their client base by an average of about 30% during the past five years. In addition to maintaining steady new client growth, firms have successfully increased their average relationship size as well. Half of participating firms have increased their average assets per client by at least 24% to $1.9 million or greater.

Naturally, this combination of more clients and larger client relationships translates directly to overall AUM growth. Half of participating advisors reported increasing their AUM by 75% or more over the past five years, and nearly half doubled their revenues during the same period. Most firms have become significantly more profitable as a result.

Advisors have done a good job of managing expenses and driving efficiencies. The median standardized operating margin for all firms in the study has increased 41% over the past five-year period, reaching 27.2% in 2014. The same year, top-performing firms1 reported margins of 38.3% or more.

Growth drives hiring plans

Firms in this year’s study cited recruiting to add skills and increase capacity as a top strategic priority, second only to growth. Firms are seeking to hire to support continued firm growth, with 76% of firms planning to add either relationship managers or investment professionals and 68% planning to hire support or administrative staff.

Ten percent of firms are looking for “dedicated management” to run business operations, helping free principals and advisors to focus on serving clients and generating new business. This is an interesting area to examine, as the life cycle of advisory firms dictates changes in organizational structure. When growing firms begin to shift from a practice model to an enterprise model, it’s reflected in the need for business managers to run the increasingly complex day-to-day operations of the larger firm. For example, nearly half of all firms with more than $1 billion in assets employ a chief operating officer, compared with 34% for firms $500 million to $1 billion in size.

The elasticity of published pricing

Faced with evolving technology, shifting client expectations, and increased competition, advisors tell me that pricing is a perennial concern as they strive to strike the right balance of profitability, client service, and industry norms. With this in mind, we took a closer look at published pricing reported in the last five years of our benchmarking study. The data is thought provoking.

The continued strong demand for advice appears to be helping support advisors’ ability to maintain, or even raise, prices. Over the last five years, published pricing has remained very elastic and generally has risen—up to 11% for relationships over $1 million. Published pricing for relationships $1 million and less over that same period has remained relatively flat at 100 basis points across all peer groups.

Interestingly, the study revealed little correlation between pricing and growth. Lower pricing does not appear to help firms with organic growth: Firms across all pricing bands showed comparable five-year AUM compound annual growth rates. However, we can observe a connection between higher published prices and profitability.

Leverage the power of benchmarking

Achieving extraordinary success requires diligent preparation and accurate information. 
I encourage advisors to learn more about implementing best practices—including strategic business planning, defining a formal client service offering, and fostering a business development culture.