RIA firms thrive and grow by taking a long-term view

Lisa Salvi, Vice President, Advisor Services Business Consulting and Education

RIA firms thrive and grow by taking a long-term view

by Lisa Salvi, Vice President, Advisor Services Business Consulting and Education

The 2019 RIA Benchmarking Study shows that by focusing on the business fundamentals, many RIA firms can thrive and grow in changing market conditions.

Results of the 2019 RIA Benchmarking Study from Charles Schwab demonstrate that many advisory firms continued to experience strong long-term growth by concentrating on the fundamentals of running their businesses. By focusing on strategic business planning, value proposition, client experience, and staff, many firms thrive and grow, even in volatile markets.

The 2019 study shows that organic growth—the change in assets from new, existing, and lost clients—helped offset declines in investment performance last year. For firms with $250 million or more in assets under management (AUM), net organic growth1 contributed 4.1% toward the total change in AUM, which declined overall by 0.8% at the median in 2018 compared with 2017. The fastest-growing firms2 realized a 6.5% increase in AUM in 2018, driven by strong organic growth.

A longer-term view provides welcome perspective, showing that although AUM growth has slowed, firms with $250 million or more in AUM are maintaining their organic growth. The 5-year AUM compound annual growth rate (CAGR) decreased in 2018, ending the year at 7.5%, compared with 10.9% at the end of 2017.3 But the 5-year net organic CAGR remained steady in 2017 and 2018, at 5.1%.

New clients drove more than five times the new assets compared with the net asset flows from existing clients.

As always, new clients were integral to growth. The number of clients grew 4.5% in 2018, a slight decline from 5.2% in 2017. The impact of new client assets is significant—new clients drove more than five times the new assets compared with the net asset flows from existing clients. Fastest-growing firms saw a 9.3% increase in clients.

Planning for growth

Most firms look to organic growth to drive their business forward. A focus on services based on clients' needs, a commitment to a strong value proposition, referrals from clients and partners, and effective marketing all help firms acquire assets from new as well as existing clients. The pursuit of organic growth is typically a key component in any strategic plan.

Some firms also look to inorganic growth to gain new clients. Mergers and acquisitions (M&A) and bringing on established advisors with clients are examples of inorganic growth—and they may, in fact, be part of a firm's strategic plan as well. In 2018, 4.3% of firms acquired new clients via M&A, gaining 115 clients at the median, representing $134 million in AUM. Over the past five years, 17.9% of firms engaged in acquisitions.

In 2018, 12.6% of firms acquired clients by bringing on an advisor with a book of business. The median number of clients gained this way was 34, representing $28 million in AUM.

Having the right talent is equally important to firms pursuing organic and inorganic growth. A strong team can help generate new business, provide high-touch client service, and spread the word about the firm, increasing the firm's long-term growth and revenue. As one of Schwab's five Guiding Principles for Advisory Firm Success observes, "People are your most important asset."

Transitioning equity and leadership to nurture talent

With 42% of firms recruiting from other RIAs, a strategy to retain key talent is essential.

The need for talent frequently surfaces as a concern for growing firms. A large share of firms—71%—brought on staff last year, adding 3 employees at the median, bringing the total staff at the end of 2018 to 12 employees. Seventy-six percent of firms plan to hire from external sources in 2019. With 42% of firms recruiting from other RIAs, a strategy to retain key talent is essential.

Transitioning equity and transitioning leadership are aspects of firm management the study explored this year. Both transitions provide growth opportunities to staff. Transition planning also provides founders with more options as they look to retire. Even if transitioning equity starts as a talent strategy, it will also help provide succession options.

For many firms, sharing equity is a way to retain talent and spread responsibility for the health and growth of the business. The larger the firm, the more likely it is to offer equity to non-founders—42% of firms with less than $100 million in AUM versus 83% of firms with $1 billion or more in AUM share equity with non-founders. The percentage of working owners has remained steady over the past few years, at 31% for the median firm in 2018. However, some roles are seeing an increase in equity opportunities, such as Senior Client Account/Relationship Managers.

Options for equity financing have recently increased. Most often the employee finances the equity—46% of firms reported they finance equity purchases in this way. But there are other options, with firms offering financing by sellers (37%) or by banks (secured by the firm or not—25%), or granting equity as compensation (20%).

Firms cite retaining talent and succession planning as the primary reasons for offering equity to non-founders.

Firms cite two primary reasons for having non-founders own a part of the firm: retaining talent (27%) and succession planning (26%)4. While offering equity to non-founders can be an important part of a compensation package, it's important to note that it does not necessarily indicate they might assume leadership positions someday. A documented path to partnership, offered by 38% of firms, can help employees understand what's needed for leadership and enable them to work toward a goal at the firm.

Diversifying ownership can help firms capitalize on an expanded skill set that others bring, institutionalize the business, and build infrastructure for growth. As a retention strategy, it can help good employees feel a part of the firm's future.

Sticking to the fundamentals

As the 2019 RIA Benchmarking Study confirmed, focusing on the fundamentals is key to positioning firms for long-term success in any market conditions. Aligning on growth strategies—from new client acquisition to inorganic growth opportunities—and ensuring continuity of the team will help chart the future of the firm.

What the RIA Benchmarking Study can do for you

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 Business Consulting and Education, which provides a wide range of programs to help you grow and manage your business. Contact your Schwab Advisor Services representative 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 2020 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.