Independent RIAs enjoying record profitsNews added by Benefits Pro on July 11, 2014

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By Nick Thornton

Independent RIAs are reaching levels of profitability at record rates, according to Charles Schwab’s 2014 RIA Benchmarking study.

Now in its eighth year, the study notes that, while record highs in the major stock indices explain much of the growth in assets under management, the most successful firms are seeing “organic” growth because of better strategic planning and “operational discipline.”

Firms of all sizes have rebounded significantly since the market lows of 2009. More than one-third (36 percent) of firms report having doubled their AUM and revenues since the depth of the financial crisis. The median firm has realized 12.8 percent annual growth in AUM and a 13.6 percent increase in revenues since the firm began to track those measures for its study.

Median revenues of the firms surveyed were $3.3 million; one-third reported more than $5 million in revenues for 2013.

Jonathan Beatty, senior vice president of Schwab Advisor Services, said that increased competition is encouraging the best RIAs to develop new strategies for growing and managing wealth.

“Robust new client acquisition and expanded share of wallet with existing clients were the primary drivers of organic growth and underscores the power of the independent model and the continued demand for unbiased advice among investors,” Beatty said in a note accompanying the study.

The study identified three areas that are distinguishing the performance of the “best-managed firms” from their peers.
The first is what Schwab calls “institutionalizing the business,” which involves setting strategic standards at the management level and implementing oversight to ensure “discipline of those standards” through the operation.

More firms in the latest study reported implementing a new strategic plan (61 percent) than did the previous year (52 percent).

The best firms are also seeing referral-driven growth from what the study calls Centers of Influence, defined as business partners and professional peers, such as attorneys and accountants. The study’s data shows that the fastest-growing firms added about 30 percent more new clients relative to their peers, mostly from COI referrals.

The third distinction of the most successful firms is a willingness to aggressively incentivize their teams, creating “cycles of opportunity,” including equity in the firms, to attract and retain the best talent.

Larger firms — those with more than $1 billion in assets — reported having twice as many professional staff with equity in their firms as do firms with $250 million to $500 million in assets.

The competition to attract the best talent is fierce in the industry. Half of new hires made during the study left one RIA firm for another.

“As the RIA model continues to grow and evolve, there is an increase in competition and in the need for firms to differentiate themselves,” said Beatty. “Increasing numbers of investment advisors are making the necessary investment in their people and in their firms, as well as making important strategic decisions about how the run their business.”

More than 1,100 firms representing almost $750 billion in assets under management participated in the 2014 study, making it the leading study on RIA growth analysis in the industry, according to Schwab.

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