It’s been another year of robust growth for RIAs. The median RIA firm in Charles Schwab’s 2013 RIA Benchmarking Study ended 2012 with $572 million in assets under management (AUM)—up 13.3% from the previous year. Revenues grew by 7.1% to $3.4 million. That has allowed RIAs to look to the future with optimism and high expectations for good reason.

The industry’s momentum has given RIAs a great opportunity to take stock and consider the future of their firms. While every firm has different growth objectives, we believe all advisory firms can benefit from taking a step back from day-to-day operations and evaluating themselves. How would they like to better prepare themselves for their goals, and possibly overseeing larger firms? If that’s what they want, they must determine the right path for achieving the type and scale of growth they desire. 

Although this year’s benchmarking study illustrates many of the benefits of greater scale, growth may not be part of some advisors’ long-term strategic plan nor fit with their professional and personal goals. But if growth is what they want, advisors must have a picture of what the growth will look like. With the right information, they can make informed choices about the right path for them.

Examining The Growth
The study results show the remarkable growth trend seen across the industry. From 2010 through 2012, for example, the median firm realized an 11% compound annual growth rate (CAGR) in AUM and 13% compound annual growth in revenues. Additionally, nearly one-third of the firms in the study had a 15% or greater compound annual growth in assets—suggesting that they’re on track to double in size by the end of 2014. Another 25% of firms are on track to grow to twice their size by the end of 2016.

Given the market environment in 2012, it’s not surprising that investment returns were the most significant contributor to advisors’ asset growth last year (adding 8.5% to the median firm). But net organic growth—the change in assets from existing clients and new clients, minus the assets lost to client attrition—continued to play a major role. In 2012, net organic growth added 4.5% to assets at the median firm, consistent with results in each of the past few years.

As good as RIAs are as a group, some segments have experienced even stronger results. The top 20% of firms in terms of net organic growth—the “fastest-growing firms”—generated net organic growth of 15% at the median, which is more than five times the 2.9% rate seen at the median for all other firms in the study. The fastest-growing firms also had 36% more new clients on average. The fastest growers in each peer group in the study outperformed the median firm in all other peer groups, regardless of firm size. (See Figure 1, page 90.)

The Benefits Of Increasing Scale
Advisors generate significant benefits for their business as they climb the growth ladder and step up from one peer group to the next. Advisors should consider what their firms could look like if they plan to pursue growth. Four key areas are important:

1. Productivity. Firms become increasingly efficient in serving clients and business development efforts as they grow. For example, the study showed AUM per professional at firms managing $1 billion or more in assets was 71% higher than at firms with $250 million to $500 million in assets, while revenue per client was 41% higher. Firms with $1 billion or more in assets under management generated $6.7 million in new AUM per professional while firms in the $250 million to $500 million peer group generated $3.6 million.

Technology has greatly helped advisors make productivity and efficiency gains in recent years. (Just 38% viewed technology integration as a challenge in this year’s study, down from 59% in 2012). Advisors also continue to make significant investments in things like work flows (86% of firms are investing in work-flow technology now or will in the next 12 to 18 months), mobile technology (73%) and cloud technology (67%).

2. Staffing. As firms grow, they can better benefit from a team approach. At firms with at least $1 billion in assets under management, for example, the principals account for 35% of the professional staff. At smaller firms, the principals are doing more of the work (they account for 50% of the staff at firms with $100 million to $250 million in AUM). A bigger staff allows clients more access to a firm and gives principals more time to focus on acquiring new clients and other growth initiatives, and the Schwab study suggests that larger firms are more efficient: The median firm with $1 billion or more in AUM spent 41% less on staff time for client service per $1 million in AUM last year than did the median firm managing $250 million to $500 million.

3. The firm’s overall financial profile. Several key financial metrics improve significantly as firms get larger. While revenues at the median firm with $250 million to $500 million in AUM grew by a respectable 5.9% last year, they grew significantly faster at larger firms. In the group of RIAs with $500 million to $1 billion in assets, the median firm saw its revenues rise 7.9%. The median firm with $1 billion or more saw revenues rise 8.1%.

The personal income of advisors also soared at the larger firms. At firms with $250 million to $500 million in assets, the income per professional was $455,000. It was $660,000 at firms with $500 million to $1 billion, and it was $863,000 per professional at firms with $1 billion or more.

Furthermore, total direct expenses decline as firms grow, once again reflecting the benefits of efficiencies created by scale and a larger infrastructure.
4. Clients. Advisors who want to grow fast and profitably must attract the right clients and offer them service appropriate for their contribution to the firm’s bottom line. RIAs are more likely to apply client minimums as they grow—71% of firms with $1 billion or more in assets have a minimum fee, while only 58% of those in the $250 million to $500 million category do.

It’s not surprising that larger firms attract larger, wealthier clients. Clients with at least $2 million in assets represent just over half (52%) of the revenues for the median firm in the $250 million to $500 million peer group. But those clients make up 61% of revenues at the median firm in the $500 million to $1 billion peer group and they contribute more than two-thirds (69%) of the revenue at the median firm with $1 billion or more.

Larger firms are also more likely to charge higher fees to clients with the same level of wealth as clients at a smaller firm. For example, the median firm managing $1 billion or more charges clients with $10 million in assets a fee of 65 basis points. That is 12 points more than the 53 basis points charged by the median firm in the $250 million to $500 million asset range to the client of comparable wealth.

Growth Strategies
What are the right growth strategies for advisors trying to reach the next level? We see two types, both used successfully by firms at different points in their life cycles.

1. Relationship marketing. It’s not surprising to find that the leading source of referrals at firms across the board is existing clients. The firms that are particularly good at attracting and serving the right clients all excel at relationship marketing—making themselves known among the types of clients they most want to serve through both existing clients and centers of influence such as other professionals in their communities.

It is notable that the fastest-growing firms in each peer group—those generating 15% net organic growth in 2012—generate far more new business from both client and center of influence referrals than their peers. For example, the median fastest-growing firm with $500 million to $1 billion in AUM got 7.2% of its net new-client asset flows last year from current client referrals. For the median firm that was not among the fastest growers in that AUM category, that number was just 2.5%.

Referrals from centers of influence are a particularly strong source of growth for the top firms that excel at relationship marketing. Amazingly, the fastest-growing firms—irrespective of their size category—get more referrals just from their centers of influence than all other firms get from all other referral types combined. In short, centers of influence referrals can supercharge a firm’s growth—typically because they are pre-qualified and tend to bring in bigger accounts than referrals made by clients.

2. Mergers and acquisitions (M&A). Although organic growth strategies like relationship marketing remain the most prevalent strategic initiatives for firms, advisors are increasingly exploring alternatives—such as the acquisitions of other RIAs—to bolster their growth. Broadly, approximately 25% of firms managing between $100 million and $1 billion say they’re actively seeking to buy another firm. The $1 billion-plus firms are even more interested in acquiring another firm (34% say they want to buy).

Those firms that are not currently among the fastest-growers are most likely to want to acquire as a means for growth. In fact, one in three is actively seeking to buy another RIA, while only one in five of the fastest-growing firms are.

We see advisors choosing to merge or acquire for four key reasons:
• They get access to new markets. M&A can help firms extend their reach to new locations and areas.
• They get more scale. Instead of having to build infrastructure from the ground up to support a larger business, firms can acquire it with one transaction.
•They want to create a succession plan. Depending on the AUM category, 25% to 37% of firms in the benchmarking study say they are considering M&A as part of their succession strategies.
• They want to acquire new skills. A merger or acquisition can help growth-oriented firms add resources and skills they lack, such as dedicated marketing or business development professionals.

The Right Path
The opportunity is clear and the benefits of growing are highly compelling. Firms that increase scale can see myriad improvements, from productivity and financial metrics to the fundamental makeup of their client base and staff. Ultimately, the decisions about whether to grow and how to best do so are in the hands of individual RIAs, who must take the time now to examine their businesses, think strategically about their goals and determine the role that growth should play in their futures. Establishing the right path today can help them achieve success in the months and years to come.

Jonathan S. Beatty is a member of the Charles Schwab Advisor Services management team, leading sales and relationship management.