Five years ago, some industry observers took a grim view of the future for independent RIA firms. During the difficult operating environment of the post-2008 economy, some believed these advisories would not survive the challenges of the Great Recession. What a difference five years can make. Based on the results from the 2014 RIA Benchmarking Study from Charles Schwab, many firms today have not just survived but thrived and are enjoying their greatest levels of success to date.

More than one-third (36%) of firms participating in the study (which provides information on topics such as asset and revenue growth, sources of new clients, products and pricing, staffing, compensation, marketing, technology and financial performance) have doubled their assets under management and revenues since the lows of 2009. The median firm grew assets by 12.8% annually and grew revenues by 13.6% to $3.3 million during that period. While market performance has contributed to the growth of these firms, the study data paints a more complete picture. In fact, half of the 12.8% asset growth has been organic—coming from new clients and new business with existing clients.

The power of the independent model is evident not just in the increase in organic growth among RIA firms, but also in the continued demand for professional advice among investors. In Schwab’s “Advice and the Affluent Investor Study” from June 2013, one-third of affluent investors reported that their desire for investment advice had increased in the past year. Meanwhile, the 2014 benchmarking study reveals that RIA firms are growing more strategically as the industry evolves—managing their growth in ways that point to the overall maturity of the industry. Firms today are creating enduring enterprises—legacy businesses built to live beyond their founders. It’s interesting to see in the data the ways in which RIAs are succeeding.

Three Success Drivers Of Top RIA Firms
We learned from the study and from interviews with the best-managed firms (the top 20% of qualifying firms in the study, ranked by productivity, profitability, revenue growth and net asset growth) that top performers show remarkable focus and common attributes in three key areas that are helping them outperform firms in the median.

Relentless Focus On Growth
Growth remains a key objective for all firms in the study. In fact, 25% of them want to double their AUM and revenues over the next five years. The best-managed firms are relentlessly focused on generating strong organic growth. According to the study, referrals are crucial to that effort. While a full 80% of all firms cited referrals as a key initiative for achieving growth, the top-performing firms added approximately 30% more new clients through referrals in 2013 than their peers. Acquiring new clients through referrals from existing clients (41%) and through other professional referrals (39%) ranked one and two, respectively, among firms’ top strategic initiatives for this year.

 

Their success in this area is due in large part to professionals such as accountants and attorneys who can persuade an RIA firm’s ideal clients to consider hiring it. Such referrers have become invaluable sources of new business, and the top firms take steps to build and maximize those strategic relationships.
We are also seeing firms hiring dedicated management to oversee various operational aspects of the businesses—a clear indicator of their focus on disciplined growth. Sixty-one percent of firms in the study with more than $1 billion in assets under management reported having an operations manager on staff, and 47% reported having a chief financial officer. Firms with $500 million to $1 billion are recruiting dedicated professionals as well—29% indicate they have a chief investment officer on staff, while 28% indicate they have an operations manager on board. The addition of professional management also creates freedom for founding principals to focus on client relationships and growing the firm.

Establishing Operational Discipline
The best-managed firms in the study are managing their growth more strategically. We see top performers in every peer group focusing on more disciplined planning. For example, 61% of RIA firms have implemented formal strategic plans during the past year, an increase from 52% in the previous year’s study.
In the area of efficiency, too, the best-managed firms are excelling. On average, the best-managed firms serve 58 clients per professional and manage $98 million in AUM for each pro, while all the other firms in the study serve just 46 clients per professional and manage $68 million in AUM for each. However, despite larger client rosters, these best-managed firms actually spend fewer hours on client service—28 hours per client, while it’s 36 hours at all other firms. This level of operational efficiency is vital to the ongoing growth and profitability of RIA firms.

Creating Opportunity
As the RIA industry evolves, investment advisors are increasingly considering the talent they hire to be crucial to helping them grow. Our study showed that 50% of new hires at RIA firms in 2013 came from other RIA firms, so it’s vitally important to focus on strategies that attract and retain top talent. To that end, the best-managed firms are putting employees on a professional path that allows them to grow along with and participate in the success of the firms. This in turn allows founders and principals to position their businesses to endure beyond their own tenure. From what we’ve seen, those firms with $1 billion or more in assets have twice as many professionals with equity ownership than firms with $250 million to $500 million in assets.

The vast majority of firm owners in the study, about 90%, want to find internal successors to preserve continuity and ensure legacy. Nearly half of the firms (49%) reported already having a documented succession plan in place.

Advisors are also adding expertise by recruiting professionals from other industries. Seventy percent of advisors at firms with more than $1 billion in AUM report having at least one CPA on their professional staff. And 53% of $1 billion firms report having at least one lawyer. At firms with $500 million to $750 million, just 45% say they have an accountant and 32% a lawyer.

A Road Map For An Enduring Enterprise
The landscape will only get more competitive as the RIA industry continues to grow and the independent model thrives. It’s gratifying to see the independent advisors in our study making the necessary investments in their people and their firms to differentiate themselves and remain competitive. The emphasis on strategic growth and the operational discipline required to achieve it indicate that firms are maturing along with the industry. The practices employed by the best-managed firms offer a road map for all advisors aiming to grow, maximize their success and establish a legacy to last well into the future.

Jonathan S. Beatty is Schwab Advisor Services’ senior vice president of sales and relationship management.