The Thriving RIA

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.