Despite a 7.1% drop in total assets under management in 2022 due to market declines, registered investment advisors last year saw a 4.1% increase in revenue and a 6.2% increase in clients, according to Schwab’s 2023 RIA Benchmarking Study.
Organic growth, which excludes market performance, reached its second-highest point in five years, and client retention remained at 97%, where it has hovered since 2017, the survey found.
“Even though there was some pressure on AUM, you’re still able to attract quite a few new clients to your firms,” said Lisa Salvi, a Schwab Advisor Services managing director, business consulting and education, said in an online press conference last week. “The RIA industry continues to be strong, and we know that demand for advice is not going anywhere. The value proposition of the independent model does continue to resonate with investors and clients.”
In the future, growing firms will be managing more complex businesses supported by more people, more detailed business processes and more sophisticated and integrated tech stacks, she said. Having a written strategic plan to navigate this growth will be critical for ongoing success, she added.
“That’s a really good place to start if you’re not sure you have a really solid strategic plan written,” she said.
Equally important is having a team and infrastructure that can adapt to market fluctuations and opportunities, and to address client concerns appropriately, the survey said. For the first time, the survey included questions about investments, volatility, inflation and liquidity.
“We saw firms prioritize additional resources in investment management areas, including income strategies and cash management, given the current rate environment,” said Laura McDowell, director of Schwab Asset Management Solutions.
The study also found a continued focus on asset allocation and a renewed interest in active management, she said, which “tends to correlate with volatile market conditions.” Usage of individual bonds and ETFs, both active and passive, increased, while usage of passive and active mutual funds decreased.
“Fee compression, even as it relates to asset management, is top of mind when evaluating investment vehicles and fund family partners,” McDowell said. “Vehicle structures that are more tax aware also showed favoritism by advisors in the study. And firms’ use of private equity and direct indexing strategies both increased.”
Direct indexing, formerly reserved for the ultra-high-net-worth client and those with multigenerational family wealth, has moved downstream with lower minimums and lower associated costs, making it more accessible to the mass affluent, she said.
“Clients’ desire for greater customization and personalization added to the momentum we’ve seen in this space. The increased use across segmentation has really been profound,” McDowell said.
The 2023 RIA Benchmarking Study included 1,300 advisory firms representing $1.7 trillion in AUM. They responded to a questionnaire between January and March.
As part of the benchmarking, the survey’s Firm Performance Index identified top performing firms that ranked in the top 20% of the index.
Top performing firms, for example, had 27.8% AUM growth in 2021 and rremained even during the turbulent markets of 2022. Other firms had 19.3% growth in 2021 and 9% in losses in 2022. Over a five-year period, the top performing firms had 2.8 times more net asset flows, 2.7 times more clients and 2.0 times more revenue, the survey said.
For 2023, RIAs’ top strategic initiatives were to acquire new clients through client referrals, recruit staff to increase firms’ skill set or capacity, acquire new clients through business referrals, enhance strategic planning and execution, improve productivity using process changes, and develop the skills and capabilities of staff, according to the survey.
Half of all the study participants said they were pursuing inorganic growth by buying another RIA, hiring an advisor with a book of business, or bringing on a principal with transferrable assets.
“The main piece of advice that we give advisors is do your homework before embarking on an M&A strategy,” said Jerry Cobb, a Schwab Advisor Services director and business management consultant. “What the really means is breaking it down into what we like to think of as three basic phases.”
The first is the “envision” stage where the advisor clarifies objectives and identifies the tangible outcomes the firm is looking to achieve, he said. In the “prepare” stage, the advisors consider deal imperatives such as their approach to valuation, financing, deal structure and due diligence. In the third stage, “connect,” advisors identify qualifying targets and reach out for a prospective deal, he said.
On the organic growth side, firms with written marketing plans, an “ideal client” profile and client value propositions attracted 52% more new clients in 2022—and 46% more new client assets—than firms without those documents, the survey found.
More than 80% of all firms use behavioral finance for more than 50% of client interactions, and those that did saw 3.3 times more new assets from existing clients in 2022 than those than didn’t, the survey found.
Another trend, segmentation, will be critical to smart growth, as RIAs across the board reported that 56% of their clients had less than $1 million and generated just 22% of revenue, while on the other extreme 4% of clients had more than $10 million and generated 25% of revenue.
“It’s critical to provide a client experience that aligns revenue with the cost to serve,” Salvi said. “You don’t want to underserve those really large clients because you’re so busy overserving those on the other end.”
Segmentation can help firms build a scalable business and minimizes capacity limitations, and the survey showed that firms with a segmentation strategy tend to manage more clients per professional, she said.
“Client segmentation is not necessarily defined by AUM, but by the needs of specific groups of clients,” Salvi said. “You decide how to deliver an experience that wows them.”
Fewer than half of firms have documented referral plans for existing clients, but those that did generated almost twice as many new clients and new client assets than those that didn’t, the survey found.