It’s been clear to me for quite some time from industry data and my own personal experience that the net organic revenue growth of RIA firms is quite low when you exclude market movement.
Charles Schwab recently released its “2022 RIA Benchmarking Study,” and I decided to crunch the numbers and see what the data shows.
I’ll go straight to the punch line: The average RIA firm had negative revenue growth over the past five years if you exclude what the market was doing. (I used a traditional 60/40 market portfolio as a proxy for RIA investment allocations.)
In other words, essentially all the revenue growth for RIA firms in the Schwab study over the past five years stemmed simply from the growth in the financial markets.
Various assumptions are built into my calculations, but there’s no doubt that the net organic revenue growth is almost nonexistent.
Why should you care? You should because organic growth is the lifeblood of a business, and without it you are at the mercy of volatile financial markets.
Crunch The Numbers
Here’s how I crunched the data:
The S&P 500 total return for the five years ended December 2021 was 112.9%. The total U.S. government bond market total return for the five years ended December 2021 was 19.5%. With a traditional 60/40 allocation, this portfolio would have grown about 75.5% over the past five years. The compound annual growth rate was about 11.9%.
Now let’s take a look at the growth performance of advisory firms. We’ll look at the “2022 RIA Benchmarking Study from Charles Schwab,” which took data from 1,218 firms that custodied their assts with Schwab or TD Ameritrade.
AUM Growth
Schwab’s benchmarking study breaks out its results in six peer groups based on assets under management (see Figure 1).
Schwab’s report says the average compound annual growth rate of assets under management for all firms in the study for the five years ending 2021 was 14.1% (and, interestingly, the slowest growing firms were the largest—those with more than $2.5 billion in AUM). The 14.1% compound growth rate of assets under management sounds pretty good until you look at how much of that growth was due to simple market growth.
For comparison, a passive 60/40 bond portfolio, as mentioned before, grew at an annual compound rate of 11.9%.
Simple math says that when the market movements were taken out, the compound rate of net new assets for the average RIA firm was only 2.2% over the past five years.
Revenue Growth
You can’t eat AUM, so let’s look at actual revenue (see Figure 2).
Schwab’s report says the average compound annual revenue growth rate for all firms in the study was 11.3% for the five years ended 2021. Interestingly, the fastest growing firms here were the ones with $750 million to $1 billion in assets, what many industry pundits call the “messy middle,” because they’re too big to be lifestyle practices and too small to benefit from economies of scale.
So now that we know the 60/40 bond portfolio grew at a compound annual rate of 11.9%, the data suggests that the average RIA firm actually had net negative organic revenue growth over the past five years. They showed positive revenue growth only because of the growing market appreciation.
