Practice Management

What the fastest growing RIAs have in common

Schwab study of 1,261 firms finds that overall assets under management climbed 16.2% in 2017 at the median versus 9.6% in 2016

Jul 12, 2018 @ 2:20 pm

By Ryan W. Neal

Business is booming for registered investment advisers.

Regardless of firm size, independent firms are experiencing strong five-year compound annual growth in key metrics like assets under management, revenue and number of clients, according the Charles Schwab's annual RIA Benchmarking Study.

(More: Average client assets top $2 million for first time)

But some are excelling beyond the rest. The fastest growing firms — that is, those in the top 20% with $250 million or more in assets — enjoyed a net organic compound annual growth rate of 15.4% in 2017, versus 3.9% at the median for all other firms. Organic growth is particularly important because it's less dependent on market conditions and better reflects the firm's strategy, value proposition and client satisfaction, according to the Schwab study.

Those firms are also attracting twice the number of new clients, bringing in twice as many assets from those new clients and are finding new assets through business partner referrals and marketing versus existing client referrals.

Jonathan Beatty, senior vice president of sales and relationships management at Schwab Advisor Services, attributes the success to appealing to client needs via strategic marketing channels.

"With the success of this industry comes more competition, and the firms who thrive are those who effectively amplify their brands, invest in their people, focus on best practices and deploy the right technology to drive operational excellence and an optimal client experience," Mr. Beatty said in a statement.

Schwab's study of 1,261 firms that custody with Schwab found that overall assets under management climbed 16.2% in 2017 at the median versus 9.6% in 2016, and the five-year compound annual growth rate for AUM was 10.9%, from $358 million in 2013 to $652 million in 2017. Meanwhile, revenue was $3.6 million in 2017, up from $2.2 million in 2013 — representing a five-year CAGR of 9.8%.

The Benchmarking Study offered several "guiding principles" to help other RIAs improve growth.

First, firms should keep client experience at the top of mind by offering services based on the wants and needs of the ideal client.

The top growers are also improving business operations by leveraging technology and developing standardized practices to maximize scalability and manage risk. This includes and a robust cyber security program to safeguard clients and build trust.

While average client size is increasing, Schwab found asset growth from new clients is double that from existing clients (bucking the wisdom that it's easier to grow via held-away assets). The fastest growing RIAs are the ones working to strengthen the firm's reputation among the community they serve, Schwab reported.

(More: Morgan Stanley wants brokers to use new tech to chase $2 trillion in assets held outside the firm)

Finally, firms are deepening their bench by investing in talent. Salaries, bonuses, benefits and other personnel-related costs account for 73% of a firm's annual expenses, according to the study. Firms of all sizes are focused on hiring employees with an emphasis on back-office and administrative staff and relationship managers instead of client-facing senior management.

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