While median annual client growth hit a record 7.8% and median assets under management per client climbed 6.8% to nearly $1 million, median operating profit margin at RIA firms dropped to 20% from 24% in 2016, according to a survey by TD Ameritrade Institutional.
The survey painted a picture of a business that is grappling with pricing pressure as its most important metrics, save profitability, are growing.
In 2017, firm AUM increased by 20%, on average, compared to 13% in 2016 and nearly on par with 2009's record of 20%, the survey found. Revenue increased by 16%, twice the rate of 2016. And productivity, as measured by revenue per team member, rose 12% to a record high after a decline in 2016.
But one in six firm owners said pricing pressures were among the top factors that may challenge future growth, TD Ameritrade said in a release.
"Changes to the industry landscape are causing many investors to rethink how they define an adviser's value," said Vanessa Oligino, the firm's director of business performance solutions. "The issue of price is not going away, yet we believe independent financial advisers can compete and win by delivering a superior client experience. Firms also need to better articulate all the services they provide and demonstrate how they generate value for their clients."
The survey found that firms generated, on average, 71 basis points of revenue on every dollar in AUM in 2017, compared to the recent peak of 78 basis points in 2015. Despite the dip, TD Ameritrade said most firms are unwilling to adopt pricing approaches other than the AUM-based fee, preferring to wait and see. Two-thirds of firms have not made pricing changes in the past two years and 84% have no plans to do so in the next two.
According to the study, the typical firm indicated that 98% of clients are charged exclusively based on AUM, and the fee includes advice for areas outside investment management.