As RIA industry swells, advisors discover pros and cons of growth

According to the latest report from Schwab Advisor Services, RIAs need to jump on the growth train in order to keep pace.

As the pursuit of scale continues to dominate the financial planning industry, RIAs are realizing specific pros and cons that come with growth.

In an industry where income is mostly based on assets under management, it’s easy to only see the upside to getting bigger, but as the latest report from Schwab Advisor Services illustrates, growth can introduce multidimensional challenges along with opportunities.

Schwab’s newly published Independent Advisor Outlook Study, which is based on interviews late last year with 862 advisors, found that growth can generally make it easier to attract new talent, weather market downturns and react to competition.

On the flip side, the report shows that size brings new challenges in terms of maintaining corporate culture and business momentum.

In general, the report shows more upside than downside to growth, and according to John Beatty, chief operating officer at Schwab Advisor Services, there’s little evidence the RIA industry is tapping the brakes on its growth mode.

“As I talk with advisors, I hear strong confidence about growth and the ability to better serve investors,” Beatty said. “Growth means new opportunities and challenges, and the innovative entrepreneurial mindset is alive and well in the RIA space.”

While assets under management remains the primary measure of growth and size, a deeper dive shows advisory firm owners are embracing a more nuanced perspective when it comes to measuring success.

The report found that 64% of advisors define growth by number of clients, 43% also measure growth by considering the total number of RIAs in the industry, and 42% of respondents factor in the diversity of advisory services being offered.

“It’s all about how you find and attract new clients,” Beatty said. “New clients are ultimately the most valuable expression of growth.”

RIAs that are in growth mode almost universally agree that it provides an ability to invest in the business with a long-term perspective. While 75% of respondents said growth makes operations more complex, 67% said growth allows firm owners to take more risks.

As Beatty sees it, even with some of the challenges, the benefits of growth are plentiful, and the pursuit of growth is no longer a luxury that RIAs can ignore.

For example, when it comes to the top advantage of growth cited by advisors, retaining and attracting new talent, Beatty said, “People want to build a career with a winner.”

“There’s two sides to the growth coin, but most advisors I talk to believe growth is necessary,” he said. “And they want to know where it helps and what the challenges are.”

As the focus on business growth increases, data and automation are becoming crucial elements of practice management, according to the report.

“Data and automation could be the rocket fuel that launches the RIA industry into the next stage of growth,” Beatty said. “Advisors are leaning into the opportunities around data and what it could mean to them in terms of growing their businesses.”

While the use of data is already being integrated across the wealth management space, the report suggests RIAs will increasingly rely on third-party providers and platforms to help them manage and analyze data on clients, markets and investments.

According to the report, 80% of respondents currently leverage data to improve portfolio decisions, and 69% use it to improve operational efficiencies.

While 47% of advisors say they are using data to identify the unmet needs of clients right now, another 39% say they plan to do so in the next three years. Meanwhile, 53% say they’re currently tapping data to anticipate the next best actions for serving their clients, and 35% say they will do so in the next three years.

Beatty said client expectations are one of the drivers toward data and automation, which is why RIAs shouldn’t take the challenge lightly.

“In some ways, data and automation is a one-two punch,” he said. “Data can help advisors know when clients need them, and automation can tee them up to be there when clients need them.”