What sets high-performing RIAs apart? Healthy growth, says Fidelity

While the RIA sector has seen steady asset growth, the struggle to translate that into significant profitability remains painfully real, according to a new report from Fidelity.

In its latest 2024 RIA Benchmarking Study, Fidelity found organic asset growth rebounded for most RIA firms in 2023, with a compound annual growth rate of 11 percent on average. But revenue growth hasn't picked up, staying flat at 11.3 percent year-on-year, while revenue yield dipped down to 68 basis points from 71 basis points the previous year. 

On the other side of the ledger, firm expenses sucked up 82 percent of revenue in 2023, a record high for the annual research.

According to Gwendaline Mazzara, vice president and senior business consultant at Fidelity Institutional, firms must adapt to the struggle by focusing their efforts on several key areas of organic growth.

"Firms must consider how they harness value across the entire client lifecycle,” Mazzara said. “It requires foundational internal readiness across talent, platforms, client segmentation, and offerings to effectively attract, qualify, nurture, close, onboard, and engage right-fit investors.”

Among firms managing under $1 billion in assets, AUM growth began to rebound following a 2022 decline, though larger firms continued to outpace them. One thing that set high-performing firms apart, Fidelity found, was a focus on leveraging technology to optimize client acquisition and engagement, not just operations, which helped them close new business opportunities at a higher rate – 73 percent compared to 68 percent for their peers.

“GrowthTech can help firms take their business development to the next level in an efficient, scalable way,” Mazzara said.

And while there's a temptation to offer discounts and bundle services, high-performance firms take the higher road of emphasizing efficient revenue generation. That includes controlling costs according multiple categories, with consistently lower expenses across 21 different categories compared to other firms.

"Higher performing firms aren’t focusing on growth for growth’s sake," Mazzara said. "They are intentional about scaling and optimizing operations, uncovering new prospects, and expanding client relationships.”

In the next five years, firms under $1 billion in AUM are shooting for annual growth of 11.8 percent, while larger firms are targetomg a 13 percent rate. In pursuing that long-run growth, Fidelity says high-performing firms are securing clients at a higher rate, earning almost one-third more clients from prospecting and roughly 1.5 times as many new relationships from client referrals as other firms in 2023. At least part of that success, Mazzara argues, boils down to knowing your clients.

"Our data points to margin compression, which is often the result of a less than clear definition of a firm’s optimal client,” she said. “Client segmentation helps ensure your firm isn’t taking on client concentration risk in a higher wealth band."