From the November 2007 issue of Investment Advisor • Subscribe!

November 1, 2007

Better Managed? More Productive

Schwab Institutional conducted its second comprehensive advisor benchmarking study this year, RIA Benchmarking: Growth Trends Study, which included financial and organizational data from more than 1,500 advisors managing $425 billion in assets. Dave Welling, VP of marketing and advisor business management of Schwab Institutional, notes that the Study confirms the healthy growth of the RIA industry. The overall industry is growing at a pace "north of 20% in terms of assets; with revenues tracking pretty close" to that percentage, he says, and some firms are growing "40% to 50% a year, even big $1 billion firms," though by contrast, some RIA firms "don't want to grow." But those that do choose to grow face a similar barrier: "They simply can't hire people fast enough to serve the opportunity that's coming at them. When we talk to advisors in person, it's people and systems: the infrastructure, the technology that they put in place. They don't need to linearly add back-office staff as they're adding clients."

What about profitability, though? "We see it improving," says Welling, noting that the median profitability in the Schwab study is between 22% and 25%--that's operating profit, post-partner compensation--depending on the peer group.

As an expert observer at the roundtable of the six top advisors, Welling had some comments of note.

On the people issue:

"The number two barrier in our study that advisors articulated is the ability to find talent, to bring them on board, and then the ability to get some scalability in the organization. When you look at productivity, from the best-managed firms' standpoint--the top 15% of all firms in terms of productivity and profitability--is their ability to leverage the combination of people and technology to the point where their revenue per principal is 50% to 80% higher in terms of productivity than anyone else--it's a phenomenal difference."

On practices becoming businesses:

"Marita [Sullivan] and Joe [Sheehan] touched on something that was interesting--the emergence of this professional manager, particularly in larger organizations. It's that point where advisors already have a successful practice, and they're trying to make a transition into the business. The advisors look in the mirror and say, 'Do I want to be that, the CEO, or do I want to keep being an advisor and hire somebody to do that?'"

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