Best Practices of Successful RIA Firms

Examining the operations of top RIA firms can help advisors understand critical elements of success, learn effective management strategies and emulate the best practices that are applicable to their own firms. Here is a closer look at the best practices of some of the most successful RIA firms in the marketplace.

We studied this group by separating top firms from the 300-plus RIA firms that participated in our most recent AdvisorBenchmaking survey, then compared the practices of that group with those of the entire survey population. We applied a multi-criteria score model to capture these top firms by examining three variables, and top firms needed: an AUM growth rate higher than 35% or profits per principal in the top decile; net profit margin in excess of 45%; and an offering of at least four services, including both investment management and financial planning.

This process identified 45 “top firms.” As a group, they enjoyed a higher level of assets and showed they could build the size of their firms and improve the health of their businesses–which led to higher growth rates for top firms compared to average firms. While there is no magic formula to making an advisory practice an industry best, we spotted several trends worth noting among this year’s top firms:

Higher growth targets. Over the next year, 56% of the top firms target a significant level of growth (from 11%-20%), compared with only 43% for the average firm.

A broad view of market threats. Top firms are also more aggressive in identifying and managing market threats, the most frequently cited being finding new clients and coping with increased compliance demands and with poor investment performance. About 46% of average firms saw finding new clients as a threat, compared with 62% of top firms. Increased compliance was a threat by 42% of average firms, but 51% of top firms. Poor investment performance was a threat by 22% of average firms, but 30% of top firms.

A focus on referrals. Top firms put a heavier emphasis on using existing clients as a referral source–58% versus 47% for the average firm, when evaluating key drivers of growth over the next five years. They are also less likely than the average firm to expect organic growth of the existing client base.

A comprehensive marketing mix. When we reviewed the marketing mix of top firms, we noted some interesting areas of divergence, but the most striking result was that top firms plan to make more use of a variety of marketing methods. Possibly due to their higher growth targets, top firms are taking a much more aggressive and comprehensive approach to developing a marketing program. Overall, the likelihood of having a written marketing plan was the same for the two groups, but top firms were including many more components in their plans. Of note was their much higher usage of events marketing and direct mail. Also interesting was their web savvy and in using webinars as a complement to their events programs.

Investment discipline. We did not poll firms specifically on their investment philosophy, but several points from the top-performer analysis came together to suggest that these firms take a more nuanced and strategic approach to how and when they use specific kinds of assets. Overall, they are much more concerned about poor investment performance, and this was the first indication of a difference in investment discipline. In addition, we saw some significant differences in the way they use both ETFs and alternative investments.

Top firms are more likely to select ETFs for factor or asset exposure or trading and transparency. They are more likely to use alts for “a select few clients” and only half as likely to say they don’t use them at all. To us, these combined results speak to a strong, well-informed investment process, in that top firms choose to deploy different types of vehicles, for different clients, for different reasons and objectives. And they are very deliberate and disciplined about doing so.

Not every firm can be top tier. But to thrive in today’s investment advisory marketplace, it helps to emulate the practices of the firms that stay ahead of the risks that threaten their business and make the most of marketing plans and referrals. Aiming for consistently high growth, profitability and performance won’t automatically make your firm the best, but it’s almost guaranteed to make your firm better.

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AdvisorBenchmarking is a research and analysis center focused on the registered investment advisor (RIA) marketplace. Study results quoted in this article are based on the 300-plus RIA firms that took the online survey in March-May 2011. The service is aimed at helping advisors grow and enhance their firms by comparing how their businesses fare against other advisors. Advisors also learn best practices of the most successful advisors in the business.

AdvisorBenchmarking is an affiliate of Guggenheim Investments. The analysis on AdvisorBenchmarking.com is based on the number of completed surveys and reflects only information from those surveys. This information is intended to be general in nature, and these overviews are no substitute for professional, legal or consulting advice. This information should not be construed as advice from Guggenheim Investments or any of its affiliates.

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