Growth in AUM, Revenue Halved for RIAs in 2015: FA Insight

Firms that leverage operational efficiencies fared significantly better than their peers

The explosive growth and record profitability that advisory firms experienced in 2013 and 2014 have reverted, largely in part due to when U.S. securities market appreciation fell from more than 30% growth in 2013 to nearly zero in 2015.

According to The FA Insight Study of Advisory Firms: Growth By Design, an annual research report that’s now published by TD Ameritrade Institutional, many firms were unprepared to weather the dramatic change. The results of the study serves as a “reminder that proactive planning must replace relying on markets to generate growth.”

The pace of asset growth last year slowed by 56%, and firm revenue growth slowed to half of its 2014 rate, while median overhead expenses per client rose 31%, according to the study.

According to the study, annual growth in assets under management for the typical firm was just 4.7% in 2015, less than half of what was achieved in 2014. As a result, revenue growth fell from 14.4% to 7.3% during the same period.

Across the industry, revenue growth was cut in half last year, with the typical firm expecting to close 2016 with even slower growth.

“After 2014's record profitability and explosive growth, advisors now must be more disciplined – and that's not a bad thing,” Vanessa Oligino, director of Business Performance Solutions at TD Ameritrade Institutional, said in a statement. “Firms need growth plans that go deeper than just riding the rising market tide if they expect their success to carry through different cycles.”

In fact, the study found that advisory firms with solid growth plans and strong execution fared significantly better.

Among “standout” firms, which FA Insight defines as those in the top quartile measured by revenue growth and income generation, annual revenue grew roughly two to three times faster than their peers in 2015. Standout firms converted 40% to 50% more owner income per dollar of revenue, according to the study.

These prosperous firms have supplied key insights into what drives success through the ups and downs of the security markets. Chiefly among them, the study finds, is operational efficiency.

“An advisory firm’s operational infrastructure, including management of workflow processes and application of technology, can be a powerful tool for leveraging efficiencies in addition to raising the quality of client service,” the study states.

According to the study, “operational efficiency may be the single most important factor in determining a firm's growth and profitability, particularly in challenging markets.”

The study finds that standout firms spend a much lower percentage of revenue on overhead expenses, which results in greater profitability and higher income per owner.

The good news is that more firms are realizing the importance operational efficiency can have on growth. According to the study, 68% of firms plan to place primary emphasis on operational efficiency or productivity gains in order to generate future growth, close to double the share of firms from two years prior that cited efficiency or productivity as key contributors to growth.

Though most advisors said they are willing to automate processes, to what degree varies across different tasks. Portfolio management is the area where firms have the greatest tendency to automate. Many firms, 29%, have applied technology to fully automate portfolio management workflow, according to the study.

However, many advisors struggle with technology integration. The study finds that 3% of firms say they are fully integrated, which means users can access data from a single sign-on and work seamlessly across different applications.

The 2016 FA Insight Study of Advisory Firms: Growth by Design is based on online survey responses from 325 advisors from participating firms with a minimum $100,000 in annual revenue, while half had annual revenue of at least $1.5 million. About 75% of firms were independent RIAs while an additional 11% were primarily RIAs.

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