RIA firms have seen three straight years of increasing revenues and profitability, and are on track to post positive AUM growth numbers, according to AdvisorBenchmarking’s recently released 2006 RIA Marketplace Study. The RIA industry seems to be remarkably healthy and is likely to continue growing. But how do advisors view the growth? Are they equipped to take on many of the challenges that go hand-in-hand with growth?
When asked for their five-year forecast, advisors said they saw their future as bright. One in three advisors (33%) believes AUM annualized growth will be in the 11% to 20% range in the next five years, while 32% believe AUM growth will be more than 30% and 22% believe growth will be in the 21% to 30% range. Their short-term outlook is sunny as well: By the end of 2006, advisors expect to grow their assets by 21%.
This goal seems pretty realistic, considering growth rates over the last three years. However, achieving this goal won’t be a cakewalk for advisors, especially due to the current market.
A More Active Approach
Given the fact that this is a tough and more competitive market than it was just a few years ago, one of the biggest challenges advisors face has become managing investor expectations. When asked to evaluate potential threats, the percentage of advisors who cited difficulty with managing client expectations (56%) nearly doubled from 2004 (29%). Competition from other advisors (42%) came in second.
In order to better meet client expectations and help clients achieve their goals, advisors are getting more active in their investment styles. The number of surveyed advisors who employ tactical investment techniques rose for the third straight year, climbing from just 17% in 2003 to 38% in 2005. This increase suggests that advisors are taking a more proactive approach to managing portfolios. Nearly 40% of advisors surveyed indicated that they were “tactical asset allocators” or had “become more tactical” in the past year. Most of these “tactical” advisors still create long-term strategic asset allocation targets for clients’ portfolios, but they also make periodic adjustments for the asset mix based on short-term market adjustments. With the trend toward more active investing, advisors report a significant increase in their use of alternative investment products, such as ETFs. Nearly three quarters (74%) of advisors invest in ETFs, up from just 42% the previous year.
As previously stated, the last few years have been good ones for the investment advisor. AUM, profit margins and revenues all rose; but in a market of more difficult-to-find performance returns, opportunity can become more indefinable. Instead, make sure it finds you. If you haven’t already, consider broadening your investment expertise in some of the alternative investment options. Finally, stay close to your clients, and discuss their expectations and the current market environment with them to make sure both you and they are on the same page regarding their portfolio.
All registered investment advisors are invited to participate in the latest Rydex AdvisorBenchmarking survey of RIAs. Advisors who participate will receive a customized Practice Analysis report, learn best practices of the most successful advisors, gain access to trend analysis, and will get a complimentary copy of the 2005 Annual Survey. To participate, visit
Maya Ivanova is a research analyst with Rydex AdvisorBenchmarking.com, an affiliate of
Rydex Investments. She can be reached at [email protected].