Illustration: Wesley Bedrosian/© theispot.com

One of the unique advantages of independent RIAs that many industry observers often overlook in their prognostications and predictions for the future, is that fundamentally, these are small businesses owned and operated by their founders, or their next generation of management.

The ability for RIAs to flexibly design their own service model, develop their own culture, set pricing, deliver their version of financial planning and investment management services, work with their defined target markets, bring on their type of staff, as well as determine how big or small they want to be, provides a competitive advantage for delivering a differentiated client service experience.

When compared to the big publicly-traded or bank-owned financial services brands that are beholden to managing to the lowest common denominator because of their size, scale and compliance worries, independence shines. So much so, that independent RIAs have been the fastest growing segment in the industry for the last several decades, with that outlook expected to continue for years to come.

This independent nature, however, has its own set of business challenges. That is: How are they performing in their business? How do they compare against their peers in the industry? Are they charging enough? How profitable are they? Is their back-office efficient? Do they have the right types of clients? Do they have the right people in place? Are they optimally structured? Bottom line: How do you as an RIA owner/operator know where you stand?

The answer for many firms lies in one of the fastest growing areas of practice management: business benchmarking. This is the ability to tap into broad industry data that statistically rolls up the thousands of independent RIA firms and provides RIA leaders with the critical business intelligence they need to understand how they are performing.

Got Data?

The thirst for this type of industry data for a fragmented marketplace is in high demand, which is why all the major custodians are expanding and investing in this type of business intelligence to help their RIAs continue to grow. After all, their very livelihood as custodians is dependent on ensuring that RIAs continue to succeed in a more challenging and competitive marketplace.

For example, Schwab and Fidelity both maintain internal benchmarking departments, while TD Ameritrade acquired the benchmarking data and other assets from FA Insight two years ago. Pershing partners with InvestmentNews to sponsor the former Moss Adams studies — pioneered by Mark Tibergien, CEO of Pershing Advisor Solutions, practice-management guru who invented business benchmarking for RIAs back in the late 1990s and a contributor to this publication.

As the need for this data has expanded, business benchmarking has evolved beyond simple, bound reports to now being integrated into online business intelligence dashboards.

Case in point: the recently completed “2017 Fidelity RIA Benchmarking Study.” This comprehensive study is the latest ammunition for RIAs to continue their assault on gathering assets and increasing market share in a changing environment.

Fidelity surveyed 408 RIA firms to establish what top firms were doing and how the RIA industry is shaping up. In a surprising development that may be indicative of a market top, revenue and client growth have slowed. Overall client growth has dropped to 5% per year, down a couple of percentage points from just two years ago.

At the same time, revenue growth has declined on a top-line basis to 7%, down from 15% in 2014. Along these lines, median revenue yield has also come under pressure and is now on average 70 basis points, down 3 bps from that same time period in 2014.

This “fee compression” that many analysts have been predicting based on increasing fee-transparency, low-cost online robo advisors and discount brokers with newly established advisory capabilities, may start to become reality. According to the study, more than 60% of advisory firms are actively “discounting” existing pricing schedules up to 20-30 basis points to win and keep clients.

Will this trend continue? Fidelity, in its analysis, points to this fee problem as one of the “storm clouds” advisors will have to be prepared to manage. The study also points out that RIAs are starting to feel this pressure on revenues after a nearly decade-long, free-swinging bull market that has propped up their profitability.

As a result, RIAs have focused on productivity initiatives to maintain their profit margins as revenues come under pressure. According to the study, RIAs successfully have made their advisors more efficient.

Got Tech?

By leveraging the latest technologies to streamline workflows, advisors at RIA firms are now managing, on average, 71 clients per advisor, up from 64 one year ago. AUM per advisor also is trending upward to $80 million, a roughly 10% increase from last year.

Despite declining revenue growth, overall industry profitability is staying steady at 19% operating margin, remaining consistent over the past five years due to this productivity boost. Once again, the renaissance in advisor technology is having a big impact on the industry.

In fact, Fidelity found 49% of all firms cite technology as their top initiative this year. The good news here is that there is more room to run as advisor tech continues to deliver innovation and advisors continue to invest in their core infrastructures.

New to benchmarking studies is measuring firms’ adoption of digital advice platforms (robo). While only 8% of firms are using digital advice today, 33% of all firms are considering deploying automated investing in the near future. In a sign of early success and growing momentum for digital advice, it is the industry’s largest, most successful firms that are leading the way in this category.

Rounding out the Fidelity study was a deep dive on what separates the top- performing firms from the rest of the pack. Fidelity defines high-performing firms as those at least three years in the business, have $50 million or more in assets under management and have at least two employees. Also, they don’t have more than 25% growth from M&A activity as well as rank in the top quartile for compound annual growth, operating margin and revenue per employee.

By isolating this segment, insights can be made on how they have structured themselves, how they approach the business and what’s behind their focus on operational excellence, technology and client service. This group typically has younger professionals involved in ownership, is winning with younger investors and maintains a higher share of wallet with their clients.

These firms provide a clear path with benefits for why firms need to focus on the next generation of advisor and client, have a thoughtful approach to manage overhead expenses and a ruthless focus on technology for both advisor productivity, but also for digitally enhancing the client experience.

Thus, as you look to set your business plans for 2018, take a page or two from Fidelity’s latest benchmarking study — you, your clients, your staff and your business will be glad you did.