The main business priorities of RIA firms this year are acquiring new clients, leveraging technology, including customer relationship management (CRM) systems to improve productivity, and enhancing strategic planning and execution, according to a new study by Charles Schwab.
The 2019 RIA Benchmarking Study shows that RIA firms’ revenue continued to increase in 2018, supporting a strong five-year compound annual growth rate (CAGR), along with strong five-year growth in assets and clients, as they remained healthy despite recent market volatility, Lisa Salvi, vice president of Business Consulting and Education at Schwab Advisor Services, told ThinkAdvisor on Wednesday.
The 13th annual RIA Benchmarking Study, which contains self-reported data fielded from January to March this year among 1,310 firms that custody their assets with Schwab Advisor Services and represents $1.1 trillion in assets under management, shows that RIA firms are actively seeking talent, with 71% of them reporting they hired staff in 2018 and 42% recruiting from rival RIAs, according to the study.
“We all know we’ve been in one of the tightest labor markets in history,” Salvi said. “The amount of time and energy advisory firms are putting into hiring is significant,” she noted, adding 76% of firms said they’re looking to hire people this year.
The study also unveiled findings related to equity sharing and financing options at RIA firms in a new section of the annual report. Options for equity financing expanded recently, with RIA firms now using banks, internal financing and outside investors, it said. Among those offering equity to employees, most often employees are financing the equity purchases, according to the study.
“If you go back about five years, obtaining financing for equity programs was a big pain point for advisors,” according to Salvi. “It was very difficult to figure out,” she noted. But she said: “We’ve really seen that, over this five-year period, that has resolved a great deal [and] that most firms have figured” the problem out by turning to the increased set of options available to them. There’s also “broader understanding and awareness of the independent model and what those firms are looking for within the broader financial services community,” she said.
What also stood out for Salvi in the findings of this year’s study was that “once a firm crosses a billion dollars in assets under management, only 48% of those firms are saying they’re led primarily by founders,” she said. What’s happening is that, “as firms grow in complexity, there are” second-generation and even sometimes third-generation leaders “making day-to-day management decisions,” she said.
On the cybersecurity front, the study found RIAs are enhancing their programs to protect their clients and firms. Among RIA firms with $250 million or more in AUM, 48% now incorporate cybersecurity in client education, 60% use consulting services, 65% have cybersecurity insurance and the vast majority — 92% — address cybersecurity in employee training, according to Schwab.
The latest study also found that the fastest-growing firms had a 9.3% increase in clients and AUM growth of 6.5% from a year earlier. Those top companies represented the top 20% of RIA firms ranked by organic growth. In addition, according to the study, the median compound annual revenue growth rate from 2014 to 2018 for all firms with $250 million or more in AUM was 9.4%, to $4.2 million. In that time period, median AUM grew at a CAGR of 7.5% to $672 million, and the number of clients grew at an annual rate of 5.4%, to 380.
The study found that RIA “firms of all sizes are yielding strong profit margins.” Profitability — measured as standardized operating income margin — grew 28.9% among firms with $100 million to $250 million in AUM, 26.6% among firms with $250 million to $500 million in AUM, 29.9% among firms with $500 million to $750 million in AUM, 26.6% among those with $750 million to $1 billion in AUM, 30% among those with $1 billion to $2.5 billion in AUM and 26.4% among those with more than $2.5 billion in AUM, according to the study.
New clients “drove more than five times the new assets” for RIA firms compared with net assets from existing clients, Schwab singled out as another key finding of the study.
Another growing trend is that RIA firms are increasingly offering value-added services to meet client needs and better differentiate themselves from competitors. Among the most popular value-added services are annuity products (29% of firms in 2018, up from 25% in 2014), charitable planning (79%, up from 67%), family education (72%, up from 58%), life insurance products (28%, up from 22%), and tax planning and strategy (74%, up from 68%), the study found.
— Check out M&A Activity Among RIAs on Track to Achieve All-Time High This Year: TD Ameritrade on ThinkAdvisor.