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RIAs continue to set the pace for industry growth

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Registered investment advisers (RIAs) continue to set the pace for growth in the industry in 2012, according to results from the Schwab Advisor Services annual RIA Benchmarking Study.

 
More than 1,000 RIA firms, representing nearly half a trillion dollars in assets under management (AUM), participated in the annual study, the largest of its kind focusing exclusively on RIAs.
 
Results revealed that the median RIA firm in the study ended 2012 with USD572m in AUM, an increase of 13.3 per cent over the previous year, while revenues grew by 7.1 per cent to USD3.4m in 2012.
 
Based on the study findings, by the end of 2014 about one-third of adviser firms will have doubled in size over the previous five-year period.
 
“It’s gratifying to see the continued robust growth in the RIA industry in 2012,” says Jonathan Beatty, senior vice president, sales and relationship management, Schwab Advisor Services. “Several factors are helping to support industry health and growth including steady investment performance across all firms. We’re also seeing that quality client service and an emphasis on relationships remain key drivers for client retention and of overall RIA growth and success.”
 
The ways in which firms grew in 2012 varied but themes were prevalent. Investment performance across peer groups accounted for 8.5 per cent of all growth last year, reflecting sound strategies and a broadly improved market. Net organic growth – the change in assets from existing clients, new clients and assets lost to client attrition – was another key driver, accounting for 4.5 per cent of AUM growth at the median firm.
 
RIA firms in the study have seen consistent growth over the past three years (2010-2012), however, some firms have demonstrated significantly greater net organic growth, the area over which they have most control. These fastest-growing firms had a median net organic growth of 15 per cent, which is five times greater than all other firms at the median. The fastest-growing firms generated an average of 36 per cent more new clients from referrals than all other firms.
 
While advisers think about growth differently, all recognise that growth brings the benefits of scale which, as shown in the study, are compelling and tend to increase with size.
 
Improved productivity, operations and financial results are among the benefits of scale seen in the study. Firms with at least USD1bn in AUM enjoy 51 per cent greater revenue-per-client and 71 per cent greater AUM-per-professional than firms managing USD250m to USD500m in assets. Clients with assets of more than USD5m accounted for half of the revenues at RIAs with USD1bn or more in AUM, while they accounted for just one-fifth of the revenues at firms with USD100m to USD250m in AUM. Larger firms also reported improved margins. The standardized operating income margin at firms with USD1bn or more in AUM was 25 per cent greater than that of firms managing USD250m to USD500m assets.
 
“The power of growth is evident in the results of our annual study,” says Beatty, “and although we understand growth is not the strategy of every RIA, we do see the overall industry trend is a disciplined approach to growing and to maximising financial results. Interestingly, we see many similarities in the practices and operation of the fastest-growing firms that lead to growth, including attracting and retaining clients through existing client referrals and their centres of influence.”
 
The RIAs in the 2013 study reveal the importance of offering outstanding client experiences. Based on study results, the path toward growth and increased profitability requires the ability to attract the right kinds of clients and to serve them well. RIAs that excel at relationship cultivation benefit more from referrals from existing clients and centres of influence (COI).
 
The fastest-growing firms in all AUM segments generated more new business from referrals than their peers, approximately three times more net assets flows from new client acquisition in 2012. Moreover, across all peer groups, these fastest-growing firms acquired referrals from COIs at a higher rate than all other firms do from COIs and existing clients combined.
 
Although client referrals and COI are a primary channel for RIA growth, according to the study, some firms are also looking to non-organic means to achieve growth – specifically, by acquiring another firm. Approximately 25 per cent of RIAs in the USD100m to USD1bn AUM segment indicated they are actively seeking to acquire another firm. Among firms managing USD1bn or more in AUM, 34 per cent are actively looking to acquire another firm. Among the fastest growing firms, one in five reported plans to acquire another RIA while one in three of all other firms is looking to acquire.
 
“With the compelling benefits of increased scale, it’s not surprising that RIAs are eager to move to the next level with their business,” says Beatty. “Whether through organic or non-organic means, the path to growth is a strategic decision that firms are weighing at the individual level. The study results can help them make these decisions armed with better information based on real data from their peer groups.”

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