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RIAs are prepared to weather coronavirus challenges, says TD Ameritrade Institutional


Amid the immense challenges and disruption spawned by the coronavirus pandemic, independent registered investment advisors (RIAs) are again proving their resiliency, course-correcting as needed to position themselves for long-term growth, according to new FA Insight benchmarking research from TD Ameritrade Institutional1.Indeed, advisory firms reported record levels of productivity and asset growth in 2019 and attracted new clients at a steady rate. And though Covid-19 has ushered in an age of anxiety and uncertainty, strong operational foundations should serve firms well as they navigate new challenges, according to the 2020 FA Insight Study of Advisory Firms: Growth By Design.

“RIAs are getting creative about how they address the operational and business development challenges brought on by COVID-19,” says Vanessa Oligino, Managing Director of Business Performance Solutions at TD Ameritrade Institutional. “It’s times like these that breed innovation, so we expect many RIAs will emerge even stronger as they discover new opportunities to excel.”

Optimism, to be sure, was shaken by a pandemic that gripped the United States in the middle of the survey effort. Firms providing data prior to 13 March 13 – when a national emergency was declared – had a much different outlook for the future than those completing the survey in the weeks that followed. Though both groups experienced nearly identical revenue growth in 2019, expectations for 2020 growth were nearly four percentage points less among those reporting after March 13.

In 2019, RIAs saw a 6.6 per cent increase in new clients and a 23 per cent increase in median assets under management (AUM) from 2018 – three percentage points above 2009’s previous all-time high.

In fact, assets resulting from new clients and business development efforts made up 55 percent of the increase in AUM, with market appreciation accounting for the remainder.

And the wide swings in the market that began in 2018 impacted firms last year in other ways, not the least of which was declining revenues. Median revenue growth in 2019 was 9.5 percent, a drop from 13.2 percent in 2018, and operating profit margins dipped from 2018 to 17.6 percent.

In addition, rising costs outpaced revenue increases at most firms, and at 41.3 percent, overhead expenses as a share of revenue, hit its highest level since 2008.

Thanks to an increased use of integrated technology and automation tools, such as team collaboration tools, tele-conferences, document management and signature applications, advisory firms have improved productivity and reduced their reliance on support personnel. With the broadening array of technology solutions, firms may be scaling back on non-revenue roles in favour of supporting revenue generators through greater use of technology or outsourcing.

Further, 70 per cent of firms rely on one platform or application as a central “hub” – often times the CRM system – for accessing all other technology tools, and 81 per cent of firms have the capability for data to flow automatically across software applications, up from 61 per cent in 2016.

RIAs are also adding headcount now for long-term growth. Roughly 20 per cent noted that new team members were major contributors to firm growth, while 28 percent credit their existing team’s expertise as a key driver.

One area for growth that remains largely untapped by advisors is pricing. In 2019, RIAs typically generated 96 per cent of their revenues from an AUM-based fee. Only six per cent of firms in this year’s study report collecting at least half of their revenues from fees not tied to the AUM.

Implementing a minimum client fee, effectively a pricing floor, can enhance performance. Firms with a disciplined adherence to a minimum fee, for example, report 42 percent greater profitability. But even though alternative pricing strategies have the potential to drive stronger revenue growth, a majority of firms said they are satisfied with the ease of the industry-standard AUM-based fee model, and have no expectation of making a change.

RIAs rank business development as their top growth challenge, second only to the economic climate. Social media was the third most cited source for attracting new clients, behind the main new business sources: client referrals (49 per cent) and referrals from “centrs of influence” (22 per cent), such as accountants, lawyers and other non-competing professionals whose client or prospect base is similar.

Firms cited in-person client and prospect events as the activities that accounted for the greatest share of marketing budgets in 2019, along with digital advertising. Formal referral programs ranked lower on the list, despite the importance of referrals to the bottom line.

But with so many uncertainties right now around the viability of events, firms need new ways to engage. Social media tools and electronic communications are more important than ever for staying present in the lives of clients and prospects, the report said. And webinars, podcasts, targeted video presentations and virtual classrooms may all provide new channels to replace in-person events.

“Covid-19 may force changes, but history shows us that independent advisors are adaptable and resilient. We’re confident that advisory firms will continue to find ways to pursue their growth goals,” says Oligino. “Unprecedented times can bring unprecedented opportunities: it is up to strategic, forward-thinking advisors to seize the day and act.”

For more than 12 years, FA Insight has set the standard for independent benchmarking research for the investment advisory industry. The 2020 FA Insight Study of Advisory Firms: Growth By Design is based on responses to an online survey fielded 5 February to 30 April, 2020. This year, 345 individuals from qualifying firms – those with a minimum of USD100,000 in annual revenues and in business for at least 12 months – completed submissions.

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