Independent Advisors’ Revenue and Assets Rebound for Record Year, Says 2011 Charles Schwab RIA Benchmarking Study

Study Finds New Operational Discipline as a Foundation for Growth; Schwab Relationship Managers Consult with Advisors on Report Results

Tuesday, July 5, 2011 5:30 am PDT

Dateline:

SAN FRANCISCO

Public Company Information:

NYSE:
SCHW
"Best-Managed Firms1 net asset flows are growing 13% annually solely from referrals"

SAN FRANCISCO--(BUSINESS WIRE)--Bolstered by a double-digit rise in the S&P 500, independent registered investment advisors (RIAs) ended 2010 with revenue and assets reaching all-time highs, according to the 2011 RIA Benchmarking Study from Charles Schwab. Fueled by strong asset recovery in 2009, this year’s study reveals that RIA firm revenue began to recover in 2010, with the median firm posting over 18 percent growth after falling by 11 percent in 2009. A cornerstone of Schwab Advisor Services’ Business Consulting Services practice management program for RIA clients, the study reveals that a new operational discipline and dedication to client care were strong drivers for growth in the last year. The study also found that advisors ended 2010 on a note of rising confidence and optimism, as nearly nine in ten firms (87%) plan to grow moderately or aggressively in the coming year, with referrals from clients and business partners continuing to top the list of advisors’ growth strategies.

“Despite the worst recession in 80 years, advisors’ commitment to serving the needs of their clients and to adopting best practices in expense management has shaped a stronger RIA industry,” said Bernie Clark, executive vice president and head of Charles Schwab Advisor Services. “As the RIA industry continues to recover, independent advisors are well placed to benefit from the strong foundations they built during the downturn, increasing their ability to weather future storms, and creating an underpinning of industry growth and momentum for years to come.”

Schwab’s annual RIA Benchmarking Study, the largest study of its kind focusing exclusively on RIAs, captures trends and best practices in the RIA industry based on the experiences of individual firms. This year’s study represents the views of 820 firms managing more than $300 billion in combined assets, with 75 of those firms managing $1 billion or more. The median participating firm has 186 clients, $212 million in assets under management (AUM) and $1.3 million in annual revenue.

Advisory firms that participate in the study receive a complimentary Peer Benchmarking Report that is customized to their firm’s size and business model. Schwab Advisor Services business consultants and relationship managers will be consulting with firms one-on-one to help interpret the results, diagnose potential problem areas and discuss possible solutions. The reports are a fundamental business planning tool and provide personalized, detailed and actionable insights for firms on topics such as advisor asset and revenue growth, sources of new clients, products and pricing, staffing and productivity, strategic planning, technology and operations, and firm economics.

Revenue and assets rebound

RIA profits rebounded in 2010 with most firms ending last year with greater revenue and assets than in the six-year history of the survey, surpassing the year-end high for assets in 2007 and the 2008 high for revenue. The median firm in the study ended 2010 with $212 million AUM versus $176 million in 2007, before the market downturn. The median firm had $1.30 million in revenue in 2010, versus $1.22 million in 2008, the best previous performance.

Median standardized operating income recovered to 18.3 percent, up from 14.9 percent in 2009. This, combined with strong revenue gains, produced a surge in profits of 45 percent at the average firm. Organic growth enabled most RIA firms to surpass 2007 asset levels despite markets that haven’t completely recovered. The typical firm delivered net positive asset flows of 4.3% annually during the last three years.

Focus on growth

As seen in last year’s study, advisors are focused on accelerating growth with more than half (63%) placing growing the firm at the top of their strategic business initiatives and 86 percent of firms ranking such an initiative in their top three. The top enabler of growth is maintaining quality of client service while adding new clients, reported by 80% of firms, while over three-quarters (77%) identified closing new client business as a growth enabler. Additional growth enablers include:

  • Delivering investment returns (70%)
  • Implementing new technologies (69%)
  • Maintaining efficient operations while adding new clients (63%)

However, firms continue to face familiar obstacles to growth with four out of five firms (81%) reporting at least one barrier to growth and 69 percent of firms identifying at least one barrier to growth related to marketing and business development. RIAs consistently report devoting sufficient staff time for business development as the biggest growth barrier (52%). One new barrier in this year’s survey is meeting and adapting to regulatory changes (21%). Additional top barriers to growth include:

  • Following a well-thought-out marketing strategy (39%)
  • Identifying new prospects (34%)
  • Sufficient financial investment in marketing (32%)
  • Hiring talent (28%)
  • Implementing long-term strategic plans (25%)

New operational discipline

While revenues in 2010 peaked, firms were managing 13 percent more clients than before the crisis. In part due to declines in revenue per client in 2010, RIA firms worked to control costs and increase efficiency as a way to manage profitability. At $7,300 revenue per client for the median firm, revenue was up from 2009 ($6,900), but down 13 percent from a 2007 high. With more clients representing fewer revenue dollars, many advisors found themselves working harder for the same money.

Discipline in internal operations and effective cost management helped reduce staffing-related expenses at the average RIA firm to 62 percent of revenue in 2010 from 65 percent a year earlier. To reinforce productivity, firms held the growth of staff and non-staff expenses below revenue growth, resulting in a lower percentage of revenue going toward both types of expenses. Specifically, the top areas of cost-savings as a percent of revenue were: non-owner professional staff compensation, owner compensation, benefits and payroll tax and rent.

“Independent advisors clearly reaped the rewards of renewed discipline in 2010,” said Clark. “By focusing on new, more efficient work styles during the financial crisis, RIAs were able to maintain service while protecting revenue. The ongoing opportunity for successful firms will be to maintain operational discipline in the good times too.”

Productivity drivers

RIA firms are using outsourcing and adopting technology systems as additional strategies to boost productivity. Historically maintained in-house, back-office operational functions such as data management, performance reporting and invoicing are increasingly being outsourced, with a more than 40 percent increase in outsourcing since only one year ago. Outsourcing may be especially helpful for small to mid-size firms to gain scale quickly in areas where internal expertise could be difficult or expensive to develop. Most likely to be outsourced are information technology (IT) (75%), payroll (67%), compliance (38%, up from 27% last year) and benefits (32%).

The percentage of firms investing in technology to improve productivity continued to increase across the industry. The average firm was using 5.4 out of eight commonly used technologies in RIA offices, compared with 4.2 just three years ago. The most commonly used technologies are portfolio management systems (96%), customer relationship management (CRM) (84%), email archiving (83%) and document management (70%). The greatest technology growth of the past three years has been in trade order management and rebalancing software (66% increase), client websites (61% increase) and document management (35% increase). Investing in new technology is a top-3 priority for nearly one-quarter of firms, and the most important item outside of business development.

Client attrition stemmed

Throughout the financial crisis, RIAs provided clients with close attention and frequent communication, a tactic that built client loyalty and paid off for firms: on average, RIAs slowed client attrition by 25 percent versus the previous year, holding on to 97 percent of their clients during 2010.

Firms also grew their client base by 4.4 percent in 2010 versus 3 percent in 2009, though this remains below the 8 percent median annual growth rate of the client base from 2003 to 2006. Client referrals continue to be a top initiative for advisors, with over half of advisors (54%) stating it as a top three strategic initiative for 2011. Despite the importance of client referrals to nearly all firms, however, 42 percent do not currently track client referrals as a success metric and 60% do not track client satisfaction in a systematic way.

“Best-Managed Firms1 net asset flows are growing 13% annually solely from referrals,” noted Clark. “This is a strong indication that these firms bring a discipline to referrals that can have direct effect on business growth.”

Strategic planning key to aggressive growth

A new component of the study this year, strategic planning is a crucial element of business development and reveals a range of opportunities RIA firms could pursue to promote growth more aggressively. While nearly two-thirds of firms indicated they go through a strategic planning or priorities process, only 42% have a written strategic plan in place, meaning 58% of firms do not.

“We’ve found that Best-Managed Firms follow a more rigorous planning approach compared to peers, using a longer time horizon and validating their results against the plan more often,” said Clark. “Firms should make strategic planning a priority if they want to see real, sustained growth.”

When it comes to succession planning, 40% do not have a succession plan in place. For those that do, it tends to be larger firms. When asked about the strategies they were considering for the succession of their firm, advisors strongly favored internal succession (80%) over merging with or acquiring another firm (28%), selling the firm (25%) or recruiting an external successor (21%). One third of firms indicated they were considering more than one strategy.

“With many advisors 50 years of age or older, having a plan in place for succession can instill confidence among employees and clients,” added Clark. “Planning what will happen to a business once it stops being an advisor’s full-time job is a critical business practice.”

Schwab’s Business Consulting Services for advisors

Schwab’s Business Consulting Services is a comprehensive practice management platform that draws on more than two decades of experience working with advisors. Through one-on-one support, online resources, and consultative events, Schwab provides independent investment advisors with comprehensive practice management solutions including insights, tools and resources to help them drive growth, improve scalability and efficiency, and focus on client service. Schwab’s Business Consulting Services, provided to advisors who custody with Schwab, comprise six comprehensive offerings that cover key areas of running an independent advisory firm: business strategy and planning, marketing and business development, human capital, transition planning, technology and operations, and compliance resources. Schwab’s relationship managers, and business and technology consultants work closely with advisors to identify areas of need and leverage solutions to support the advisor business.

In addition to the annual RIA Benchmarking Study, Schwab’s Business Consulting Services for advisor clients includes:

  • Business Strategy & Planning to help advisors develop and follow a business plan, including one-to-one consultations with Schwab business consultants and relationship managers, hundreds of practice management workshops and events each year, and Schwab Market Knowledge Tools® white papers.
  • Human Capital resources to enhance advisors’ ability to find and retain employees and align team members with the firm’s goals, including the Human Capital website, a Compensation Benchmarking Tool, and an online Career Opportunity Service.
  • Marketing & Business Development tools to help advisors address marketing and business development challenges, including the Marketing & BD website, a Marketing Diagnostic Tool, and a number of third party marketing resources.
  • Transition Planning services to help advisors with transition and succession decisions, including Schwab’s M&A Listing Service and Schwab Advisor Transition Support website.
  • Technology & Operations insight for advisors to maximize technology, streamline operations and enhance client service, including Schwab’s Technology Adoption Scorecard, Schwab Advisor University™, and Schwab’s SOLUTIONS® technology workshops.
  • Compliance Resources to help advisors stay current with regulatory matters, including the Compliance Review newsletter, online resources, and discounts on third party compliance consulting.

About Charles Schwab

The Charles Schwab Corporation (NYSE:SCHW) is a leading provider of financial services, with more than 300 offices and 8.1 million client brokerage accounts, 1.4 million corporate retirement plan participants, 736,000 banking accounts, and $1.7 trillion in client assets as of May 31, 2011. Through its operating subsidiaries, the company provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC, www.sipc.org), and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through its Advisor Services division. Independent investment advisors are not owned, affiliated with or supervised by Schwab. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides banking and mortgage services and products. More information is available at www.schwab.com and www.aboutschwab.com. (0711-4224)

Responses were collected during February and March of 2011.

All information contained in the 2011 RIA Benchmarking Study report is provided for general informational purposes only. The report is not a recommendation of any business enterprise or investment advisory practice management technique, strategy or practice reported on or described. All data is self-reported by Study participants and is not verified or validated. Each participating advisory firm submitted only one set of responses.

Third party firms mentioned are not affiliated with or employed by Charles Schwab & Co. Inc.

Some of the services mentioned are provided by third-party firms who are not affiliated with nor employees of Schwab.

1 The RIA Benchmarking Study from Charles Schwab comprises self-reported data from advisory firms that custody their assets with Charles Schwab. The Best-Managed Firms are the top 20 percent in productivity, profitability, and revenue growth, calculated after removing those with less than $1 million in revenue.

Photos/Multimedia Gallery Available: http://www.businesswire.com/cgi-bin/mmg.cgi?eid=6782322&lang=en

Contact:

Charles Schwab
Anita Fox, 415-667-1308
anita.fox@schwab.com
or
Makovsky + Company
Janet Yoo, 212-508-9606
jyoo@makovsky.com

Multimedia Files:

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Schwab RIA Benchmarking Study 2011-Top growth enablers (Graphic: Business Wire)
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Schwab RIA Benchmarking Study 2011-Plans for firm succession (Graphic: Business Wire)
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Schwab RIA Benchmarking Study 2011-Resources used in developing a strategic plan (Graphic: Business Wire)
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Schwab RIA Benchmarking Study 2011-Top barriers to growth (Graphic: Business Wire)

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