Last year was a good one for registered investment advisors, according to the 2011 RIA Benchmarking Study from Charles Schwab, the largest focused solely on RIAs.
Firms are managing a 13% increase in clients since before the market downturn. At $7,300 worth of revenue per client for the median firm, revenue was up from 2009’s $6,900 (although still down 13% from a 2007 high), and overall profits were up 45% on average. Most firms ended last year with more revenue and assets than ever before.
“Despite the worst recession in 80 years,” advisors emerged stronger in many ways, said Bernie Clark, executive vice president and head of Charles Schwab Advisor Services. RIAs slowed attrition from the year before. One reason, Clark said, was that they stepped up communications and brought in adult children.
Within firms, principals shored up confidence by taking pay cuts instead of laying off employees. Larger firms divided responsibility more clearly between chief financial, compliance and operating officers, Clark said, a move that will help in the next down cycle.
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.
RIAs are the fastest-growing group in financial services, with some 90% of firms winning business from wirehouses. 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 $1.3 million in revenue in 2010, versus $1.22 million in 2008, the best previous performance.
Median standardized operating income recovered to 18.3%, up from 14.9% in 2009. The typical firm had net positive asset flows of 4.3% each year during the last three years. Nearly nine in ten firms (87%) plan to grow moderately or aggressively in the coming year, mainly from referrals.
Advisors are focused on maintaining quality of client service while adding new clients. Staffing-related expenses dropped on average to 62% of revenue from 65% in 2009, with RIAs finding cost savings in compensation for owners and staff, benefits, and rent. There was a 40% increase in outsourcing, particularly in IT, payroll, compliance and benefits.
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 common 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.
Three areas that need improvement are succession planning, tracking referrals and client satisfaction. Forty-two percent do not currently track client referrals as a success metric and 60% do not track client satisfaction regularly. “At Best-Managed Firms net asset flows are growing 13% annually solely from referrals,” Clark said. “This is a strong indication that these firms bring a discipline to referrals that can have direct effect on business growth.”
Forty percent -- mainly smaller firms -- do not have a succession plan in place.