Updated Thursday, July 31, 2014 as of 3:30 AM ET
Industry - RIAs
What Fast-Growing RIAs Do Best
Financial Planning
Wednesday, July 10, 2013
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One key element separates fast-growing RIA firms from their peers, a new report finds.

The fastest-growing firms in Charles Schwab's 2013 RIA Benchmarking Study, accounting for the top 20% of the 1,025-firm sample set, were able to generate three to five times as many referrals from clients and "centers of influence" than the rest of their peers.

"That's the differentiating factor," explains Jon Beatty, Schwab Advisor Services' senior VP for sales and relationship management. "We call it relationship marketing -- these advisors have achieved a level of relationships [with clients and business partners] where the community is promoting on their behalf."

BIG DIVERGENCE

"We knew for a long time that advisors grow through referrals," he adds. "But this [study] was the first time we saw such a divergence between the fastest growers and the rest of the firms."

That split was constant regardless of firm size, according to the study, published on Wednesday. 

Among firms with $250 million to $500 million, the top 20% saw 8.6% of net asset flows from new clients come from referrals, while the rest of the group got just 3.1% from referrals. For  firms with more than $500 million, the referral numbers were even higher: The top 20% got more than 11% of net asset flows from new clients from referrals, vs. 3.6% or 3.7% for the rest of the firms.

The fastest-growing firms also seemed to feel less pressure to acquire another firm, perhaps because they've accomplished growth in more organically, Beatty pointed out. Only about one in five of the fastest-growing firms reported an interest in dealmaking, while one-third of all other firms were already shopping for another practice to acquire.

BENEFITS OF SCALE

The focus on growth is important because size really does matter: The report found that firms with at least $1 billion in assets had 51% greater revenue per client than firms managing $250 million to $500 million, and operated at a 25% greater margin. Those larger firms also managed 71% more assets per professional than their smaller counterparts.

The economies of scale relate largely to technology use, Beatty says. With better technology implementation and systems integration, firms "can manage more clients per professional," he explains. "Your client relationship people spend less time hunting for client data, and they can become more efficient and responsive." 

GROWTH MODE

Overall, the new Schwab report -- which focuses on firms with more than $250 million in AUM -- shows an industry in growth mode. (The study tracks data from participating RIA firms that custody assets with Schwab, offering firms a customized comparison with peers in return for their participation.) 

Almost a third of the firms participating in the study are on pace to double their business over the five years from 2010 to 2014, Beatty says, if they can continue the same pace of growth. "And there's another group right behind them that are set to double by 2016," he says. "The industry is thriving."

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