Schwab 2022 benchmarking study shows organic RIA growth

The coveted 'O' word for advisors (no Wall Street boosts needed)

July 25, 2022 9:01 PM

Advisory firms that grow without the support of strong markets or the boost of an acquisition — "swimmies" — show stronger overall performance, according to Schwab Advisor Services.

Dealmaking among registered investment advisory firms usually hogs the wealth planning spotlight, as practices of all sizes snap up competitors and billion-dollar firms expand through high-priced deals. But the big news now has little to do with mergers and acquisitions.

Instead, the headline is that RIAs are doing a better job of growing just by being themselves. In 2021, attracting new clients and more dollars from existing customers, or “organic” growth, reached its highest point in five years, according to Schwab Advisor Services’ 2022 RIA Benchmarking Study.

Advisory practices of all sizes saw “tremendous” expansion last year, with a median increase in client assets under management up 19.5%, revenues up 23.2% and the number of clients up 6.2%, the study said. Those figures include firms that got bigger through acquisitions, which are approaching their 10th year of torrid activity. Dealmaking for RIAs set a ninth consecutive record in 2021, with 307 acquisitions, a spike of nearly 50% on the 205 deals recorded in 2020, according to Echelon Partners. Nearly half of the acquisitions, or 145, were for firms of more than $1 billion in assets.

Last year’s buying frenzy put $576 billion in client assets in the hands of acquirers — an asset base that when combined with the stock market’s nearly 27% return last year, automatically boosted revenues from clients who pay fees based on their assets under management.

But it’s growth without the external boost — the “swimmies” — of an acquired firm or a strong stock market that is particularly prized. Organic growth evinces the validity, viability and promise of a firm’s internal business model. It’s proof that in a wildly fragmented industry with roughly 700 new entrants each year, an advisory practice can increase its customer base, client assets and profits all by itself.

Organic growth “is very indicative of strategy, client experience and value proposition,” said Lisa Salvi, Schwab’s managing director of business consulting and education. The top-performing RIAs showed 16.1% organic growth in 2021, the highest of all firms, according to the study. Schwab defines top performers according to a proprietary 15-point scale whose measures include five-year compound growth rates for revenues, client attrition and operating margin.

Brandon Kawal, a principal at Advisor Growth Strategies, a consulting firm for advisory practices, said that “anecdotally, we’re seeing a separation between those that are growing organically and those that aren’t.” The depressed stock market, he added, “is not protecting those that aren’t.” The long-term organic growth rate for firms is around 4%, while “the best growers” average 10%-15%, he said.

Here are key takeaways from the Schwab report, which is a barometer for independent wealth managers. Some 1,218 advisory firms, representing $1.8 trillion in AUM, participated in the survey. For a look at last year’s study, click here.

‘Exceptional growth and business performance’

RIAs of all sizes showed “tremendous growth” last year, with the average client AUM jumping 19.5% on 2020.
Revenues rose an average 23.2% on the prior year, while the number of clients rose 6.2%.
Across firms of all sizes, asset growth rates last year were higher than the five-year compound annual rates over 2017-2021.
Organic growth, which excludes market performance, “played a pivotal role” while reaching a five-year high as firms gathered more assets from new and existing clients.

Keys to achieving organic growth

Documenting a strategic plan makes things more likely to happen.

“Having intentional and documented strategies helped firms achieve strong client acquisition results.”
Salvi said that “one surprising thing” from the survey “was the power of documenting strategies — a client referral plan, a business referral plan, those really turbocharge your results.”
“Firms with written marketing plans, ideal client personas and client value propositions attracted more new clients than firms that didn’t have all three in place.”
“Firms with written referral plans gained more new clients from those channels than firms without referral plans.”
Salvi said that “if you want to grow, the things that lead to outperformance are a written marketing plan, client personas and client proposals.” Those steps lead to 45% more client assets.

Talent rules

For the first time in the annual report’s 16-year history, recruitment of advisors and staff was the top strategic priority at RIAs.

Independent advisory firms will need to hire more than 70,000 new staff over the next five years — and that’s before accounting for attrition, retirements or the emergence of new firms.
Nearly four in 10 firms in the study have a documented “employee value proposition” that explains what a practice offers employees in return for their skills, capabilities and experiences.
An EVP is “a key differentiator in the competition for talent.”
“More than two-thirds of all firms reported offering clearly defined career paths and/or career progression opportunities which can improve engagement and performance.”
“We like to see firms with an employee value proposition” in the form of a written statement, Salvi said. “It’s an expression of culture — and of the values and approaches that can make a practice grow organically.”
Recruitment and organic growth intersect because advisors and staff “want to be part of a cycle of opportunity,” Salvi said.