During the 2022 economic environment that saw both stocks and bonds decline in historic fashion, driving down assets under management across the financial planning industry, organic growth stood out as a bright spot for the industry.
According to the 17th annual 2023 RIA Benchmarking Study released Thursday by Charles Schwab, assets from new and existing clients both reached their second-highest point in five years, with client growth maintaining a steady pace of 6.2%.
“We’ve learned that RIAs are good at retaining clients,” said Lisa Salvi, managing director of business consulting and education at Schwab.
The comprehensive report is based on surveys of 1,300 RIAs with custody relationships at Schwab and TD Ameritrade. The participating firms, which represent $1.7 trillion in combined assets under management, experienced a 7% decrease in assets under management last year, which compares to a 14.3% decline for the classic model portfolio of 60% stocks and 40% bonds.
“It was a very challenging year,” Salvi said. “But when we’ve had challenging markets, that’s when the value proposition of advisors stands out.”
Looking beyond the broad averages for asset levels tells a more significant story about how some firms are separating from the pack.
Last year those firms with less than $250 million in assets averaged a 5.1% asset decline and 6.2% net organic growth. That compares to 20.1% asset growth and 9.4% net organic growth in 2021.
For firms with more than $250 million, average assets fell by 7.6% last year while net organic growth grew by 4.1%. That compares to 2021 when the category average assets grew by 21.3% and net organic growth grew by 7.8%.
The third category in the report is top-performing firms, represented by the top 20% of firms across 15 metrics related to growth rates, client and staff attrition, profitability and revenue growth, as well as whether the firm has things like strategic plans, succession plans and the client value proposition.
Those firms, which include RIAs of all sizes, averaged no change in assets under management last year while adding 10.8% net organic growth. In 2021, the firms in the top 20% averaged 27.8% asset growth and 14% net organic growth.
Measured on a five-year compound annual growth rate, top-performing firms have double the revenue growth of all other firms, and nearly three times the growth rate of clients and net asset flows, according to the report.
“There are real behaviors that you can see, and firms can use to drive performance,” Salvi said.
Examples of how top firms are distinct include the fact that 79% have written strategic plans and 74% have written succession plans. Among all other firms, 51% have written strategic plans and 65% have written succession plans.
Top-performing firms are also more likely to have documented client profiles (79%) and client value propositions (76%), compared to 63% of all other firms with documented client profiles and 59% with client value propositions.
More than half of top firms have a documented marketing plan, compared to 39% of all other firms, and their average marketing and business development spend is 2.4% of revenue, compared to 2% for all other firms.
Growth was listed as a top priority among RIAs in this year’s report, supplanting recruiting talent, which was the top priority in last year's report.
Nearly half of the firms in this year’s study said they had employed some form of inorganic growth strategy over the past five years. And those firms that have grown through acquisitions or bringing on advisors with books of business averaged an 11.8% five-year compound growth rate in assets, compared to 8.3% for firms not employing inorganic growth strategies.
When it comes to inorganic growth, larger firms are the most active, with 38% of firms with more than $1 billion actively seeking to buy another RIA, compared to 26% of firms with more than $250 million.
In terms of bringing on other books of business, 55% of larger firms are actively in that camp, compared to 44% of smaller firms.
And 26% of larger firms are seeking to bring on a principal with transferable assets, versus 18% of smaller firms.
Recruiting staff dropped to the second-highest priority, but was still very important, with 77% of firms hiring talent in 2022. And two-thirds of those hires were for new positions at the RIA.
Three-quarters of the firms in this year’s report say they plan to hire in 2023. The median firm plans to hire for four new roles over the next five years.
Beyond just recruiting talent, Salvi said firms are getting better at realizing ways to retain talent.
“We’re seeing RIAs develop employee value propositions, which is something firms in most industries have taken a look at,” she said. “It could include things like a wonderful career path or sabbaticals, but it’s basically about learning how to invest in your workforce to help them succeed. More than half of the top-performing firms have employee value propositions in place.”
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