Current market and economic conditions aside, the financial planning industry has been enjoying a powerful growth spurt that's being fueled, at least in part, by spreading economic uncertainty.
The latest edition of the Charles Schwab RIA Benchmarking Study paints a picture of an industry that's growing fast, becoming increasingly sophisticated and creating so many opportunities that adviser and staff shortages might be on the near horizon.
Among the key metrics illustrating the health of the wealth management space is the growth rate of assets under management.
The study divides advisory firms into six categories according to their size, and all six categories saw asset growth last year that surpassed the five-year compound annual growth rate, or CAGR.
At the low end, firms that have between $100 million and $250 million, with a median asset base of $176 million, grew by 18.8% last year, which compares to a 14.1% five-year CAGR.
Firms that have from $500 million to $750 million with a median base of $606 million grew by 20% last year, compared to a 14.1% five-year CAGR.
Among the largest firms, which have more than $2.5 billion and a median asset base of $4.4 billion, last year’s growth rate of 18.7% compared to a 12.2% five-year CAGR.
The median growth rate for all firms last year was 19.5%, compared to a 14.1% five-year CAGR. That translated to a 23.2% growth rate for revenues, reaching a median of $3.2 million.
More than 1,200 firms, representing $1.8 trillion, participated in this year’s research.
While a strong stock market will boost just about any wealth management business model, the focus on organic asset growth tells a truer story of business acumen.
According to the report, firms managing less than $250 million experienced an 8.2% organic growth rate last year, compared to 6% in 2020. Firms with more than $250 million saw a 7% organic growth rate, compared to 4.5% a year earlier. Meanwhile, the firms categorized by the research as top-performing saw organic growth spike by 16.1%, compared to 9.2% in 2020.
“We always like to look at organic growth because it strips out market performance and it’s a better barometer of the business strategy and client experience,” said Lisa Salvi, managing director of business consulting and education at Schwab Advisor Services.
“This is extremely strong organic growth,” Salvi added.
As might be expected, firm revenue also saw a jump last year, with median revenue of $3.2 million representing a 23.2% gain over the prior year. That compares to a five-year CAGR of 11.3%.
The latest research shows the median firm grew to 307 clients, a 6.2% one-year increase, compared to a 5.1% five-year CAGR.
Salvi, who's been involved with the benchmarking study for the past 10 years, said RIAs tend to gain market share and clients in periods of uncertainty, which suggests next year’s data could include more strong numbers.
But the strong growth at the firm level comes with a potential hiring challenge. Asked to prioritize strategic initiatives, advisers ranked recruiting and increasing staff skill sets the highest, ahead of client acquisitions through referrals, which was the top priority a year ago.
“We’ve been doing the study for 16 years, and [hiring] has never come in this high,” Salvi said. “I think firms are looking at tight labor market.”
The research shows that the median firm hired three people in 2021, with two of those filling newly created positions.
A third of the firms recruited their new hires from colleges and universities.
The report also suggests that the median firm will need to hire six new people over the next five years.
“Based on current growth rates and the number of RIAs, the industry will need to hire more than 70,000 new staff over the next five years, without accounting for any attrition, retirements or new firms,” Salvi said. “I think that 70,000 forecast is kind of on the conservative side, which is why when I talk to interns or college students, I wonder what it’s like to be in the market today.”
A big part of managing growth is leveraging the available technology. This ranked as the fifth-highest strategic initiative in the most recent report, up from seventh place a year earlier.
“I think of that as the second side of the talent conversation,” Salvi said. “Firms have gained productivity through the pandemic. They’re really interested in how to increase efficiency.”
According to the report, 44% of firms managing more than $250 million have three or more data sources or systems integrated with their client relationship management platforms. That’s up from 37% a year ago.
For firms under $250 million, 29% have three or more data sources or systems connected to their CRM, up slightly from 26% a year ago.
The research breaks out firms representing the top 20% of the overall group as top performers and shows what those RIAs are doing differently.
For example, 56% of top performers have a documented marketing plan, compared to 42% of firms with more than $250 million, and 27% of firms with less than $250 million.
Top performers have an average marketing and business development spend of 2.3%, which compares to 1.5% for larger firms and 1.8% for smaller firms.
Top performers are also more efficient when it comes to resources. The average top performer spends 53 hours a year acquiring new clients, compared to 66 hours for all other firms.
Cost of staff time for acquiring new clients is $3,704 at top firms and $4,160 at all other firms. Cost of staff for each new $1 million in client assets is $2,307 at top firms, compared to $3,169 at all other firms.
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