Schwab recently released its 2019 RIA Benchmarking Study.  The survey contains responses from over 1,300 RIAs that custody their assets at Schwab to questions about firm operating performance, strategy, and practice management.  The survey is a great resource for RIA principals to see how their firm’s performance and direction measure up against the average firm.  We’ve highlighted some of the key results from the study below.  You can download the full survey here.

Firm Priorities

As part of the survey, Schwab asked RIA principals to rank the top priorities for their RIA.  Not surprisingly, top-line growth is a top-line priority—most RIAs ranked gaining new clients through existing client referrals or business referrals as their primary focus.  Just behind new client acquisition was improving productivity through new technology (e.g., taking advantage of CRM efficiencies).  Developing or enhancing a succession plan was at the bottom of the list, a result which is generally consistent with our experience working with many different RIA clients.  Succession plans are easy to put off because there is no immediate benefit for developing one.  But eventually every firm will need one, and developing a succession plan may very well be the lowest hanging fruit to enhance firm value, protect clients, and improve career satisfaction.

Growth

The firms participating in the survey have seen strong five-year growth on average.  Between 2014 and 2018, AUM grew at a compound annual growth rate (CAGR) of 7.5%, while revenue and number of clients grew at a respective 9.5% and 5.4% CAGR.  The best-performing firms (Schwab defines this as the top 20%) saw positive AUM growth even in 2018 (the worst year for market performance covered by the survey) due to strong net organic growth.  Interestingly, the fact that revenue growth has outpaced AUM growth suggests that the effective realized fees for these firms has increased over the last five-years, despite reports of fee pressure across the industry.  This could be attributable in part to the fact that the respondent firms reported an increased breadth of services offered between 2014 and 2018.  All of the RIA size categories identified in the survey saw similar growth over the last five years, although firms managing less than $2.5 billion in AUM generally experienced higher growth than firms over $2.5 billion in AUM.

M&A

M&A contributed to growth for many firms over the last five years.  4% of firms acquired new clients by M&A in 2018, and 18% of firms have completed an acquisition in the last five years.  Over the past five years, 13% of firms gained new clients by bringing on an advisor with an existing book of business.

Succession Planning

Succession planning is a key concern for the industry, particularly since 62% of firms are still primarily led by their founders.  Eventually, of course, all of these founder-led firms will need an exit strategy for the founding partners, whether that is through internal succession or a sale to a third party.  A full 92% of respondents indicated that they were considering internal succession, but only 38% of firms have a documented path to partnership.  Most firms, however, have added non-founders to the ownership base—only 29% of firms reported not sharing equity with non-founders.  26% of firms reported sharing equity with non-founders to support succession planning, while a further 27% reported sharing equity to retain key talent.  These equity purchases are mostly financed either by the employee (self-financing) or by the current shareholders (seller financing), although there are an increasing number of options for third-party financing of equity purchases.

Productivity

Respondent firms reported increases in productivity between 2014 and 2018.  Over this period, AUM per professional increased from $88 million to $97 million, and the number of clients per professional increased from 46 to 52.  Also over this period, hours per client for operations and administration decreased from 19 to 17, while hours per client for client service remained flat at 34, suggesting that these gains in productivity were the result of administrative efficiencies, not a decrease in client service.

Profitability

The respondent firms reported strong standardized operating margins across size categories, ranging from 26.4% for the $2.5 billion + AUM category to 30.0% for the $1.0 to $2.5 billion size category.  Even the smallest size category, RIAs with $100 to $250 million AUM, reported standardized operating margins of 28.9%.

As indicated by the Schwab survey, succession planning is at the bottom of many firms’ to-do lists, but it’s a critical issue that all firms will have to face eventually.  For more information on RIA succession planning, keep an eye out for our upcoming whitepaper, Buy-Sell Agreements for Wealth Management Firms (scheduled for release in early September).