Independent Investment Advisors in Growth Mode, Says 2010 Charles Schwab RIA Benchmarking Study

As the markets continue to move sideways, independent registered investment advisors (RIAs) are looking ahead, with the vast majority seeking to grow while maintaining or increasing firm profitability. According to the 2010 RIA Benchmarking Study from Charles Schwab, a cornerstone of Schwab Advisor Services’ Business Consulting Services practice management program for RIA clients, 84 percent of participating advisors plan to grow aggressively or moderately over the next five years. In addition, 95 percent of advisors are looking to use technology to increase efficiency, and 88 percent have purchased technology with the objective of enhancing client service.

"The independent advisor model continues to prove its staying power and appeal to customers as the industry emerges from a difficult past few years for the markets and economy,” said Bernie Clark, senior vice president and head of Charles Schwab Advisor Services. "Despite lower revenues and compressed profit margins, our independent investment advisor clients have remained profitable and continued to grow by focusing on serving their clients and adapting their businesses to focus more on efficiency and expense management.”

Advisory firms that participate in the study receive a complimentary Peer Benchmarking Report that is customized to their firm’s size and business model. The reports provide personalized, detailed and actionable insights for firms on topics such as advisor asset and revenue growth, sources of new clients, products and pricing, staffing and productivity, technology and operations, and firm economics. Schwab Advisor Services business consultants and relationship managers will be helping firms interpret the results, diagnose potential problem areas and discuss possible solutions.

Schwab’s annual RIA Benchmarking Study, the largest study of its kind focusing exclusively on RIAs, captures trends and best practices in the RIA industry based on the experiences of individual firms. This year’s study represents the views of 870 firms managing more than $300 billion in combined assets, with 80 firms managing $1 billion or more. On average, participating firms have 380 clients, $470 million in assets under management and $2.6 million in revenue.

Staying profitable and adding clients

Despite lower revenues, the median operating income for RIA firms participating in the Schwab study remained positive at 10.1 percent in 2009 compared to 15 percent in 2008. Firms report revenues to be down 11 percent in 2009, bringing in $1.2 million in revenue compared to $1.3 million in 2008 at the median. Revenue per client was $6,900 in 2009 compared to $7,800 in 2008. But firms appear to see the light at the end of the tunnel, estimating 2010 revenues to be 10 percent higher.

"Independent advisory firms have done a remarkable job remaining profitable and successful despite the pressures nearly all businesses have felt over the past few years,” said Clark. "Looking ahead to the future, Schwab is encouraging firms to stay vigilant in monitoring things like expense discipline, time management and client profitability.”

In terms of growth over the past three years, 58 percent of advisors say they are satisfied, down slightly from 65 percent in last year’s study. Firms have continued to add clients, although at a slower pace than in past years. Advisors report growing their number of clients by 2.6 percent in 2009 compared to 5.3 percent in 2008. In addition, net new asset flows from new and existing clients also remained positive with the typical firm adding $6 million in assets representing a four percent growth in assets under management.

Looking ahead, advisors are becoming more strategic about their growth strategy and planning. More than four in 10 advisors (44%) say that developing and following a well-thought-out marketing strategy is a challenge on which they are focused, a 52 percent increase from 2007. In addition, 31 percent say they are focusing on developing and implementing a long-term growth plan as a challenge, a 63 percent increase from 2007.

"We are seeing an increasing number of advisory firms recognize the importance of strategic business planning,” noted Clark. "Three years ago, it was about ‘how do we grow as fast as possible’ for many firms. Now, advisors are much more focused on ‘how do we really plan for growth and do it in a strategic and deliberate way’.”

Higher assets and revenues per client key to greater productivity

Across all advisory firms participating in the Schwab study, some are seeing stronger overall growth and appear to be far more productive than their peers. From 2006 to 2009, the top 20 percent of firms in terms of productivity, operating income, and revenue growth had a compounded annual growth rate of:

• 6.1% in assets under management (compared to 2.4% for all other firms)
• 7.3% in revenue (compared to 0.5% for all other firms)
• 5.7% in number of clients (compared to 4% for all other firms)

In addition, compared to all other firms in 2009, the top 20 percent had 57 percent higher assets under management per professional, 63 percent higher revenue per professional, and 51 percent more clients per professional.

"As firms grow, the key to increased productivity seems to be higher assets and revenues per client, as opposed to spending less to serve the same size client,” said Clark. "Revenue per professional also appears to be an indicator of a firm’s overall productivity level.”

Gearing up for future growth

RIAs report a number of factors contributing to growth. More than three-quarters (77%) say that maintaining quality and consistency in client service while adding new clients is an enabler to growth, and 74 percent believe success in converting prospects into clients is a factor in driving growth. Additional growth enablers include:

• Delivering investment returns that help attract and retain clients (68%)
• Implementing technologies to build scale (65%)
• Adapting operations and day-to-day procedures to accommodate growth and be efficient (62%)

Referrals continue to be an essential driver of growth for advisors, accounting for 83 percent of advisors’ new clients. Roughly half of those referrals come from existing clients and a quarter come from professional partners.

But RIA firm growth is not without its roadblocks, according to Schwab’s study. Eighty-three percent of firms report at least one barrier to growth, with nearly three-quarters (73%) of advisors say that marketing and business development is a barrier to growing. More specifically, 56 percent say devoting sufficient staff time to business development is a roadblock to growing, making it the biggest growth barrier for advisors in this year’s study. Additional barriers to growth include:

• Developing and following a marketing strategy (44%)
• Finding enough budget to invest in marketing (39%)
• Identifying prospects (38%)
• Developing and implementing a growth plan for the firm (31%)

Looking to tap technology

The majority of RIAs participating in the Schwab study consider investment in technology to be a strategic priority with 73 percent calling themselves either aggressive or moderate technology adopters. In addition to using technology to increase efficiency and better serve clients, advisors’ motivations for making technology purchases also include scaling their business for the future (85%), reducing risk and potential for error (84%), differentiating from competitors (50%), and adding systems to serve new types of clients (30%).

"We are hearing loud and clear from advisors that technology is key to running their businesses, which is why Schwab is making significant investments to help advisors achieve scale and efficiency through technology, especially with the development of the Schwab Intelligent Integration™ platform,” noted Clark.

RIA firms indicate saving up to 18 percent of their time by using various technologies, and most firms participating in the study have already made significant investments in technology. The most commonly adopted are a portfolio management system (95%), client relationship management system (CRM) (84%), and email retention software or service (78%). Portfolio management systems and CRM systems rise to the top in terms of technologies advisors feel are most vital to the success of their business. Ninety-seven percent of advisors rate their portfolio management systems as very important to their business, along with 89 percent saying the same for their CRM.

But while advisors are satisfied with their portfolio management system, satisfaction with CRM systems appears to correlate directly to how well it is integrated with the daily operations of the firm. Overall, 57 percent of advisors say they very satisfied with their current CRM solution. Of the 22 percent of firms that use only the basic features of a CRM, there is a 29 percent satisfaction rate with a CRM. Among 43 percent of firms that use multiple features in their CRM and integrate it with other systems within their firm, there is a 76 percent satisfaction rate. Advisors using multiple CRM features and integrating it with other systems report double the time savings compared to advisors using only basic features.

Schwab’s Business Consulting Services for advisors

Schwab’s Business Consulting Services provide independent investment advisors with comprehensive practice management solutions including insights, tools and resources to help them drive growth, improve scalability and efficiency, and focus on client service. Specifically, Schwab’s Business Consulting Services, provided to advisors that custody with Schwab, comprise six offerings that cover key areas of running an independent advisory firm: business strategy and planning, marketing and business development, human capital, transition planning, technology and operations, and compliance resources.

In addition to the annual RIA Benchmarking Study, Schwab’s Business Consulting Services for advisor clients includes:

• Business Strategy & Planning to help advisors develop and follow a business plan, including one-to-one consultations with Schwab Business Consultants, hundreds of practice management workshops and events each year, and Schwab Market Knowledge Tools® white paper reports.
• Human Capital resources to enhance advisors’ ability to find and retain employees and align team members with the firm’s goals, including the Human Capital website, a Compensation Benchmarking Tool, and an online Career Opportunity Service.
• Marketing & Business Development tools to help advisors address marketing and business development challenges, including the Marketing & BD website, a Marketing Diagnostic Tool, discounts on Advisor Impact’s Client Audit program, Ideal Client Profile worksheet, and a number of third party marketing resources.
• Transition Planning services to help advisors with transition and succession decisions, including Schwab’s M&A Listing Service and Schwab Advisor Transition Support.
• Technology & Operations insight for advisors to maximize technology, streamline operations and enhance client service, including Schwab’s Technology Adoption Scorecard, Schwab Advisor University™, and Schwab’s SOLUTIONS® technology workshops.
• Compliance Resources to help advisors stay current with regulatory matters, including the Compliance Review newsletter, online resources, and discounts on third party compliance consulting.

About Charles Schwab

The Charles Schwab Corporation (NYSE:SCHW) is a leading provider of financial services, with more than 300 offices and 7.9 million client brokerage accounts, 1.5 million corporate retirement plan participants, 794,000 banking accounts, and $1.4 trillion in client assets as of May 31, 2010. Through its operating subsidiaries, the company provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors. Named "Highest in Investor Satisfaction with Self-Directed Services" by J.D. Power and Associates in 2009, its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC, www.sipc.org), and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through Schwab Advisor Services. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender) provides banking and mortgage services and products. More information is available at www.schwab.com and www.aboutschwab.com. (0710-4299)

Responses were collected during February and March of 2010.

All information contained in the 2010 RIA Benchmarking Study report is provided for general informational purposes only. The report is not a recommendation of any business enterprise or investment advisory practice management technique, strategy or practice reported on or described.

All data is self-reported by study participants and is not verified or validated. Each participating advisory firm submitted only one set of responses.

Third party firms mentioned are not affiliated with or employed by Charles Schwab & Co. Inc.