These are good times to be an independent RIA, as the growth stars are aligning for this unique segment in financial services, which also is propelling growth of asset managers, custodians and technology companies that serve them.
Case in point, the recent RIA Symposium in San Francisco, a nationwide series of events that custodian Pershing Advisor Solutions is producing through top-tier speakers professing all things growth directly to the billion-dollar RIAs in attendance, who were lapping it all up.
According to the latest benchmarking research sponsored by Pershing and data from wealth-management-focused investment bank Echelon Partners, the RIA industry is in a strong growth mode, with double-digit year-over-year growth in both revenues (11.7%) and assets (20%), up dramatically from the previous couple of years. Meanwhile, other segments in wealth management, such as the independent broker-dealer space, have seen the opposite and are actually shrinking as the industry continues to migrate away from commissions and sprint toward fiduciary-driven fees.
Corresponding to the near decade-long market expansion since the financial crisis, RIAs have found themselves growing at rates that effectively double the size of their firms every three to five years, leading to many new management challenges. Most notably, the increasing costs for advisor talent, which is also in double digits (10%) year over year, crimps profit margins as firms race to hire the best advisors to keep up with their growth.
Despite the good times, RIA Symposium speakers all sounded a warning that this fast growth may not be sustainable. In fact, over half of the growth in RIA firms has been coming from market performance, a hidden subsidy that, while enjoyable, may not be supportable long term as the market grows more volatile.
"The biggest problem with growth rates being market driven is that they tend to cause firms to not invest the right amount of time, resources and efforts into a strategic marketing plan to sustain their growth long term," said Megan Carpenter, CEO of FiComm Partners, a leading wealth management marketing, branding and public relations firm. "From benchmarking data, advisors are only spending 2% of their top-line revenues on marketing, which includes business development — a sales function — and when we back out business development, that means that advisors are essentially spending nothing on marketing."
This revealing stat definitely got the audience's attention. It also caused a minor flurry of discussion when this stat was posted on Twitter.
"It's important to note that other industries spend 12% of their top line … on marketing, so there is a real missed opportunity in wealth management for advisors to fully take advantage of their growth opportunities," Carpenter noted. "And not only from the new business brought in, but also in the long-term enterprise value that is built from enhancing your firm brand."
To help advisors figure this all out, Carpenter laid out the key steps advisory firms need to put in place to create an organic growth engine that is scalable and effective in generating new business.
