Advisors Are Prepared to Withstand COVID-19 Challenges: TD Ameritrade

Independent RIAs were in reasonably good shape when the coronavirus gripped the U.S. and are poised to maintain their footing, with many possibly emerging stronger, according to FA Insights benchmarking research released Wednesday by TD Ameritrade Institutional.

Data came from an online survey fielded Feb. 5 to April 30 to which 345 individuals from qualifying firms responded. All firms had been in business for at least one year, generated a minimum of $100,000 in annual gross revenue and served individuals or households as primary clients.

"RIAs are getting creative about how they address the operational and business development challenges brought on by COVID-19," Vanessa Oligino, managing director of business performance solutions at TD Ameritrade Institutional, said in a statement.

"It's times like these that breed innovation, so we expect many RIAs will emerge even stronger as they discover new opportunities to excel."

Make no mistake, the pandemic rattled optimism among survey respondents. Those who provided data before March 13, when a national emergency was declared, had a different outlook for the future than those who responded after that date.

The research showed that although both groups of participants experienced nearly identical revenue growth in 2019, expectations for 2020 growth were nearly four percentage points lower among those who reported after March 13.

Mixed Pre-Pandemic Performance

The research indicated that some signs of concern had begun to crop up last year. In the wake of wide market swings that began in 2018, median revenue growth in 2019 was 9.5%, down from 13.2% the year before, and operating profit margins declined by three percentage points to 17.6%.

In addition, rising costs outpaced revenue increases at most firms, and overhead expenses as a share of revenue hit their highest level since 2008, at 41.3%.

At the same time, several developments offset these results. In 2019, RIAs saw a year-over-year 6.6% increase in new clients and a 23% increase in median assets under management, which was three points higher than the previous record high set in 2009.

The research showed that assets resulting from new clients and business development efforts made up 55% of the increase in assets under management, with market appreciation accounting for 45%.

Productivity Enhancements and Fees

Increased use of integrated technology and automation tools — team collaboration tools, teleconferences, document management and signature applications — has helped advisory firms improve productivity and reduce their reliance on support personnel, according to the report.

It said the widening array of technology solutions may be enabling firms to scale back on non-revenue roles in favor of supporting revenue generators through greater use of technology or outsourcing.

The research found that 70% of RIAs rely on one platform or application as a central "hub" — often the customer relationship management system — to access all other technology tools.

In addition, 81% of firms have the capability for data to flow automatically across software applications, up from 61% in 2016.

RIAs are also adding staff now for long-term growth, the survey showed. Some 20% of respondents noted that new team members were major contributors to firm growth, while 28% credited their existing team's expertise as a key driver.

Still untapped as a source of growth is pricing, the research showed.

In 2019, RIAs typically generated 96% of their revenues from a fee based on assets under management. In this year's survey, only 6% of firms reported that they had collected at least half of their revenues from fees not tied to assets under management.

Implementing a minimum client fee, effectively a pricing floor, can enhance performance, the report said, noting that firms with a disciplined adherence to a minimum fee reported 42% greater profitability.

But even though alternative pricing strategies have the potential to drive stronger revenue growth, a majority of firms in the survey said they did not expect to make a change.

Cultivating New Growth Pipelines

RIAs in the survey ranked business development as their top growth challenge, second only to the economic climate.

As for attracting new clients, 8% of respondents cited social media marketing as a main source, behind client referrals, cited by 49%, and referrals from "centers of influence," such as accountants, lawyers and other non-competing professionals whose client or prospect base is similar, 22%.

Firms reported that in-person client and prospect events accounted for the greatest share of marketing budgets in 2019, along with digital advertising. Formal referral programs ranked lower on the list, despite the importance of referrals to the bottom line.

TD Ameritrade Institutional said that with so many uncertainties right now around the viability of events, firms need new ways to engage.

Social media tools and electronic communications are more important than ever for staying present in the lives of clients and prospects, the report said. And webinars, podcasts, targeted video presentations and virtual classrooms may all provide new channels to replace in-person events.

A recent study found that investors are strongly inclined to stick with new modes of communicating with their advisors necessitated by stay-at-home mandates after the pandemic subsides.

"COVID-19 may force changes, but history shows us that independent advisors are adaptable and resilient," Oligino said. "Unprecedented times can bring unprecedented opportunities: It is up to strategic, forward-thinking advisors to seize the day and act."

— Check out How to Become a Top-Performing RIA: Schwab on ThinkAdvisor.