How High-Performing RIAs Are Growing Their Profits: Fidelity

Fidelity's just-released 2024 RIA Benchmarking Study shows that for firms with less than $1 billion in assets under management, assets rebounded last year after a sharp decline and multi-year low in 2022. Larger firms experienced a slight decline in asset and revenue growth, but continue to outpace their smaller counterparts.

For firms of all sizes, growth remains a top priority and expectation.

Seventy-three percent of firms with more than $1 billion in assets and 66% of smaller ones say marketing and business development are their biggest strategic priorities. Big firms aspire to a 13% compound annual growth rate over the next five years, while their smaller counterparts would like to see 11.8% growth.

The study found, however, that rising expenses are making it harder to turn growth into profit. Overall margins remain low as large firms have to deal with rising expenses such as compensation and depreciation/amortization, and smaller ones with IT software and professional services.

As a percentage of revenue, firm expenses in 2023 hit multi-year highs. These are the expenses as a percentage of revenue for those with $1 billion or more in assets and those with less:

Large firms: indirect expenses, 34%; direct expenses, 48%
Smaller firms: indirect expenses, 45%; direct expenses, 41%

Fidelity found that some firms are addressing these challenges more effectively than others. High-performing firms — those ranked in the top quartile based on asset growth, profitability and revenue generated per employee — are finding healthy, profitable growth.

High performers' mean Earnings Before Owner's Compensation margin is 66%, compared with 42% for other firms, and the mean operating margin is 26% versus 15%.

Top Performers Differentiate Themselves

The Fidelity study shows that high-performing firms set themselves apart from peers by cultivating efficient growth and protecting their margins from end to end.

For one thing, these firms accelerate their growth rate through client referrals. In 2023, high performers received about the same number of opportunities as their peers but closed them at a higher rate, resulting in about a third more clients added in 2023.

For another, high-performing firms maintain better pricing discipline. Fidelity noted that as RIAs expand the breadth of their services to better compete, they commonly add new services without assessing an additional fee, thereby eroding revenue and profitability.

Fidelity's study showed that high-performing firms, in contrast to their peers, do a better job at maintaining pricing discipline. They offer smaller discounts, on average. The difference between their actual and expected revenue based on stated fees is 17 basis points, compared with 23 points for other firms.

Moreover, only 10.5% of high performers bundle 10 or more services under a single fee, versus 18.5% of other firms that do so.

High-performing firms are also better at controlling expenses. This includes both keeping overall expenses down and maintaining this discipline across a range of expense categories.

Their overall expenses represent 74% of revenue, compared with 85% of revenue for other firms. Fidelity said this differential is driven by consistently lower expenses in categories outside compensation.

In fact, out of the 21 categories of expenses asked about in this group, high-performing firms were lower or on par in all but one of them — professional services: taxes, excluding payroll taxes.