RIAs Post Solid Growth in ‘23, but Referrals, Talent Remain Key
Charles Schwab’s most recent RIA benchmarking study showed that, by many measures, 2023 was a year of notable expansion for registered investment advisors.
In this year’s research, the company conducted a survey of more than 1,300 firms representing $2 trillion in assets under management (AUM). The findings revealed an increase in assets under management, a strong pace of hiring, and a growing reliance on technology to provide services to clients.
“As RIAs seek to grow, many are achieving success by pursuing a multifaceted approach. Firms can jumpstart their organic engine by being intentional in developing outreach strategies,” said Lisa Salvi managing director, business consulting and education Charles Schwab Advisor Services. “To support growth, upskilling talent and enhanced digital capabilities that offer personalized experiences will help firms serve current clients and attract the next generation.”
RIAs experienced a considerable resurgence in 2023, with assets under management rising by about 18% to a median of $542 million. The trusted relationship between advisors and their clients, along with the ongoing appeal of the independent model, continues to promote long-term profitability for businesses of all sizes.
This represented a significant rise over the 7.1% decline in AUM in 2022, when the median AUM was $455 million. The median organic growth rate, excluding market performance and inorganic growth, was 5% in 2023. The custodian defined organic growth as the change in a firm’s assets caused by new, existing, and lost clients. RIA revenue increased by 6.3%, while the number of clients increased by 4.3%, reaching a median of 350. Top-performing firms experienced even faster growth of 12%.
“Assets from existing clients, excluding investment performance, hit a five-year high,” said Salvi. “The top performing firms gained 2.4x more assets from new clients than all other firms in 2023.”
Schwab discovered that this year’s top performing firms distinguished themselves by having well-developed strategies for obtaining referrals, which accounted for 67% of both new clients and new client assets. RIAs who had ideal client profiles, client value propositions, and marketing plans attracted 67% more new clients and new client assets compared to businesses that did not have all three in place.
Not unexpectedly, RIAs continue to prioritize obtaining new clients through client referrals as their top strategic priority for the second consecutive year, with acquiring clients through business referrals coming in second place. According to the survey, RIAs have been actively recruiting new talent, with around 75% of them hiring in each of the past five years. Additionally, 73% of RIAs have expressed their intention to recruit new advisors this year.
However, Schwab observed that to accommodate previous growth rates and the size of the RIA space, the industry will have to hire more than 70,000 new employees within the next five years. The figure does not consider attrition, retirements, or advisors changing firms. Hiring ranks third among RIAs’ strategic initiatives.
Schwab also stated that mergers and acquisitions remain a topic of interest for firms. Nearly 33% of respondents with assets over $1 billion have expressed their intention to acquire other RIAs, while over 50% of them are actively looking to onboard external advisors along with their client portfolios. Overall, Schwab discovered that 50% of the companies included in the study are actively pursuing prospects for inorganic expansion.
‘Some of the bigger shifts that I’ve seen are a very big focus on talent acquisition as a driver of M&A, and more and more firms just want to understand the landscape,’ said Salvi.
The Schwab study assessed participants based on 15 performance measures, which included five-year client compound annual growth rate (CAGR), customer attrition, operating margin, and time dedicated to client support, among other factors. The survey designated firms that were in the top 20% for these areas as top-performing firms.
The top-performing firms were more deliberate in their approach to gathering client input, including interviews and surveys. Furthermore, 82% of the most successful companies had documented strategy plans, while 75% had documented succession plans. In comparison, among the larger group of participants, the percentages were 68% and 64% for strategic plans and succession plans, respectively.
