Rising Expenses Eating into RIA Asset Growth: Fidelity

Most registered advisory firms have experienced a rise in assets under management since an industrywide decline two years ago; however, many are struggling to convert that gain into profitability.

Following a significant decrease from 2021 to 2022, the three-year compound annual growth rate (CAGR) in assets under management at firms with less than $1 billion declined from a high of 20.1% to merely 7.5%, falling below the 13.2% recorded in 2019 and 12.3% in 2020. However, growth rebounded to 11% last year, according to Fidelity Investments’ latest RIA Benchmarking Study.

The outlook was somewhat less favorable for firms with assets over $1 billion, as their CAGR declined from 21.3% in 2021 to 12.9% in 2023, further decreasing to 12% the following year, as reported.

Meanwhile, high compensation expenses have resulted in low margins for most firms. The increasing cost of software and professional services, including legal, compliance, and tax-related work, is also causing pressure on firms with less than $1 billion in assets. Additionally, the higher-asset firms are facing challenges from depreciation and amortization.

According to Fidelity, direct expenses at smaller firms increased from 44% in 2020 to 48% in 2023, while indirect expenses increased from 30% to 34%. Direct expenses increased from 35% to 41% of revenue at the larger firms, while indirect expenses increased from 38% to 45%.

Consequently, the mean operating margins for firms with less than $1 billion in assets decreased to 18% last year, down from 26% in 2020 and 19% in 2016, the year in which margins began to increase. The margins of the firms with a revenue exceeding $1 billion decreased from 27% to 14%, a substantial decline from the 21% margins of 2016.

However, there is still a strong desire for increased assets: The average desired growth rate over the next five years for firms with less than $1 billion is 11.8%, while for those with more than $1 billion, it increases to 13%.