Adding Capacity to Grow in a Slowing RIA Revenue Growth Environment

By Shad Besikof, President & COO

Shad Besikof

One of the most interesting breakout sessions that I attended at IMPACT a couple of weeks ago inspired me to share a few thoughts on the maturing RIA space and ways to offset slowing revenue growth.

The RIA market has been growing at a rate of 10 percent to 15 percent each year for the last two decades, but as the business shows some signs of maturing, 2016 revenue growth came in at only 5 percent. While many firms target a 10 percent growth rate, only about half hit their target, according to Investment News 2017 Compensation and Staffing Study. Trillions in assets are expected to transition from one generation to another over the next 20 years, which should propel RIA growth significantly. However, shifting activities that are outside one’s core business to a professional outsourcing company, such as TruClarity, can accelerate growth and reduce turnover by improving client satisfaction.

Advisory firms are spending significant time focusing on staffing for technical skills, which is great, but little time is being spent formalizing business development programs or finding creative ways to add capacity (other than hiring additional staff). It’s clear that something needs to change to refuel the RIA growth engine. Slowing client referrals, professional referrals and business development have driven assets under management (AUM) growth. In fact, according to the 2017 Investment News Compensation and Staffing Study, 20 percent of the more than 320 firms in the survey indicated that they are at capacity and cannot grow any more; another 69 percent said they are nearing capacity. The bottom line is RIA firms are limited in their ability to absorb capacity because they wear too many “hats.”

To put this in perspective, let’s assume there are approximately 1,920 working hours per year using a 40-hour work week (across 48 weeks). If an advisory firm has two professionals who are collectively targeting $2.5 million in revenues on $250 million in assets, then each partner’s hourly fee would be $650. If they both wear “multiple hats,” which is often the case, and spend a total of 200 hours taking on multiple tasks (i.e., hiring new staff for technical skills, calling technology vendors, paying bills, performing bookkeeping, managing compliance, designing/ordering marketing materials, paying rent, etc.), then they’ve burned about $130,000 in hourly fees.

They’ve also burned 200 hours not focusing on business development, which — if applied toward a 15 percent AUM growth rate (in this case, $37.5 million in new assets) — would have yielded $375,000 in new revenues (assuming a 1 percent advisory fee). One way to solve for this time dichotomy is by outsourcing tasks to a professional business management company.

If the firm chose to outsource those costs of $130,000 per year, they could shift that 200 hours into revenue-producing activities and net $245,000 in new revenues ($375,000 less $130,000). By adding a simple rule of thumb valuation multiple to this equation, one’s RIA business valuation would have just increased by $750,000 (revenues multiplied by two). Imagine if an RIA firm instantly added capacity by outsourcing to more than a dozen professionals for less than the cost of hiring just one? If one chose to hire individual staff instead, it could take up to six months, add additional risk and ultimately, not be the right fit.

About 50 percent of all firms in the Investment News survey reported a formal training/educational program for developing client service skills of staff, but only 20 percent have a formal plan in place for developing future leaders. Approximately 31 percent of firms do not have any program in place for business development. Outsourcing essential back and middle office tasks to a professional advisor management company with decades of experience will standardize routine and regular activities. This will allow the financial advisor to spend more time with their clients, which will improve overall client satisfaction and retention, ultimately allowing the RIA firm to flourish with limitless growth potential.

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