Fidelity Investments’ Advisor Metrics: RIA Roadmap to Growth Key findings The Fidelity Investments (Fidelity) RIA Metrics research reveals three ways in which RIAs can help accelerate their growth: 1) Firm structure – Compared to their slower-growing counterparts, faster-growing RIA firms are more likely to be: n
Founded by breakaway brokers
n
Actively adding new clients
n
Enabling growth by attempting to scale their business
2) Client base – The types of clients they pursue can impact RIAs’ growth. Regardless of their size, RIA firms tend to grow faster when they choose the “right” clients by: n
Targeting high-net-worth clients (those with assets of at least $1 million)
n
Augmenting their client base with larger institutional clients, such as corporations, endowments, and foundations with at least $50 million in assets
n
Working with larger pension and retirement clients with at least $50 million in plan assets
3) Services and products – Since many faster-growing RIA firms work with higher-asset retail and institutional clients, these firms are more likely to: n
Offer portfolio management for investment companies
n
Provide small business advisory services (such as valuation, sales, consulting, or legal support)
n
Value access to private equity opportunities
Actions to consider Based on this research, here are five actions RIA firms can take to help them accelerate their growth: 1) Explore opportunities for breakaway brokers — they bring in established client bases 2) Partner with CPAs, attorneys, and insurance and trust companies to help cultivate high-net-worth client referrals 3) Offer advice to 401K plans and other workplace savings accounts 4) Evaluate your existing client base and focus on serving the profitable clients, while shedding the unprofitable ones 5) Prepare for the future challenges that growth can bring by focusing on staffing, back-office efficiency, and scaling your business early, before business growth is stalled by such challenges
ABOUT THIS STUDY n Fidelity
commissioned a phone survey of RIA executives at firms with at least $25 million in total assets under management (TAUM).
n Data
n Northstar
n 7%
Research, Inc., an independent third-party firm unaffiliated with Fidelity, conducted the survey, not identifying Fidelity as the sponsor.
in this report are representative of U.S. RIA firms with at least $25 million TAUM, with a margin of error of ± 4.6%.
of survey respondents are executives at RIA firms with at least $1 billion in assets under management.
n $235
million is the average TAUM for those surveyed.
n RIA
executives completed the survey between May and July 2007.
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Part I: Understanding RIA firms’ growth and challenges NINE OUT OF 10 RIA FIRMS HAVE SEEN ASSETS GROW AVERAGE GROWTH RATES BY FIRM SIZE AND BUSINESS MODEL Past 3-Year Asset Growth
55%
than one quarter of RIA firms have grown by 100% or more, at least doubling their assets in the past three years.
n Firms
59% 50% 54%
with less than $50M in assets have grown the fastest, at an average of 59% in the past three years, followed by firms with $250M+ in assets, growing at an average of 54%.
n Firms
with $50M to less than $250M in assets have experienced the slowest, yet still significant, growth at an average rate of 50% in the past three years.
53% 53% All growing firms $25M to <$50M $50M to <$250M
n More
n Despite
their different business models, wealth managers and asset managers have grown at the same average rate (53%).
$250M+ Wealth managers Asset managers
Base: Growing RIA firms with $25M to <$50M TAUM (n=161), $50M to <$250M TAUM (n=160), $250M+ TAUM (n=84), growing asset managers (n=93), growing wealth managers (n=247)
Q: By what percentage has your company increased assets in the past three years?
WHAT ADVISORS SAY HAS HELPED THEM GROW
96%
94%
94%
96%
91%
88%
All growing firms
80% 73%
72% 70% 72% 71%
69% 70% 71%
68%
71%
65%
$25M to <$50M $50M to <$250M $250M+ Wealth managers Asset managers Base: Growing RIA firms with $25M to <$50M TAUM (n=161), $50M to <$250M TAUM (n=160), $250M+ TAUM (n=84), growing asset managers (n=93), growing wealth managers (n=247)
Adding new clients n Nearly
General market growth
three-fourths of all RIAs (and especially asset managers) say their firm growth can be attributed to general market growth over the last three years. The fastest growing firms, however, are not as quick to attribute their firm growth to the market, giving their own actions more credit.
Additional share of wallet
Q: What were the sources of your business growth in the past three years?
n Firms
with $250M+ in assets, who may have saturated their client relationships, are having the most trouble growing by increasing their share of wallet (SoW) with existing clients.
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THE HIDDEN DRIVERS OF GROWTH
While RIA firms attribute their growth to new clients and market action, according to the research, there are other important drivers of growth that may not be as easily recognized. The Fidelity RIA Metrics research reveals that faster-growing firms share similar characteristics in the areas of firm structure, clients served, and products and services offered. These findings can serve as lessons for all RIA firms looking to grow. The fastest growing firms tend to: n Work with higher net-worth retail clients n Focus on retirement clients with larger assets n Shy away from institutional clients with smaller assets n Be founded by a breakaway broker n Actively add new clients n Express more interest in access to private equity opportunities n Feel more challenged by scaling their business
In addition, faster-growing asset managers are also more likely to: n Charge performance-based fees n Have a firm founder with an insurance background n Offer portfolio management for investment companies
While faster-growing wealth managers are more likely to offer small business advisory services (such as valuation, consulting, sales, or legal support). The following chart highlights the characteristics of faster- vs. slower-growing firms overall and by business model. All Growing Firms Category Key Indicators
Client Base
Compensation
Employees
Firm Founder
Services Provided
Firm Characteristic Average growth rate Average tenure Average revenue % of retail clients that are HNW Supports larger retirement plan clients ($50M+ in assets) Supports smaller endowments (with less than $50M in assets) Supports smaller pension plans (with less than $50M in assets) Fixed fee Hourly charges Commissions Performance-based fee Average number of employees Asset managers on staff Insurance specialists on staff Estate planners on staff Tax planners on staff Breakaway broker Sales background Insurance background Portfolio management â&#x20AC;&#x201D; retail Retirement income planning Retirement accumulation planning Financial planning College education planning Small business advisory services Pension consulting Portfolio management â&#x20AC;&#x201D; investment companies
Wealth Managers
Asset Managers
Faster Growth Slower Growth Faster Growth Slower Growth Faster Growth Slower Growth
93% 10 yrs $1,112K 44%
27% 14 yrs $1,160K 37%
92% 10 yrs $937K 44%
27% 14 yrs $927K 34%
94% 10 yrs $1,915K 59%
27% 12 yrs $1,507K 52%
13%
9%
10%
8%
30%
14%
59%
77%
52%
79%
67%
74%
63%
77%
63%
77%
54%
71%
28% 27% 22% 14% 7 65% 29% 27% 25% 49% 25% 19% 77% 65% 64% 59% 57% 24% 23%
28% 32% 26% 11% 8 68% 25% 29% 26% 39% 21% 16% 81% 76% 74% 67% 68% 20% 21%
31% 33% 22% 9% 5 62% 32% 29% 28% 44% 20% 16% 83% 74% 72% 69% 70% 29% 21%
31% 39% 28% 10% 7 66% 28% 28% 30% 41% 22% 16% 80% 81% 81% 75% 74% 18% 20%
11% 6% 8% 31% 10 78% 14% 19% 14% 56% 17% 17% 64% 31% 31% 17% 19% 11% 14%
18% 9% 4% 12% 8 72% 7% 18% 7% 37% 9% 2% 79% 56% 53% 35% 46% 14% 16%
15%
14%
6%
12%
39%
18%
Slower-growth firms are defined as those that have grown below the average overall for each business model. Faster-growth firms are defined as those that have grown at or above the average overall for each business model. *HNW indicates high-net-worth, defined here as investable assets of at least $1 million.
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THE HIDDEN DRIVERS OF GROWTH BY FIRM SIZE
er and rvices to
The following chart highlights the characteristics of faster- vs. slower-growing firms by size of firm. Both smaller and larger firms apply many of the same strategies for growth. Each focuses on the right clients and the products and services to support them, while building a firm structure that enables growth. TAUM <$50M Category
Key Indicators
Firm Characteristic
TAUM $250M+
Faster Growth Slower Growth Faster Growth Slower Growth Faster Growth Slower Growth
Average growth rate
96%
26%
90%
27%
91%
29%
Average tenure
8 yrs
13 yrs
11 yrs
14 yrs
12 yrs
16 yrs
$360K
$521K
$1,070K
$918K
$3,050K
$2,830K
36%
26%
47%
37%
57%
58%
Average revenue % of retail clients that are HNW
Client Base
TAUM $50M to <$250M
Supports larger retirement plan clients ($50M+ in assets) Supports smaller endowments (with less than $50M in assets) Supports smaller pension plans (with less than $50M in assets)
2%
0%
3%
9%
52%
21%
66%
72%
48%
75%
65%
89%
63%
74%
58%
76%
71%
80%
Fixed fee
28%
29%
24%
28%
38%
24%
Hourly charges
34%
42%
20%
29%
21%
20%
Commissions
18%
27%
24%
30%
26%
16%
Performance-based fee
13%
9%
15%
12%
12%
10%
4
4
6
9
16
17
Asset managers on staff
64%
53%
63%
75%
71%
78%
Insurance specialists on staff
28%
29%
29%
24%
32%
20%
Estate planners on staff
18%
29%
36%
30%
29%
28%
Tax planners on staff
22%
28%
29%
24%
24%
26%
Breakaway broker
53%
35%
41%
43%
56%
36%
Sales background
26%
25%
20%
17%
32%
24%
Insurance background
20%
20%
20%
15%
15%
10%
Portfolio management â&#x20AC;&#x201D; retail
75%
85%
88%
80%
62%
74%
Retirement income planning
74%
80%
61%
78%
53%
64%
Retirement accumulation planning
72%
78%
59%
76%
53%
62%
Financial planning
61%
71%
63%
68%
47%
60%
College education planning
66%
73%
53%
67%
47%
60%
Small business advisory services
28%
20%
24%
22%
15%
16%
Pension consulting
17%
22%
25%
20%
32%
20%
Portfolio managementâ&#x20AC;&#x201D; investment companies
12%
13%
10%
10%
29%
26%
Compensation
Average number of employees
Employees
Firm Founder
Services Provided
Slower-growth firms are defined as those that have grown below the average for each asset category. Faster-growth firms are defined as those that have grown at or above the average for each asset category. *HNW indicates high-net-worth, defined here as investable assets of at least $1 million.
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THE BREAKAWAY BROKER EFFECT ON FIRM GROWTH
RIA firms founded by breakaway brokers have grown faster than any other type of RIA firm in the past three years. These firms: n Focus
on institutional clients and offer portfolio management services to them.
TOTAL RIA FIRMS $25M+ TAUM
n Bring
with them higher-net-worth clients (26% of new breakaways have clients with $5M or more in assets compared to 17% of other firms). 57% Other RIA Firms
n Tend
to use more sophisticated investment products, such as ETFs and hedge funds.
Average TAUM: $230M
43% BreakawayBroker Firms Average TAUM: $240M
Base: Breakaway brokers (n=191); Other RIA firms (n=245)
RIA Firms Founded by Breakaway Brokers
Other RIA Firms
Younger
Older
All breakawaybroker firms
Tenure: <6 yrs
Tenure: 6 + yrs
Avg: 11 yrs
Avg: 14 yrs
TAUM
TAUM average ($M)
$182M
$268M
$240M
$230M
Revenue
Revenue average ($)
$0.9M
$1.4M
$1.2M
$1.1M
Life Stage
Actively growing
79%
52%
60%
45%
Growth Type of Clients
Services
Products
Average growth rate
76%
52%
60%
51%
Individual investors
90%
93%
92%
94%
Pension/retirement plan
51%
72%
65%
67%
Institutional
64%
60%
61%
48%
Individual investors portfolio management
75%
81%
79%
79%
Retirement income planning
66%
70%
69%
72%
Estate planning
39%
45%
44%
58%
Retirement product selection advice
48%
55%
53%
45%
Institutional portfolio management
43%
58%
53%
38%
Tax planning
36%
49%
45%
53%
Mutual funds
70%
65%
66%
73%
ETFs
62%
65%
64%
54%
Individual stocks
51%
70%
64%
49%
Individual bonds
48%
60%
56%
51%
Hedge funds
34%
28%
30%
16%
Options
31%
42%
39%
16%
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CHALLENGES FACING RIA FIRMS
Growth brings increased challenges in managing a larger client base and the staff to support it, the research shows. This section presents the challenges that all RIA firms face in managing their business, in the next two years. n Compliance
and attracting new clients are the top challenges for all RIA firms, whether big or small or growing slowly or quickly.
n
n
TOP FIVE CHALLENGES BY FIRM SIZE (% Considered a Major Challenge)
79%
Maximizing efficiency is also a universal challenge in terms of streamlining back-office operations and finding sufficient time for client servicing.
78% 78%
The larger the firm, the more acutely challenged it is to: maximize business growth and profitability, maintain and improve back office efficiency, and train and retain staff.
83% Compliance 72% 75%
n Faster-growing
firms* are more challenged to scale their business, in order to serve their expanding client base.
70% 76% Gaining new clients 67% 65% 67% 74% Having time to service existing clients 59%
All firms
59%
$50M to < $500M
$25M to < $50M
57%
$500M+
67%
Multiple responses allowed. Base: RIA firms with $25M to <$50M TAUM (n=174), $50M to <$500M TAUM (n=208), $500M+ TAUM (n=54)
Differentiating firm 56% 54%
Q: What do you see as the most significant challenges for your firm over the next two years?
55% 69%
*Faster-growing firms are defined as those that have grown at or above the average rate for all firms.
Improving back-office efficiency
n Compared
to their wealth manager peers, asset managers feel more challenged by finding new clients and differentiating their firms.
TOP FIVE CHALLENGES BY BUSINESS MODEL (% Considered a Major Challenge)
86%
93%
84% 79%
77%
72% 67%
66%
69%
69% 65%
All RIA firms
59% 53%
56% 54% 57%
Asset managers Wealth managers Multiple responses allowed. Base: Asset management firms $25M+: n=102, wealth management firms $25M+: n=262
Gaining new clients
Compliance
Having time to service existing clients
Differentiating firm
Improving backoffice efficiency
Q: What do you see as the most significant challenges for your firm over the next two years?
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Part II: Benchmarking RIA Firms PROFILE OF RIA FIRMS BY FIRM SIZE AND BUSINESS MODEL
A review of RIA firm characteristics by size of firm reveals that, compared to smaller firms, those with $500M or more in assets: n Have
been in business longer, on average higher revenues and have more employees n Retain the same proportion of back-office employees
(meaning that larger firms are not yet taking advantage of scale) to be asset managers, so they offer fewer financial planning products and services
n Earn
RIA Firm Profile by Size of Firm Key Characteristics
Firm Founder
Employees
Compensation
n Tend
TAUM <$50M
Average tenure Average revenue Percent with dual registration Breakaway broker Sales background Accounting background Insurance background Legal background Average # of advisory employees Average # of back-office employees Average # of employees Asset managers on staff Estate planners on staff Insurance specialists on staff Tax planners on staff Percentage of AUM Hourly charges Fixed fee Commissions Performance-based fee
11 yrs $441K 10% 43% 28% 19% 20% 6% 2 2 4 59% 24% 28% 25% 87% 37% 27% 22% 14%
TAUM $50M to <$500M 13 yrs $1,219K 19% 44% 22% 19% 15% 8% 4 4 8 72% 32% 25% 25% 87% 26% 27% 28% 13%
TAUM $500M+
All Firms
14 yrs $3,385K 22% 44% 22% 17% 9% 17% 10 11 21 70% 20% 26% 19% 93% 15% 31% 17% 15%
12 yrs $1163K 16% 44% 24% 19% 17% 8% 4 4 8 67% 27% 26% 24% 88% 29% 28% 24% 14%
Base: RIA firms with $25M to <$50M TAUM (n=174), $50M to <$500M TAUM (n=208), $500M+ TAUM (n=54)
A review of RIA firms by business model shows that compared to wealth managers, asset managers are slightly younger but larger and more profitable. RIA Firm Profile by Business Model Average TAUM Average tenure Key Characteristics Average revenue Percent with dual registration Breakaway broker Accounting background Firm Founder Sales background Insurance background Legal background Average number of advisory employees Average number of back-office employees Average number of employees Employees Asset managers on staff Insurance specialists on staff Tax planners on staff Estate planners on staff Percentage of AUM Fixed fee Compensation Commissions Hourly charges Performance-based fee
Wealth Managers $184M 13 yrs $979K 15% 43% 23% 23% 16% 5% 4 3 7 63% 30% 28% 28% 90% 31% 26% 36% 11%
Asset Managers $392M 12 yrs $1,615K 9% 44% 10% 15% 8% 15% 4 4 8 75% 10% 9% 17% 91% 17% 6% 8% 22%
All Firms $235M 12 yrs $1,163K 16% 44% 19% 24% 17% 8% 4 4 8 67% 26% 24% 27% 88% 28% 24% 29% 14%
Base: Asset management firms $25M+: n=102, wealth management firms $25M+: n=262
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CLIENT PROFILE OF RIA FIRMS BY SIZE AND BUSINESS MODEL
Compared to other RIA firms, asset managers and large firms with at least $500M in assets: n Have
fewer, but wealthier, retail clients (60% of large firmsâ&#x20AC;&#x2122; retail clients and 55% of asset managersâ&#x20AC;&#x2122; retail clients are high-net-worth, compared to 32% for small (<$50M TAUM) firms and 38% for wealth managers).
n Serve
more institutional, bank, and government clients.
n Focus
on larger, rather than smaller, institutional and retirement plan clients.
TYPES OF CLIENTS SERVED BY BUSINESS MODEL
TYPES OF CLIENTS SERVED BY FIRM SIZE
93%
93%
96% 93% 83% Individual
85% 95% Individual
66%
66%
57%
62%
72% 70% Retirement plan
68% Retirement plan
54% 54%
45% 58%
66% 67%
Institutional 14% 7% 15%
14% 24%
30% Banking/Thrift 10% 5% 11%
51% Institutional
9% 59%
67%
Banking/Thrift 10%
30%
59%
14%
24% Government
9% Government 24%
Total
$50M to < $500M
$25M to < $50M
$500M+
Multiple responses allowed. Base: RIA firms with $25M to <$50M TAUM (n=174), $50M to <$500M TAUM (n=208), $500M+ TAUM (n=54) Q: Which of the following types of clients does your firm support?
All firms
Asset managers
Wealth managers
Multiple responses allowed. Base: Asset management firms $25M+: n=102, wealth management firms $25M+: n=262
Clearing, custody, or other brokerage services may be provided by National Financial Services LLC, or Fidelity Brokerage Services LLC, Members NYSE, SIPC. 484306.1.0 1.862034.100
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