Independent Investment Advisors in Growth Mode

Most independent registered financial investment advisors are looking ahead to future growth and profitability.

As "the independent advisor model continues to prove its staying power and appeal" to customers, these firms emerge from a difficult past few years for the financial markets and the economy with lower revenue and compressed profit margins, but profitable and in growth mode, says senior vice president and head of Charles Schwab Advisor Services, Bernie Clark.

Up to 84% of the independent advisory firms participating in the 2010 RIA Benchmarking Study from Charles Schwab plan to grow aggressively or moderately over the next five years with the help of technology higher efficiency in client service.

If three years ago their goal was to grow as fast as possible, Clark says, now advisors are focused on "how do we really plan for growth and do it in a strategic and deliberate way?"

In 2009 the median operating income of participating firms decreased by 11% to $1.2 million, compared to $1.3 million in 2008. Yet they see the light at the end of the tunnel, estimating 10% revenue growth in 2010.

The crisis has increased demand for financial expertise. Participating firms continued to add clients, although at a slower pace than in past years reporting a 2.6% increase in the number of clients in 2009 compared to 5.3% in 2008. Typically net new asset flows from new and existing clients added $6 million in assets under management, or an average of 4% per firm.

Schwab's annual study of individual firms this year represents the views of 870 firms managing more than $300 billion in combined assets.

From 2006 to 2009 these firms had an annual growth rate of 6.1% in assets under management compared to 2.4% for all other firms, 7.3% in revenue compared to 0.5% for all other firms, and 5.7% in number of clients compared to 4% for all other firms.

Compared to all other firms in 2009, the top 20% advisory firms in productivity, operating income and revenue growth had 57% higher assets under management, 63% higher revenue and 51% more clients per professional.

"As firms grow, the key to increased productivity seems to be higher assets and revenue per client, as opposed to spending less to serve the same size client," said Clark. "Revenue per professional also appears to be an indicator of a firm's overall productivity level."

Future growth factors for up to 77% of participants include maintaining quality and consistency in client service while adding new clients.

Referrals continue to be an essential driver of growth for advisors, accounting for 83% of their new clients with roughly half of those referrals coming from existing clients and a quarter from professional partners.

Over 60% see such opportunities in implementing technologies to build scale and adapting operations and day-to-day procedures.

Most Schwab survey participants consider investment in technology to be a strategic priority with 73% calling themselves either aggressive or moderate technology adopters. In addition to higher efficiency goals, 85% of advisors purchase technology to scale their business for the future, 84% to reduce risk and potential for error, 50% to differentiate from competitors, and 30% to add systems that serve new types of clients.

"We are hearing loud and clear from advisors that technology is key to running their businesses," to achieve scale and efficiency using tools such as the Schwab Intelligent Integration platform, noted Clark.

Up to 95% of participating firms said they have adopted a portfolio management system, 84% a client relationship management system and 78% an e-mail retention software or service.