Schwab study shatters three RIA myths (Updated story)

Good RIAs and great RIAs operate in two different worlds of success, according to a new study by Charles Schwab Advisor Services.

It begins with findings showing that the top 20% of registered investment advisors, unlike their lesser brethren, barely skipped a beat in this market downturn, according to the it’s 2009 RIA Benchmarking Study.

From 2003 to 2006, these top firms grew assets under management at a 30% annual rate while the full sample of firms in the Schwab study grew at an aggregated 15% rate. In 2008, the top firms grew 22% or a drop of 27% in their growth rate. This compares to all firms combined growing 6%, which represents a more staggering drop of 60% in their rate of growth.

What makes Schwab’s study surprising is that the common denominator of RIA success was unexpected. Big practices fared no better than smaller ones and vice-versa. Wealth managers performed no better than investment managers and vice-versa. The study was based on 610 RIAs with average revenues of $2.5 million.

“This is a surprise to us in general,” says Mark Palmer, managing director of Schwab who oversaw the study. “All the studies we’ve done show that size doesn’t affect growth that much. [In addition] we expect wealth managers to grow faster than investment managers but they all seem to grow the same.”

What did make a difference was whether or not a firm kept up its efforts to grow. This is noteworthy because many advisors suspended asset-gathering practices in the name of hand-holding during the recent economic turmoil.

“Together [the results of the study] tell a story that debunks the myth that fast-growers can’t take care of clients,” Palmer says.

The best indicator of this myth-buster is evident in client referral statistics. Client referrals at the 20% of advisor practices that grew fastest grew 10% on average during the 2003 to 2006 time period.

For these top firms, the rate of asset growth by client referral dropped only from 10% to 9% in 2008, a 10% drop, the study shows. Last year the growth in assets by referrals for the lagging advisors dropped 33% to a 4% rate. These advisors grew by client referrals at a 6% rate from 2003 to 2006.

Perhaps other non-referring clients are still moving their own assets away from the RIAs in the top quintile?

Opposite effect

The Schwab study seems to show the opposite effect. For example, the top 20% surveyed by Schwab were accustomed to growing 5% annually from 2003 to 2006 just from consolidating the assets of existing clients.

This consolidation-derived haul of new assets at these firms actually held a steady 5% growth rate in 2008. When the bottom 80% of advisors were figured in, assets of existing clients at the firms showed a net loss of 2% in 2008, down from a 1% average annual gain during the 2003 to 2006 period for the same group.

Size and business models aside, the top 20% of firms share a characteristic that slow growers do not, Palmer says.

“These [fast-growers] have business strategies in place,” he says. “They say: how do we proactively grow?”

Easy to move the needle

These stark differences in business practices between firms come as no surprise to Chip Roame, managing principal of Tiburon [Calif.] Strategic Advisors.

“People spend too much time trying to design the perfect business model,”’ he says. “You have to have one business model and do it well. There are lots of good business models out there.”

And creating a good business model isn’t complicated either, says Timothy Welsh, principal of Nexus Consulting LLC in Larkspur, Calif.

“It doesn’t take a lot to move the needle,” says the former director of marketing for Schwab Institutional. “You don’t even need a marketing plan. You need a referral plan. Many companies don’t even have a plan in place for handling referrals.”

Note: I added the chart Schwab created to depict its key findings in its study. For people who can’t get enough PowerPoint, here it is below.

Schwab 2009 RIA Benchmarking study shows
ebbing tide does not sink all
boats