A possible roadmap for registered investment advisers has been saved
A possible roadmap for registered investment advisers
Registered investment advisers (RIAs) are preparing to thrive in the post-COVID economy. What actions might an RIA take to gain a greater share of the market?
As firms begin developing their 2021 strategic and operational plans, it is hard to believe that just a few months ago, planning for the future may have seemed like an exercise in futility. However, planning for the future is exactly what investment professionals do, and it should come as no surprise that many registered investment advisers (RIAs) are indeed preparing to thrive in the post-covid economy. A survey conducted in March and April found that almost 90% of advisors expect assets from new clients will be the primary factor in driving a 7% increase in their assets under management (AUM) over the next 12 months.1 While the continuation of the equity bull market is unknown, undoubtedly some registered investment advisers (RIAs) are likely to find greater success than others in attracting these clients and assets. So, what actions might an RIA take to gain a greater share?
New data analysis on AUM growth
To answer this question, we analyzed thousands of Form ADVs filed with the SEC and identified characteristics of those RIAs that experienced the highest AUM growth over the past four years. Our analysis focuses on the types of products and clients targeted by RIAs during this period, rather than on investment prowess or macro-economic conditions. This population consists of over 9,000 RIAs that were active between 2016 and 2020 (figure 1).2 We used a log scale to identify the distribution of AUM within the population and found three distinct groups. The analysis shows that the change in AUM between firms is steepest in the “Small” RIA segment and then flattens until reaching about $1 billion in size, when the AUM change steepens again. It may not be surprising that most RIAs today fall in the “Medium” size segment. Unfortunately, the average RIA in this “Medium” segment group experienced just a 1% compound annual growth rate (CAGR) in AUM from 2016-2020 compared with 10% CAGR for the “Large” segment and -14% for the “Small” segment. We then contrasted the business models between the “Medium” and “Large” segments along products, customers, and their employees to get a sense of the differences in each of these attributes on either side of the growth inflection point of $1 billion.
Asset opportunities by segment sizes
The results make a case that offering inhouse mutual funds as well as private funds may create the best opportunity for attracting assets. About two-thirds (67%) of the firms in the “Large” segment offer pooled investment vehicles such as mutual funds and ETFs, compared with only 30% and 26% in the “Medium” and “Small” segments, respectively. A similar breakdown exists for advising private funds with 59% of the “Large” doing so compared with 29% and 24% for the other two segments. While limited resources may make the foray into these types of funds appear to be out of reach, the data suggests that refocusing away from financial planning services may provide greater operational leverage. Only 25% of the largest firms offer financial planning services, while more than half of “Medium” firms do so. “Small” firms, which experienced a contraction in AUM, come in at 43%.
Client types also differed between the groups. A similar percentage of RIAs in the “Medium” segment reported that they have high net worth clients (77%) as retail clients (73%), while only 45% reported that they serve institutional clients. Slightly more than half (53%) of the “Large” segment manages retail client assets, while 61% manage institutional funds. The high percentage of firms in the “Small” and “Medium” segments that target retail assets demonstrates how difficult it may be for an RIA to grow profitability with a retail investor client base. The more than 5,000 RIAs that find themselves in the “Medium” segment compete for many of the same clients, and fee reductions may not be a sustainable solution to attract new clients. However, simply redirecting resources away from retail clients to institutional clients is unlikely to propel an RIA up the curve. A possible path for these RIAs may involve offering their retail clients alternative investment products as a differentiator in the competitive retail space. They could also find new high net worth individuals and institutional clients to use these products.3
The number of employees, excluding those performing only clerical, administrative, support, or similar functions, per dollar of AUM varied greatly across each of the three segments. It is not unsurprising that the average “Large” segment RIA has a higher AUM to employee ratio, but perhaps the degree to which it does is surprising. AUM per employee (other than those performing only clerical, administrative, support, or similar functions) increases only 3x from “Small” to “Medium,” while the jump from “Medium” to “Large” is more than 10x. While scale likely contributes to an extent, this change may also demonstrate that coupling the optimal mix of products with the right clients may lead to profitability increases.
Optimal client mix
Where does your firm fall on the curve? Are there updates to your product lineup that you should consider in the near-term? How can you better service your existing clients while also attracting new asset flows? Our analysis of SEC filings provides a possible strategic roadmap to produce higher AUM growth and greater profitability. However, creating and implementing this strategic roadmap is unique to each RIA. Strategies are not one size fits all. RIAs may consider an optimal client and product mix for 1 year and 5 years in the future and then take steps to meet both targets. The optimal client and product mix may require adding inhouse funds and attracting institutional clients. To achieve these targets, an RIA may require a revamp of talent, processes, and technology.
3 Josh Azar, “Retail investors open to alternatives in the hunt for higher yields,” Financial Times, July 30, 2020.
QuickLook is a weekly article from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this article are those of the author and not official statements by Deloitte or any of its affiliates or member firms.