Despite setting records in four key metrics for at least the second year in a row, registered investment advisory firms aren't growing much faster on an annualized basis than U.S. stocks.
RIAs registered with the Securities and Exchange Commission topped their prior highs for the number of firms, clients, employees and assets under management, according to
Beneath those headline numbers, however, the AUM at SEC-registered RIAs has grown at a yearly clip that is only 0.3 percentage points faster than the annualized return rates of large U.S. stocks in the past 25 years and 4.6 points slower than those equity values in the past decade. And the report represents only the latest indication that bull stocks and M&A deals may be masking a slowdown for RIAs in terms of new incoming client assets. That's why experts say it's important for RIAs to find more ways to pursue those new or deeper relationships with clients.
With so much M&A consolidation, the comparison between AUM and large-stock returns displays the difference between firms that are recruiting and buying "any and all comers" and those "who are truly trying to grow an integrated organization," according to Ryan Halliday, the managing partner of Salt Lake City and Scottsdale, Arizona-based RIA firm Crewe Advisors.
"You see what's going on in the industry, and there are certainly firms that are just aggregating advisors and advisor assets by the dozens, and that's great for them," Halliday said. "I think you're probably seeing a lot of that reflected in these types of reports."
Relationship metrics
Such findings explain why so-called organic growth from new clients or acquiring more assets from existing ones have become key drivers of RIA valuations and new marketing strategies aimed at generating leads and referrals. For example, many kinds of client gatherings could lead to organic growth while building customer loyalty for the long term, according to Angela York and Elyse Stoner, the founders of Event Advisors, a firm that plans strategic events for advisory practices. The AUM growth of 22% in just one year at RIAs poses the question of whether those clients will remain with the firm for subsequent decades, Stoner said.
"We recognize that AUM is a very important measuring tool in this space," she said. "How are you measuring relationships, though? As we see, the market can drive those numbers. But are people staying?"
So firms face a real competitive threat to instill retention among their bases of clients and their families — especially if the only times they speak with them comes in the routine plan review and update meetings, York said.
"We've heard this before, 'Gosh, I've had a couple of my top clients leave and I don't know why,'" she said. "There's a lot that can change, and if they're not feeling heard or seen or trusted, anyone can come in and try to woo them away."
RIAs can use various methods to avoid that scenario and sprout new or deeper client relationships. Crewe has blossomed to its current size of $3.5 billion in AUM by the end of last month from about $1 billion only five years ago with a boost from asking satisfied clients for referrals, Halliday noted. The firm has also benefitted from its paid relationship with an investment bank called Crewe Capital whose owner has a stake the RIA firm — which gives the RIA's clients access to investments in "preliquidity opportunities" for privately held small businesses, he said. Last month, the RIA secured a minority, nonvoting investment of undisclosed size from financial service holding company Wealth Partners Capital Group and private equity firm HGGC.
The RIA had come to an "inflection point where we had to make a decision," Halliday said. "They'll primarily be our partner on the inorganic growth side, which we haven't done in the past."
Events for organic growth
In the wake of those burgeoning M&A deals across the industry, RIAs are making a mistake if they're "just automatically assuming that they're going to retain the relationships" with the clients of the firms that they purchased, according to York. She shared the story of a younger advisor who held a post-church meal on a Sunday afternoon with the clients of a retiring advisor and their families. With so many RIAs starting or completing a succession plan, a thoughtful transition looms large for the future of their businesses.
"It was kind of a changing of the guards. It was a nice client appreciation event in a very nice place," she said. "That actually laid the foundation for the new advisor to start building the trust and start building the relationships."
In another example of a successful event, an advisor who held an educational event for clients over a selection of pies around Thanksgiving ended up having a client ask about moving an external account into the firm. These days, many wealthy clients may have holdings at several different firms, which means that those held-away assets could prove to be a fruitful area.
By acting as the host or the emcee providing the resources in the form of an expert speaker and their educational materials, the advisors can keep themselves from "missing conversations that are happening" and be more available to field questions about, say, bringing an outside individual retirement account into the RIA, rather than presenting the whole time, Stoner said.
"One of the pieces that we really love about both of these examples is the fact that the advisor can be the host but not the educator or the presenter," she said. "They wouldn't have had the opportunity for the client to pull them aside."
