The RIA industry in 2018 continued to be the darling of the wealth management industry and with the IPO of Focus Financial Partners last year the future clearly looks bright.
According to the recently released 2018 Investment News Study of Pricing & Profitability RIA firms reported median growth of 11.7% in 2017, 5.0% in 2016, and 6.9% in 2015. A quick glance at the strong revenue growth and average profits margins of 25% over the past three years makes it quite clear why private equity and other institutional investors are jumping into the RIA pond.
However, when one drills into the underlying data for AUM growth an alarming discovery is observed in 2017 market appreciation contributed by far the most to growth (8.3%). Business development efforts only resulted in 4.8% of AUM growth, nearly as much as existing client contributions at 3.9%.
It should be alarming to every RIA owner that market appreciation and existing clients simply adding additional funds to their accounts was responsible for virtually all the AUM growth in 2017.
Consider capital market performance in 2018; virtually every major asset class was awash in red ink. We estimate most RIAs book-of-business is roughly equivalent to a 60/40 portfolio (ACWI & AGG) which ended 2018 down 5.34%. Therefore, it’s reasonable to assume most RIAs are going to face a revenue headwind of approximately 5% to start 2019! The outlook for equity market returns from Vanguard to JP Morgan is muted and downright frightening if one reads Research Affiliates and GMO. The bottom line is the strong tailwind of market appreciation will likely slow and has the real potential to create a headwind for RIAs.
The good news is RIAs can thrive in 2019 and the years beyond if they commit to thoughtful and relevant marketing strategies and the technology to support these efforts. Consider in 2017 according to the 2018 Investment News Study of Pricing & Profitability RIAs spent only 2% of their revenue on business development efforts. This includes client events, entertainment, public relations, and advertising spend. Should it really surprise anyone that business development yielded so little results when the financial commitment was so nominal? However, it actually gets worse the study also found that only 33% of firms have the technology and a process in place to actually track the leads their business development efforts produce!
These statistics present a tremendous opportunity for firms to grow and thrive considering the majority of competitors are significantly underinvesting in business development and the related technology. At FA Digital we assist RIAs with sophisticated digital marketing strategies that drive engagement for your firm across all major social media platforms and major brand safe websites. We further provide technology implementation and consulting services to establish marketing automation and other software to ensure that all marketing and business development efforts are tracked, and opportunities are not lost. Contact us today for a complimentary strategy session.