Registered investment advisory clients largely remained with their advisors through the financial tumult of 2022, according to an annual Fidelity benchmarking study released Tuesday—but net new assets plummeted by nearly 40%. Overall, organic asset growth dropped below 4% from over 8% in 2021.
According to Anand Sekhar, vice president of practice management and consulting for Fidelity Institutional, the trend can be attributed largely to turbulent market conditions that have reduced the investable assets of existing and prospective clients, while demanding more of advisors’ time in terms of both outreach and portfolio construction.
“We did not, for instance, see the clients departing or assets departing from existing clients or any shifts there,” Sekhar said. “Really, it was the share of wallet gains and ... developing new client relationships where we saw the decrease by 40%.”
In response to the survey results, gathered from 245 RIAs between April 17 and July 4, Fidelity offered a few suggestions for firms looking to accelerate organic growth under shifting market and industry paradigms.
Perhaps the most obvious way an RIA can boost revenue growth (independent of growing AUM) is to be sure they’re getting paid what they’re worth. Implementation of fee discounting has increased over the last few years, yet rate schedules have remained flat—all while firms have continued to add additional services and capabilities.
“What is interesting is that EBOC—earnings before owner’s compensation, which is one measure of profitability—has been relatively flat, even in a 10-year bull market,” said Sekhar. “And you would think that in a 10-year bull market, profit margins, and EBOC in particular, would be through the roof.”
Advisors tend to discount fee rates earlier in their careers due to professional insecurity and the need to build a client base, he said, and then find it hard to later increase rates alongside complexity or the higher value of services provided.
Of the advisory firms he has consulted with that raised their prices, "the vast majority have been incredibly successful,” Sekhar said. “Ninety to 95% of clients stay because (the advisors) are able to articulate their value. It's really all about that value they can demonstrate.”
One often counter-productive way firms tried to increase profit margins in 2022 was by continuing to bring in new clients but pause on hiring. The result can be increased advisor productivity but likely diminished service, noted Sekhar, pointing out that hiring rates have also been impacted by an inadequate pool of talent.
Since 2017, clients and revenue increasingly fall on a single advisor in the firm. RIAs managing less than a billion dollars are relying on advisors to shoulder 34% more revenue production in 2022, compared with an 18.4% increase among larger firms.
To assess the right staffing levels for their stage of growth, Fidelity has released an online calculator to help firms compare themselves to their peers.
Outsourcing some back office functions was a popular alternative to hiring in 2022, according to Fidelity, particularly around investment management. Almost a quarter of firms with fewer than $1 billion managed assets outsource at least some investment management and portfolio construction services, while 27% of those with more than $1 billion do so.
“There’s a huge opportunity for firms to rethink how they’re doing things,” he said. “Advisors are expected to do more for the same fees, so they need to be very thoughtful about how they’re going to do that, and I think outsourcing is a key enabler.”