RIAs generally want to grow assets under management as well as the fees they collect. But doing that meaningfully, and consistently, without benefiting from a rising market, hiring more advisors, or outright buying another firm, proves elusive to most wealth managers.
Granted, organic growth hasn’t been a concern for RIAs much of the past decade. The longest bull run in history has made investors wealthier and advisors, who charge a fee as a percentage of those assets, richer alongside them.
Meanwhile, private equity firms and other investors have taken notice of the fragmented, consolidating RIA channel and placed bets that some firms, flush with cash to acquire others, will scale faster and become more valuable companies.
Outside investments in RIAs are only plentiful as long as a relatively short list of stakeholders see them fit. Any RIA riding the wave of the market or solely dependent on cash infusions to grow is susceptible to revenue dramatically tapering overnight. The only way to hedge against that is to have a flow of new money coming in the door. A dramatic reversal last year showed the importance of that.
In 2017, the median RIA with at least $250 million under management grew assets by 17.1% while organic growth rose 5.5%, according to Charles Schwab’s 2019 RIA Benchmarking Study. The same RIA’s assets under management fell almost 1% in 2018, even though organic growth remained positive at 4.1%.
Referrals from existing clients at wealth managers account for the bulk of new clients and assets. Employee referrals, business connections, and traditional marketing add less. The fastest growing RIAs do all of these things better than the average firm and are bringing in nearly double the assets from new clients, according to Schwab’s benchmarking study that surveys more than 1,300 RIAs.
To get a better sense of how challenging it is to achieve organic growth, the top 20% of RIAs grew assets by only 6.8% last year, according to Schwab.
So how exactly are some wealth managers achieving year-over-year, double-digit organic growth? They aren’t all doing it the same way.
Prior to becoming the CEO of HighTower Advisors in January, Bob Oros said he wasn’t sure if the $48-billion RIA was measuring organic growth. Since he joined, the company has overhauled its business model and morphed from a service provider to independent RIAs into a wealth manager that employs them.
HighTower is also investing in supporting services to help advisors across the country grow organically – and it’s working. Through June, the RIA was on track to achieve an annualized growth rate above 9%, up from 8% in 2017. Based on third quarter activity, and barring some surprise in the fourth quarter, Oros said he expects that organic growth for the firm will exceed 10%.
There are some outliers and some that grow in waves but he said the number is representative of a typical HighTower advisor.
“Our organic growth is a reflection of our advisors. We have some advisors who are just predisposed to growth,” Oros said.
But HighTower’s advisors aren’t the only ones who want to grow or have a talent for it. Their employer may prioritize it, too. HighTower is fine-tuning what it calls its advisor success team, a multidisciplinary group of regional consultants that provide more than simple practice management tips or help using software.
In addition, one of the most influential supporting services is HighTower’s “outsourced chief marketing officer.” Headed by Abby Salameh, HighTower’s chief marketing officer hired in May, the group is helping advisors establish a clear identity and crafting messages that align with it through their website, events or however they have been most successful getting new clients. They’ve helped advisors identify ways to further play to their strengths as well as entirely new ways to attract clients.
All of the above is closely tracked with organic growth in mind. “Consistent growth is not accidental,” Oros said.
For some firms, it’s particularly important how they position themselves. Successful advisors “graduate to” Kestra Financial when they join the company, and become part of a network that serves as an ongoing masterclass, said James Poer, Kestra’s president and chief executive officer. The company does not publicly share specific growth rates but, excluding markets, assets have grown by “double-digits” for years, according to Poer.
His company provides the necessary services, consulting, and marketing to help advisors focus on getting new clients, such as other wealth managers. But Kestra has found that attention to granular detail produces some of the best results and other advisors are good at pointing those out.
The company encourages and facilitates conversations amongst its advisors, sometimes at organized events, and then gets out of their way. Highly-skilled peers don’t often have time to discuss ultra-specific situations. Some might be especially skilled at, say, one type of conversation with prospective clients versus others. The success of those discussions matter – they could mean a new client and millions in new assets for an advisor.
The energy between its advisors is something Poer said is unique to Kestra. He admits that is a “squishy” qualifier but remains one nonetheless, he said.
“If I could find a way to bottle and make the invisible tangible, our organic growth would be three times the size it is. That ultimately is our special sauce and the hardest thing to articulate to advisors.”
There are many wealth managers touting marketing wizardry or special sauces, albeit with varying degrees of success. Others are attracting new clients with old-fashioned, benchmark-beating returns.
Hamilton Capital, a Columbus, Ohio RIA that manages $2.6 billion, has added assets under management at a remarkable clip. It recorded an organic, compound annual growth rate higher than 19% over the last five years and its investment management is what has people calling. It has done no meaningful marketing or acquisitions in its 22-year history, said Matthew Hamilton, chairman and CEO.
“That’s not to minimize our planning. We do a great job of planning and advising. You can do all the planning you want but if you don’t have investment returns it really doesn’t matter,” Hamilton said.
The company’s eight-person investment team “often” beats the benchmark indexes by analyzing asset class returns and proactively adjusting allocations according to a medium-term time horizon. “Our own experience as well as academic and industry studies tell us that great returns are all about picking the right asset classes more than anything else,” Hamilton said.
The RIA isn’t swinging for the fences when it comes to investment performance, but Hamilton’s clients have enjoyed grand slam results, helped by compounding investments. Satisfied clients are spreading the word about the firm.
Hamilton’s portfolio managers and supporting analysts are rewarded based on the results of the total portfolio, not their designated asset classes, aligning best results and interests. Asset allocation is a collaborative process at Hamilton during which they “stab each other in the front,” the cost to get to the best answer as a team.
“Asset allocation is a forward looking endeavor. To leave that and be static and not at least look at different opportunities and risk coming into the playing field, you will you're leaving an awful lot to chance,” Hamilton said.
“You’re almost ignoring the coming cycle, ignoring price. And one of the things about the economic cycle is you never know how long it’s going to be.”