Last year proved to be a challenging time for both markets and registered investment advisory (RIA) firms. As economic and market headwinds persisted, RIAs experienced a significant slowdown in organic growth, revealed a recent study by Fidelity Investments. Anand Sekhar, Vice President of Practice Management and Consulting at Fidelity Institutional, explains that these headwinds prompted advisors to prioritize client retention.
Instead of engaging clients in discussions about high-value topics like holistic financial planning, family engagement, and generational wealth transfer – which would lead to increased share of wallet – advisors found themselves devoting their time to protecting their core client base and helping clients understand the state of the market.
While Fidelity does not yet have statistics on 2023 performance, Sekhar remains optimistic that advisors have turned the corner this year. The study, conducted between May and July 2023 through advisor interviews, suggests that firms have weathered the storm well and are now positioned for growth. Sekhar advises that maintaining the right hiring levels and returning to more proactive engagements with clients will be key to achieving this growth.
Last year's slowdown impacted firms of all sizes, according to data from Fidelity. Organic asset growth for RIAs with less than $1 billion in assets dropped to 3.2% from a peak of 8.2% in 2021, as reported in Fidelity's 2023 RIA Benchmarking Survey. Similarly, RIAs with $1 billion or more in assets saw their organic growth decline from 8.4% to 3.6%.
Evolving Strategies for RIAs to Enhance Profitability
According to a report by Fidelity, registered investment advisors (RIAs) focused on expanding their client base in the previous year as a means to counteract the impact of market challenges on profitability. Consequently, the number of clients per advisor increased, as highlighted by Fidelity's findings. However, it is worth noting that most of the new clients brought in by RIAs had smaller investment sums, which potentially makes them less lucrative to work with. In fact, Fidelity's research revealed that only about one-third of the overall organic growth activity could be attributed to assets from these clients.
As part of their efforts to remain competitive, RIAs actively implemented fee discounting strategies in the preceding year. According to Fidelity, approximately 70% of firms with less than $1 billion in assets and 89% of firms with more than $1 billion offered discounts in 2022.
"While firms continue to offer discounts and bundled offerings, an important aspect to consider is that they are also expanding their service offerings without significantly increasing fees," says Sekhar, a spokesperson from Fidelity.
To enhance profitability, RIAs can adopt various strategies. Sekhar suggests utilizing client data analysis to reevaluate service offerings and pricing based on a segmentation strategy. Additionally, advisors can consider outsourcing investment and portfolio management tasks, which would allow them to dedicate more time to clients and other value-added tasks.
Sekhar further emphasizes the evolving role of advisors in today's landscape. "Advisors are no longer solely focused on selecting individual stocks. They are continually expected to provide additional value to investors by offering services such as tax planning, philanthropic planning, and overall financial wellness. End-clients expect a holistic perspective on their finances that aligns with their specific needs and goals."
Fidelity, renowned as the country's second-largest custodian of RIA assets, conducted its study by surveying 245 RIA firms and 3,537 advisors between April 17 and July 4.