How the market downturn affected 870 Schwab RIAs in 2009 and how they are reacting to it in 2010

RIA firms took big hits in revenues and profits in 2009 but they are mostly unfazed – and may even be energized — by the rough experience, according to findings of a big new study.

The median operating income earned by an RIA plummeted nearly 33% from 15% of revenues in 2008 to only 10.1% in 2009, says Schwab’s RIA Benchmarking Study.

Yet 31% of the advisors surveyed say they are focusing on developing and implementing a long-term growth plan as a challenge, a 63% increase from the findings of the same study done by Schwab in 2007.

This positive approach to tough circumstances speaks to the staying power of RIAs, according to Scott Slater, managing director, business consulting for Schwab Advisor Services.

Back on the horse

“I see it as the next step in the maturing of the RIA industry,” he says. “In many industries if you went through a decline with revenues dropping 20-25% a lot of people would say: it’s time to get out. That’s not what we’re seeing. They’re getting back on the horse and saying: this is a horse I really want to ride.”

The Schwab Advisor Services annual survey represents the views of 870 firms managing more than $300 billion in combined assets – including 80 firms managing $1 billion or more. On average, participating firms have 380 clients, $470 million in assets under management and $2.6 million in revenue. All of the RIAs surveyed have a custodial relationship with Schwab.

The size of the study – maybe the largest ever based exclusively on RIAs – is itself an indicator of the avalanche of interest Schwab is getting in practice management, Slater says. The reward for participating in the study for each RIA was a customized 40-page report letting the RIA firm see how it stacked up against its closest peers.

The most telling statistic in the survey, Slater says, was that revenue per client slumped 11.54% to $6,900 in 2009 from $7,800 in 2008 for the median RIA.

Number to look at

“That’s the number to look at,” he says. “You’re getting 11% less for the same amount of work.”

The median RIA practice reported revenues also to be down 7.7% in 2009, bringing in $1.2 million in revenue compared to $1.3 million in 2008.

The reason that revenues were down significantly less than operating income can be attributed to the inclination of RIA principals to absorb losses, Slater says.

“By and large, they were not willing to let people go,” he says.

Besides profits, growth also suffered. The median RIA firm grew the number of its clients by 2.6% in 2009 or about half of the 5.3% growth experienced in 2008.

The average firm had net new asset flows from new and existing clients of $6 million in assets, which represents a 4% growth in assets under management for the typical firm.

Bull market in resolve

But if results took a dive last year, resolve is working to make up the difference for future years.

More than four in 10 advisors (44%) say that they are developing and following a well-thought-out marketing strategy, a 52% increase from 2007.

In addition, 31% say they are focusing on developing and implementing a long-term growth plan as a challenge, a 63% increase from 2007.

“RIAs are more resilient than I expected,” Slater says. “Firms definitely wanted to solve the problem. They also committed to growing.”

RIAs in the survey expect their revenues to rise 10% this year.