Advisory Market Booming, Thanks to High Net-Worth Clients, New Strategies

Cork those funeral dirges and uncork the bubbly - the U.S. investment advisory market is doing much better than pundits, and even some advisors, may think.

That's the outlook from Schwab's 2017 RIA Benchmarking Study, which was released on July 14. In it, the data shows "continued growth" for the market, with an abundance of new clients, and a boost in average client assets size included in the mix.

This from the study:

  • Firms of all sizes experience growth: the industry is seeing 0% five-year compound annual growth rate in assets under management at the median since 2012.
  • Independent advisors are winning high-net-worth investors: average client relationship size reached $1.8 million in 2016, up from $1.6 million in 2015.
  • Fastest-growing firms pair referrals with comprehensive marketing strategies: the best-performing firms are attracting new client assets at 2.4 times the rate of all other firms.
  • The median firm AUM has grown to $593 million in 2016 from $358 million in 2012, a 10.0% five-year compound annual growth rate. In addition, profitability remains strong with standard operating margins of 25% in 2016.

Take HighTower, a registered investment advisory firm based in Chicago. The firm has seen its client assets nearly quadrupled to nearly $50 billion over the last four years. "One of the reasons that HighTower is growing is because investors are demanding that their advisors be fiduciaries, who must put their clients' interests first, not salesmen," says Elliot S. Weissbluth, founder and chief executive officer at the company.

Other financial professionals agree that the DOL ruling has increased firm independence and transparency, and thus client trust, and that's helping advisors grow significantly.

"Independent advisors are continuing to succeed for two important reasons," says Jonathan Beatty, senior vice president of sales and relationship management at Schwab Advisor Services. "First, high-net-worth individuals with the most complex financial needs are increasingly seeking the independent model and secondly, within firms of all sizes, advisors are making the right strategic decisions to help them retain their valued clients, win the trust of new clients, and expand and scale their businesses."

A big reason for the investment advisory industry's "new momentum" is a simple, economic one - increased demand.

"One of the reasons for this boom is due simply to there being an increased number of high net worth investors looking to allow their money to work for them," says Simon Calton, CEO of the U.K.-based Carlton James Group. "Years ago, it was far more difficult to accumulate wealth as a salaried employee, which is still true. However, the rise of the internet and technology has also generated tens of thousands more entrepreneurs, including those who are able to accumulate wealth working from their own home."

The biggest barrier to growth is a global market downturn, which is always "very possible," especially due to political turmoil, Calton says. "While a short term and significant challenge, this can be good for the long-term, weeding out financial advisors who are only reactive and riding the market average - versus those who prepare their high-net worth clients for economic uncertainty and are thus able to capitalize on it."

Basic market leveraging and business fundamentals are in play, as well.

"Investment advisory firms are growing rapidly because their structure is better for clients and advisors," notes Larry Miles, principal at AdvicePeriod, in Los Angeles. "Without the commissions and conflicts of brokerages, fiduciary advisors can focus on what really matters to clients."

Miles says the registered investment advisor industry will continue to grow, and the brokerage world will continue to shrink, until there are no brokers left. "It's just a matter of time," he notes. "The largest barrier to growth for an advisory firm is the advisor's ability to operate and scale a business. Not every great advisor has the interest or ability to be a great business operator."

"The best advisors will partner with a firm that frees them up to spend more time with their clients, and finding new ones," he added.

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