6 Key Insights from Fidelity's 2024 RIA Benchmarking Study

I recently had a chance to sit down and digest the data presented in Fidelity’s latest RIA Benchmarking Study. It’s an invaluable report that helps shed light on several key metrics, trends, and challenges – providing vital insights that can help you refine your firm’s strategies to accelerate growth and build a more sustainable business. The following are just a handful of insights I took away from the published report:

1. Both margins and productivity are declining

A growing number of RIAs are experiencing lower levels of advisor productivity combined with increased expenses – resulting in reduced operating margins and slower organic growth rates. This is especially prevalent among firms managing less than $1 billion in AUM, where operating margins have fallen to historic lows. In large part, it’s a trend directly attributed to the confluence of higher direct expenses, declining per-client AUM, and reduced revenue per advisor.

Even larger firms (with AUM of $1 billion or more) are experiencing capacity constraints due to a rising number of clients per advisor. Much of this strain, however, appears to be the direct result of a growing percentage of smaller clients with lower AUMs – consuming finite resources without proportionately increasing profitability and suggesting a pressing need to adopt new technologies and processes that will help enhance both advisor productivity and operational efficiency.

2. Client demographics and wealth tiers are shifting

The good news is that the average client age has begun to decrease slightly, with an average client age of 57.1 years for firms managing less than $1 billion and an average age of 58.1 years for firms managing more than $1 billion. Clearly, RIAs are having some success in attracting younger clients. Asset ownership, however, is still heavily weighted towards older clients. More than 80% of the assets managed by advisors are owned by clients over age 50, and more than 60% of assets are owned by clients over age 60.

Interestingly, smaller firms are experiencing a shift toward wealthier client segments, with a greater focus on $1+ million clients. In contrast, larger firms saw a slight decline in their share of $1+ million clients—possibly indicative of an intentional, strategic shift toward diversifying their client base or targeting new and emerging market segments.

3. Fee discounting remains prevalent and potentially problematic

Although the proportion of firms offering discounts has decreased this year, the practice remains widespread across the industry. Larger firms tend to offer higher discounts (a potentially strategic move to use their scale to attract and retain clients in an increasingly competitive marketplace). Notably, firms managing less than $1 billion in AUM saw a decline in fee schedules that directly impacted their revenues. Conversely, firms managing more than $1 billion improved their fee schedules, likely due to the shift mentioned above in demographics towards smaller clients who often receive lower discounts.

The study suggests that a carefully balanced approach is critical for firms seeking to optimize their pricing strategy. While discounting can be an effective acquisition tool, it must be carefully managed to avoid eroding profitability.

4. Both organic and acquisitive growth strategies are driving success

Firms with less than $1 billion in AUM reported improved asset inflows and stabilizing withdrawal rates – contributing to a doubling of their organic growth rates compared to a year ago. Generally, these firms rely heavily on referrals to drive growth, further underscoring the importance of building strong client relationships and networks and delivering quality advice and a good client experience.

In contrast, larger firms are increasingly leveraging M&A and/or lifting out advisory teams with existing books of business to fuel firm growth. But they, in turn, face the challenge of balancing higher indirect expenses with the need to scale operations efficiently. A carefully crafted growth strategy encompassing organic and acquisitive elements for these larger firms will likely prove essential to maintaining sustained success.

5. Product and service offerings are evolving

The Fidelity study found a notable increase in the use of alternative investments, particularly among smaller firms. The percentage of firms offering liquid and illiquid alternatives has grown markedly even though overall exposure still remains relatively low among accredited investors. There’s a clear opportunity for RIA firms to better differentiate themselves through expanded product offerings catering to the growing demand for more diversified investment strategies from an increasingly engaged investor base.

While direct indexing is already well-established for larger firms (over a third offering these SMAs to their clients), we’re seeing significant growth among smaller RIAs. The number of smaller firms now offering this solution has nearly doubled, and many more indicate plans to introduce this offering in the near future. Other strategies, such as ESG and impact investing, also appear to be on the rise.

6. Technology adoption is driving enhanced efficiency

While most advisory firms have adopted many technology solutions, satisfaction levels are generally only moderate – suggesting plenty of room for improvement. While efficiency tools like CRM, portfolio management software, and planning tools have become standard across much of the industry, emerging technologies like AI and new social media and video tools are making great strides in freeing up capacity and improving the overall client experience.

Yet challenges remain, particularly regarding integration and adoption at smaller firms, which often struggle with the complexity and costs associated with technology upgrades. However, investing in technology that enhances client experience and streamlines operations will be essential to remain competitive. Moreover, the strong correlation between higher technology spending and growth rates suggests that firms embracing digital transformation will be better positioned to thrive in the evolving marketplace.

Strategic initiatives for 2024 and beyond

Looking ahead, the Fidelity benchmarking report identifies several strategic initiatives that successful RIAs are prioritizing over the next few years:

• Improving marketing and business development efforts—both large and small firms are focusing on enhancing their marketing strategies to attract new clients and retain existing ones. Digital marketing, social media engagement, and in-person events are key components of these efforts.
• Investing in technology—After a surge during the pandemic, larger firms have somewhat reduced their investment in new technologies. Yet technology remains a pivotal long-term focus. Smaller firms prioritize investments that improve operational efficiency and client satisfaction.
• Succession planning—Compared to previous years, succession planning has become a lower priority for smaller firms, overtaken by the need to invest in technology. While this reflects a growing recognition of the importance of digital transformation for long-term sustainability, at some point soon (given an aging advisor population), firms will need to turn their attention back to succession and continuity planning.
• Product offering expansion: Larger firms are seeking to diversify their product offerings to cater to a broader client base, including ultra-high-net-worth individuals and institutional clients.

Navigating the future with confidence

The insights from the 2024 Fidelity RIA Benchmarking Study provide a valuable roadmap to help you more effectively navigate the challenges and opportunities ahead. By enhancing productivity, optimizing pricing strategies, expanding product offerings, and embracing technology, you have a tremendous opportunity (through refined strategy and operational improvements) to better position your firm for sustained growth and ongoing success.

Here are four questions for your leadership team to consider discussing after reading the insights from Fidelity's 2024 RIA Benchmarking Study:

1. How can we leverage technology and streamline operations to increase advisor productivity and manage our growing client base without compromising service quality in the next two years?
2. As client demographics shift and wealthier clients become a larger focus, what strategies should we prioritize to attract and retain emerging affluent clients while maintaining our service to high-net-worth individuals?
3. How can we balance our pricing strategy in the future to ensure profitability while remaining competitive in an environment where fee discounting is prevalent? And if we do discount, what does it say about our advisors knowing the value of our services?
4. What strategic growth initiatives, combining organic and acquisitive elements, can we implement over the next three to five years to drive sustainable firm expansion?

These questions encourage forward-thinking and actionable discussions on key areas of the study.

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