This "institutionalization" trend is also apparent in the family office world as factors including governance, organizational structure, risk management and technology cause such entities “of all types” to gravitate towards a structure more akin to their institutional wealth and investment management peers

Nearly half of the firms participating in Schwab's latest study have doubled their revenue since 2009, while assets under management have also increased by 75 per cent – representing a compound annual growth rate of 12.1 per cent. Profitability – measured as standardized operating margin – has also risen by 36 per cent over the last five years and now stands at 27 per cent for the median firm in the study.  

But with some $23 trillion in high net worth investor assets held outside of the industry in other advice models, Schwab believes that independent advisors still have an “immense opportunity at hand.”

“It is critical for RIAs not to become complacent in the glow of their success,” said Jonathan Beatty, senior vice president of sales and relationship management at Schwab Advisor Services. “They must take bold steps into the next phase of their firm’s lifespan, and understand that competition is increasingly a key factor in every decision they make, from products and services, to firm capabilities, staffing, and technology investment.”

Strategies

Growing through the acquisition of new clients continues to be a “paramount objective.” Last year, “top-performing” firms added 10 per cent or more new clients, while the median firm added 5 per cent. RIAs are also taking on larger clients, with the average account size now $1.9 million, according to the data.

The combination of new assets and larger account sizes has therefore helped drive up firm revenues over the past five years, with the latter also having boosted revenue per professional, Schwab said.

Meanwhile, client segmentation and workflow improvements have also contributed to improved operating margins, with twice as many RIAs having a formal client segmentation strategy in place in 2014 compared to three years ago. Indeed, the segmentation strategy for an advisor practice lays the foundation for its service model and pricing structure, and these intertwined decisions have significant ramifications for a practice's productivity and profit output, said Kenton Shirk, associate director at Cerulli Associates, when the research firm released its June 2015 issue of The Cerulli Edge – US Edition.

In line with previous research, Schwab's study shows that RIAs are also prioritizing talent. Specifically, they are expanding their professional management line up to help manage the challenges associated with increased operational complexity, while 76 per cent plan to add relationship managers or investment professionals, and 10 per cent are looking to hire “dedicated management” for business operations

“More than half of the RIA firms in the study are now embarking on their third decade in business and the data shows that they are doing so from a position of competitive strength,” said Beatty. “As RIAs and the industry-at-large continue to mature, firms are learning from each other and sharing best practices to help build scale and fuel growth. The independent model is clearly winning today among high net worth investors, and RIAs are also preparing themselves to capture future opportunities.”

He added that Schwab can see an inflection point in the study data when advisory firms begin to shift from a practice model to an enterprise model.

The study involved around 1,000 RIAs collectively managing nearly three-quarters of a trillion dollars in assets.