EXCLUSIVE: Caution Compelling RIAs To Prioritize Profitability

Charles Paikert

21 February 2023

Last year’s down market and concern about a robust recovery have made profitability the top priority of advisory firms in 2023.

“Growth is slow and firms are tightening budgets and becoming more cautious,” said Philip Palaveev, CEO of The Ensemble Practice consultancy, which has just released its annual Pulse of the Industry survey. “The focus is on improving efficiency and growing through business development.”

After more than a decade of enjoying the tailwinds of a booming market, RIAs with profit margins of 25 per cent to 50 per cent appear to have taken profitability for granted: in last year’s survey, profitability was only the seventh priority of the surveyed firms. Training people, improved efficiency and adding new clients were the top priorities in 2022.

In 2022, however, the S&P 500 declined by nearly 20 per cent, and advisory firms experienced median decline in assets under management of 7 per cent, according to the survey. What’s more, the surveyed RIAs grew the number of client relationships serviced by just 6.4 per cent, a significant shortfall from the 10 per cent growth they had been targeting.

Budgets being cut
As a result, nearly half of the firms surveyed said they are cutting at least some budgets this year. Staffing appears to be a target: only 38 per cent of large firms said they currently have openings for advisors, although two-thirds of mid-sized firms with between $500 million and $1 billion in AuM said they do plan to hire more advisors this year.

Pressure from private equity owners may be another reason for the emphasis on profitability, according to Palaveev. “Your performance today is judged against your profitability in the past,” he explained. “If your profit margin was 35 per cent when you sold, the buyer wants 35 per cent now too. And if the buyer is not happy, things can get ugly.”

The survey also noted a split between large RIAs with over $1 billion in assets and small firms with less $500 million in AUM. The former said that they are prioritizing business development including growth via acquisitions and adding partners. “Large firms continue to promote employees to partner positions where they have equity owners of the business, with 57 per cent having added a new partner,” the survey stated.

Eighty-five RIAs participated in the survey; 40 per cent have over $1 billion in assets under management and 36 per cent have under $500 million. The average participating firm had $1.4 billion in AuM.