Firms face margin pressure, staffing problems as conditions worsen in 2008. The RIA space saw a 7% year-over-year increase in revenue last year as net profits surged to record levels and assets under management increased 9% versus the S&P 500's 5% gain last year. So says Fortifying RIA Practices for Long-Term Success, a report by AdvisorBenchmarking based on its survey this past spring of about 1,000 independent advisory firms.

Despite an apparently weakening economy and generally challenging market conditions, advisors said they were optimistic about extending last year's growth in assets under management, the fifth consecutive "up" year, into 2008 -- mainly by bringing in new business.

The survey says

Still, RIAs faced hurdles last year, most notably in the form of margin pressure, compliance and regulatory burdens and a shortage of talented staff.

At many firms, a prime source of margin pressure was the addition of infrastructure last year to support revenue growth.

For AdvisorBenchmarking research manager Maya Ivanova these challenges mean that, one way or another, RIAs will need to focus on people this year if they hope to realize their goals for 2008.

"Their success hinges largely on two factors," says Ivanova. "First, they must find and retain talented employees. Second, they must focus on attracting new clients."

To address the issue of a shortage of talented staff, 54% of the RIAs surveyed said they boosted employee "industry knowledge" through seminars, 49% sponsored employees for continuing education courses and 46% provided tuition reimbursement.

And more firms are turning to outsourcers to help ease the burdens of managing operational functions in house.

On the business-development side, 73% of advisors said client acquisition and marketing are the most critical areas in which they need to improve -- yet only 46% of advisors have a marketing plan. A clear majority of those surveyed -- 86% -- depend on referrals from existing clients to fuel growth through the next five years, while 58% believe that organic growth from improved service to existing clients will lead to greater success than a reliance on new business alone.

Still, most investment advisories don't focus on specific markets. In fact, for most age is the sole factor used to define their target client. In this regard, most firms aim at clients 44 and over.

For the sixth year in a row, advisors limited the number of new clients by accepting only those who could bring in a minimum of $425,000, compared to $421,000 in 2006.

When it comes to exit strategies, most firms would prefer to sell to another advisory firm while 30% would consider selling to an existing partner or -- for 24% -- to existing employees. But 23% of those surveyed said they had have done nothing to prepare their practice for a sale.

AdvisorBenchmarking is a research subsidiary of Rockville, Md.-based Rydex Investments that focuses on the RIA marketplace. -FWR

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