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This article says so many things about the state of the financial services industry… great read.
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The Markings of a True Destination RIA
The decisions we make over the next five years will radically shape our ability to compete, and even survive.
The ball doesn’t lie, and neither does the math. As an industry, our client
acquisition rate has slowed from 7.1 percent in 2014 to 5.8 percent in 2016, asset
growth has dropped from 10.6 percent in 2014 to 8.9 percent in 2016, and revenue
growth has deteriorated from 14.4 percent to 6.6 percent over the same period,
according to the 2016 FA Insight Study of Advisory Firms by TD Ameritrade.
To add insult to injury, in a recent blog titled “The Unhappiest Successful Advisors:
Accidental Business Owners,” Michael Kitces called firms with $100 million to
$300 million of assets under management “accidental business owners.” He said,
“once you grow past about $100 million of AUM, you don’t make any more money
until you reach $1 billion.” This, he said, is because of the level of reinvestment in
people and technology required to account for your firm’s growing pains. All of this
reminds me of my high school basketball coach, who told us at the start of the
season, “Not only are you guys really un-athletic, but you have no sense of how to
play the game.”
Meanwhile, Tim Buckley, the new CEO of Vanguard says our jobs as advisors are at
risk as the firm’s robo advice platform ticks above $100 billion in assets. At the
same time, Morgan Stanley’s wealth unit just hit record revenues for the fourth
quarter of 2017. The report of the wirehouses’ death has been greatly exaggerated.
It certainly feels like an us-against-them climate in financial services. On one side,
the upstart entrepreneurs who chart their own course and wear many hats, all
while building a business that provides for principals and team members. On the
other side are industry Goliaths with the resources to out-scale, out-advertise, and
out-tech most of us. According to Cerulli’s U.S. RIA Marketplace 2017 study, the
687 firms with more than $1 billion in AUM oversee 59 percent of all assets in the
registered investment advisor channel. The 3,605 RIAs in the $100 million to $500
million AUM range, on the other hand, have 19.8 percent of RIA assets. The larger
destination firms have figured out scale and repeatable growth, and it’s in the
The battle lines have been drawn. The decisions we make over the next five years
will radically shape our ability to compete and, for many, survive.
The good news is many technology vendors, platform providers, strategic
acquirers, and other resources can help firms build a destination firm that will
attract clients, recruit next-generation talent, build scale, and develop resources to
facilitate regional acquisitions.
Technology: A destination firm needs a digitally integrated operating system for
its middle and back offices, one that lets advisors and staff focus on clients 80
percent of the time. The right tech is crucial to attract next generation clients and
advisors. While Gen Xers aren’t digital natives, we’re close. We expect a digital
experience with on-demand access to our financial lives untethered by geography
and time. With the proliferation of digital tools at our fingertips, this level of
services is table stakes today.
Differentiation: Draw a 20-mile radius around your office and review the
websites of your competition. You’ll find interchangeable marketing points like
“independent,” “fiduciary,” “CFP,” “life planning,” “open architecture,” “trust,”
“discipline,” or “100 years of experience.” You get the idea. We all look the same to
the outside world, and a potential client or recruit will see your firm the same way.
The client experience must go well beyond a math exercise and a retirement
number with a few goals. They can get this kind of low-touch service cheaper at any
given robo. In addition to the traditional financial planning, we need to present
experience at the confluence of a client’s personal values and their financial
resources influenced by behavior finance. This discipline, rightfully, is proving
critical to the success of clients living their best financial lives.
Growth: Our industry relies on referrals to grow. Joe Duran, CEO of United
Capital, reminds advisors that once we exhaust our sphere of influence, our growth
plateaus. Attracting next-generation talent or acquisitions requires a systematic
growth program. We’ll need a cohesive, digital marketing and branding strategy
that ties a stand-out client experience to the firm culture. For mature businesses,
the average age of the client skews to the age of the principals. Without a clear path
to attract next-generation advisors to backfill the aging client base, established
firms tend to follow the life cycle of their clients, with the unintended consequence
of sunsetting the firms’ value.
Training, Coaching and Business Management: I see firms doing really
smart things on the staff side of the equation. They cross-train to mitigate personal
dependencies in operational functions, build and maintain operating manuals, and
hire professional operators to manage the middle and back offices. They wisely
consult with custodians or other third-party firms on best practices. However, it’s
rare to find firms improving their client experience with the same rigor. To what
end is the benefit of a scalable operation when most advisors reach capacity at 150
households or so? The answer isn’t to find clones of ourselves, but to foster a
digitally driven client experience that wraps advisors in a system where there are
degrees of consistencies throughout the client journey. We all cannot be world class
at everything and the right resources can bolster blind spots.
Equity Value: Roll-ups and strategic acquirers offer sellers the option to take a
portion of the valuation in equity. Sellers who opt for equity in a strategic acquirer
or roll-up fundamentally believe the value of the buying firm will “perform” better
than the equity in their business over a period. If an internal succession plan or an
acquisition strategy is in the works, you must make the same case. If a nextgeneration
advisor, who probably will need to take a personal loan to fund the
transaction and sees flat growth with limited infrastructure or scale, he may not be
willing to take the risk as a buyer. It is reported that owners prefer an internal
succession plan to an outside buyer, but we’re asking a lot of employees to now
start acting like entrepreneurs. Creating a destination firm will ensure enterprise
value and make the underlying equity worth owning and betting on. The RIA
industry faces challenges from well-funded and well-known brands that are used to
serving our community. As a principal of a nationally branded, multi-office RIA
with more than $21 billion of AUM, we realize every day that we must disrupt
ourselves to remain relevant or someone else certainly will. Disruptive technologies
redefine the rules of what it means to be a consumer, and financial services is not
getting off the hook. The next decade will test the entrepreneurial grit of the RIA
industry, and I really like our chances.
Get your firm destination-ready.
Matt Brinker is the head of national partner development at United Capital.
Follow him at @mkbrinker.