There’s a popular saying in business: “What got you here, won’t get you there.” This has never been truer for RIAs today, who are at the epicenter of multiple seismic shifts threatening to upend their tried-and-true success strategies.
After decades of exceptional growth, the RIA landscape is being redefined by the convergence of significant technological, cultural, regulatory and demographic changes. Although most RIAs are well positioned to meet these challenges, they cannot be complacent. Advisers need to better articulate their value propositions, alter their fee structure, adapt to new regulations, and pursue a new generation of advisers and clients.
Tech innovation has disrupted the traditional framework of managing investments, making the basis point pricing model unsustainable. Automation and algorithms have reduced the general cost of investment management for clients, forcing RIAs to rethink their true value.
This change, however, may be a blessing in disguise. The historic model is not truly aligned with the range of services RIAs provide. Advisers are not just investment managers. In fact, RIAs provide an average of 10 different services but 90% of firm revenue comes from fees linked to assets under management, according to FA Insight, TD Ameritrade’s advisory research group.
Robo advisers provide clients asset management services, but a laptop is no financial life coach. RIA clients crave the personal connection their advisers bring. They want someone who offers financial advice and life style guidance, while understanding their aspirations and fears.
QuoteAdvisers who continue to charge clients solely based on a percentage of assets under management can expect to find themselves at the wrong end of the trend.
RIAs need a pricing structure that factors in the personal relationship they provide clients. Advisers who continue to charge clients solely based on a percentage of assets under management can expect to find themselves at the wrong end of the trend.
CONQUERING THE LACK OF TRUST
This industry also finds itself at a cultural crossroad. Even though RIAs are committed to acting in the best interests of clients and putting clients’ interests first, we are battling a public perception problem. Investors simply do not trust Wall Street and make no distinctions of it. Financial services, once again, is listed as the least-trusted industry by 2016 Edelman Trust Barometer.
There is, however, a silver lining for RIAs. Skeptical investors now ask more questions about where they turn for investment advice. Independent advisers should be seizing this opportunity to distinguish themselves. RIAs have been putting client interests first since 1940, and did not need a rule change to do this, or to be transparent on fees and pricing.
Industry groups and custodians are helping RIAs find their voice. My firm is among several that can help them speak out about how they stand out.
The new regulatory era is well underway, and investor protections take center stage. The fiduciary rule is the latest initiative regulators have put in place for client protection.
As the industry determines how to adapt, it is abundantly clear that all RIAs will need to understand the nuances of ERISA standards, which are stricter than the '40 Act.
QuoteAs the industry determines how to adapt, it is abundantly clear that all RIAs will need to understand the nuances of ERISA standards, which are stricter than the '40 Act.
Meanwhile, the SEC is expected to weigh in on the future of RIA exams. The current exam schedule that averages once every 10 years does little to inspire investor confidence. One bad actor can damage the reputation and credibility of the entire industry, wiping out client trust. This implies a lack of oversight to some, leaving room for competitors to characterize the RIA industry as “the Wild West.”
Finally, the forthcoming anti-money laundering rule from the Treasury’s Financial Crimes Enforcement Network is due out this year, and is expected to change the way RIAs monitor, protect and report suspicious client account activity.
Though custodians like TD Ameritrade are doing their part to help advisers, firms will no longer be able to rely on their custodians' AML programs. They will need their own.
NEW ADVISERS, NEW CLIENTS
As the marketplace becomes younger and more diverse, RIAs must rethink their client base.
Many firms have succeeded serving middle-aged, predominantly male, white baby boomers. However, to date, those assets are now well-entrenched and not a viable pipeline for future growth.
Pew Research reports that the largest generation — millennials — make up 27% of today's population. Though
Generation X is smaller at 21 %, this group is becoming the wealthiest generation with more money in motion than any other.
QuoteYounger clients find greater connection with their peers. Therefore, RIAs must take immediate action in hiring younger and more diverse talent.
Younger clients find greater connection with their peers. Therefore, RIAs must take immediate action in hiring younger and more diverse talent. Firms that engage Next-generation advisers tend to adapt faster on multiple fronts: whether by attracting new clients and assets, or embracing technology. In fact, top-tier firms are more likely to be those developing young talent, according to FA Insight's 2016 Growth by Design study.
If RIAs intend to thrive, this industry cannot become a static collection of greying advisers serving an aging client base. Advisers must bring continuity and succession planning to the forefront not just for the benefit of their own retirements, but for the good of their clients and the livelihood of the broader industry.
The future of the RIA industry lies in the hands of those who made it what it is today. As these seismic shifts settle into our new normal, RIAs will need leadership and a clear vision so that they may continue to evolve, flourish and continue serving the needs of their clients for decades to come.