10 reasons why RIAs fail

May 20, 2019 4:00 AM

Going strictly by the numbers, it’s the golden age of RIAs. The volume of financial advisors moving to independence has steadily increased year over year, according to a 2018 Schwab survey. That translates into a whopping 59% increase in the number of registrations from 2013 to 2017 — 238 firms that collectively represent $84 billion in AUM, according to the SEC.

But, as many an RIA principal has discovered, taking the plunge is almost the easy part. After that come the day-to-day strategy and practice-management decisions that make or break a firm’s long-term viability.

Here are 10 potential problem areas for new, and not-so-new RIAs, and how some experts address them.

Poor communication

All too often, advisors focus on achieving their clients’ end goals instead of emphasizing the journey it takes to reach that target.

Over time, clients will inevitably face personal and financial struggles. By putting them at ease by sharing personal obstacles, advisors can bridge communication gaps and solidify relationships.

By redefining the concept of success, firms will have an easier time helping their clients, Grant notes. The advisors should focus on improving their own lives as well as their impact on others. “If it results in more income, excellent," he says. "If it means we don’t make as much money, but there is contentment, then we’ve also won.”

See more: https://www.financial-planning.com/opinion/ria-financial-advisor-asks-whats-financial-success

Resisting new tech tools

In the digital era, clients may be put off by outdated practices, such as manually filling out forms with their private information.

To realize 15% company growth, technology expenses need to make up 7% to 10% of revenues, according to Brent Brodeski, CEO of Savant Capital Management and Financial Planning contributor. Embracing a new digital experience makes clients more receptive to your services and makes them more likely to stick around.

See more: https://www.financial-planning.com/opinion/advisors-who-dont-embrace-digital-tools-risk-losing-clients

Failing to upgrade marketing tools

Firms must craft a marketing message that is unique and appealing to multiple audiences.

Employ the art of storytelling, presenting case histories with a solid beginning, middle and conclusion, Grant says. The goal is to make the target audience empathize with the firm in a way that increases trust in their advisors.

See more: https://www.financial-planning.com/news/marketing-tip-how-to-tell-your-story

Lack of succession planning

Most RIAs do not have a succession plan in place.

This may result in friction when new partners are promoted who lack the skills necessary to maintain the company in the long run. The key to an effective succession plan is diversity, says Andrea Fannemel, senior manager of recruiting at RBC Wealth Management. “Across the industry we have an aging population of financial advisors so we want to think about what that new generation of advisors looks like,” Fannemel says.

In 2018, a stunning 73% of advisors did not have a succession plan in place, according to the FPA. They cited reasons such as overall complexity and not being ready for such a step. Taking on more diverse candidates and assigning them mentors ensures that veterans in the firm can eventually step down knowing the RIA is in good hands.

See more: https://www.financial-planning.com/news/increasing-diversity-in-wealth-management-can-help-succession-planning

Failing to create a sustainable work culture

A good leader establishes a work environment that nurtures, motivates and enriches employees.

A toxic culture can drive the firm right into the ground. Grant likens a successful culture to a garden: “It has to be planned mindfully before anything material can happen.”

Communication between peers is often key. Praise should be doled out when necessary and support should be offered in difficult times. The right balance of nurturing and tough love will help ensure the firm’s longevity.

See more: https://www.financial-planning.com/opinion/how-to-build-positive-company-culture-for-financial-advisors

Not understanding the role of capital

There are two ways to fund a firm: equity financing and debt financing.

Equity financing involves issuing shares to investors who later become partners. This method of financing may lead to an inflow of working capital which is often higher than the loan a firm would receive from a bank.

But distributing too much equity may mean advisors lose the authority to make important decisions, Esposito cautions. Debt financing comes with the burden of having to repay the capital if the business fails, though this route has the advantage of retaining autonomy, thanks to the lack of investors.

See more: https://www.financial-planning.com/opinion/5-key-sources-of-capital-for-rias

Turning away equity partners

Some firms still perpetuate the outdated practice of immediately hiring equity partners.

This leads to firms being encumbered with retirement obligations as well as a poor outlook for future partners, says Esposito. Many RIAs now make the move toward a 40:60 ratio of equity to non-equity — a strategy that makes sense in the long run as it will alleviate the burden the firm was previously struggling with.

See more: https://www.financial-planning.com/news/carson-becomes-latest-ria-to-partner-with-private-equity

Lack of strategic focus

Rookie RIAs may lose out by opting for a general, as opposed to a niche strategy.

“Marketing creation and dissemination becomes a shotgun approach,” according to Founder of Retirement Matters and Financial Planning contributor Dave Grant. On the other hand, a niche focus involves myriad techniques to reach its target demographic.

In selecting a niche, advisors should take into account current market saturation as well as their own level of expertise.

See more: https://www.financial-planning.com/news/choose-a-niche-or-be-a-generalist

Refusal to consider large-scale mergers

When it comes to mergers and acquisitions, RIA leaders are well-advised to focus on larger firms.

According to Dom Esposito, chief executive of consulting firm CEO2CEO, small-scale acquisitions — those in the $1 million to $2 million range — should raise red flags as they can be of low quality and are often on the market to buy out partners who might be stepping down due to retirement.

See more: https://www.financial-planning.com/news/ria-mega-merger-how-big-is-it-really

Lack of leadership skills

Effective leadership means inspiring top talent by keeping an open mind and welcoming feedback.

This pays off by minimizing generation gaps among boomers, millennials and Gen Xers, ensuring the firm’s performance isn’t hindered by outdated practices. According to industry expert and Financial Planning contributor Bob Veres, RIA owners should also make it a point to stick to a schedule.

Consistency and structure help staff tackle long work hours during the startup period and improve the firm’s progress in the long run. Finally, leaders must hold themselves accountable for errors and slip-ups. By taking responsibility for their actions, they instill confidence and ensure mistakes aren’t repeated.

See more: https://www.financial-planning.com/news/taking-charge-steps-to-stronger-leadership