The biggest challenge for RIAs and how to fix it
RIAs have long enjoyed specialized status: As fiduciaries, they’ve cornered the market for providing independent advice and providing (mostly) transparent fee structures. But their reign is being threatened. Here’s what Hollie Fagan, head of BlackRock's RIA channel predicts for their future and her recommendations for what they can take now to maintain their relevance. Comments have been edited for brevity.
Financial Planning: What is the biggest threat facing RIAs today?
Hollie Fagan: Being independent and a fiduciary won’t be enough to distinguish RIA firms in the future. The rest of the industry is moving in this direction. The lines are blurring. By 2020, fee-based assets are projected to represent more than 60% of the industry assets — roughly $20 trillion.
FP: What’s the fix?
Fagan: They need to focus on their highest-value activities... interacting with clients in meaningful ways and identifying what part of the value chain they should outsource to other parties in order to add scale to their business — middle office to firms like United Capital and Dynasty.
FP: What’s another widely fixable problem you see frequently?
Fagan: One of the most expensive problems facing RIA firms is human capital. If firms aren’t getting the results they need from their human capital, they need to address it. But that’s the hardest thing to do.
In some cases it’s hard to replace the talent because people are retiring and that skill set doesn’t exist anymore. For example, managing individual bond portfolios. Most people who did that grew up in the industry 20 to 30 years ago. Now it’s a unique skill set to find. [This is a case where it could be ] more economically feasible to outsource this to institutional asset managers — freeing up resources for RIAs to use on other parts of their business.
Human capital is the most expensive part of an RIAs P&L.
There also may be people within the firm who aren’t evolving the way they need to. Founders are often focused on building their business or focused on clients as opposed to dealing with underperforming talent — those unwilling to embrace change.
This is more acute for RIAs because they’re small business owners. But some founders have to recognize that at some point their firm will grow to a size for which they need to bring in someone to help them.
FP: How can smaller firms stay competitive?
Fagan: Advisors, at some point, have to decide what they want to be when they grow up. Smaller firms may not be able to compete with firms that are growing faster. We see billion-dollar-plus firms growing substantially faster than the other firms. Bigger firms have the capital for acquiring other firms, they have people to work on deals and also invest in growing organically by training advisors. Smaller firms won’t be able to keep pace with that.
Sure, an advisor will say, “I’m happy managing $100 million and working six hours a day.” This is a lifestyle practice. However, advisors have an obligation to their clients and they also have the regulatory requirements of succession planning so they must decide if they have the resources to anticipate changes in the economic, competitive and regulatory environment to go it alone or with a partner. They should think about outsourcing.