Independence is seductive, but even RIAs shouldn’t go it completely alone
The power of the RIA model is undeniable.
The number of RIAs registered with the SEC increased 60% between 2013 and 2017, with 230 RIAs registering last year alone, a recent Schwab Advisor Services report showed. Amid this rapid growth, firms have been trying to carve out their niche within the space, resulting in a factional divide between the truly independent and the more traditional corporate RIAs. How these firms differ comes down to operational efficiency based primarily on business philosophy.
The truly independent RIA holds all operations in house, from compliance and client management, to product and pricing. The traditional or corporate RIA, however, seeks out a partner to handle issues such as compliance, technology platform support and marketing in order to maintain its focus on client-facing and revenue-generating activities.
These differentials become vitally important when looking at statistics within the RIA space itself. More than 60% of client assets are held at 4% of the nation's RIAs. This market dominance by just a few large players indicates that the truly independent RIA is in a position of chasing the sun. They are constant scrambling to keep up with client demands, office demands, compliance demands, technology demands and the list goes on. For many of these firms, there’s an eventual breaking point, where all these demands become unsustainable.
For a solution to this problem, it's important to dive deep into the independent business model.
As we work with more independent and RIA practices, we see one common theme across the board. Pricing is going down — not up. It doesn’t matter how much more value an advisory practice claims to be adding by going independent — they never talk about increasing their fees. It would be the equivalent of Mercedes-Benz rolling out a new model that included all the bells and whistles of their top model but pricing it based on their lowest priced car. Most people would agree that this would be a losing strategy for Mercedes-Benz. So why do advisors keep doing this year after year? We've uncovered that there are few key reasons:
1. Most advisors don't know how to say no to new assets, even if they have to price below what they feel is fair. It's a snowball effect that they can rarely get ahead of.
2. Many advisors fail to have an account or fee minimum for their services. This means they end up bringing on too many clients, which jeopardizes their service-delivery model.
3. The competition is fierce for new assets, and advisors will typically cut their fee too low just to win over new business.
As these pressures mount, advisory practices can anticipate narrower profit margins. This means they will need to spend much more time bringing in new assets, even at lower fees. Most successful practices were born by advisors who knew how to find and manage money, yet now those same advisors are finding themselves spending much more time running the business side of their practice, detracting from their time spent on asset-gathering.
In addition to heighted competition on prices and services, compliance is the other constant in the financial services industry. Year after year, oversight only gets harder — not easier. As many of the existing IBD and RIA practices know, it has gotten more difficult to manage the changing compliance landscape, build client relationships, manage money and grow inorganically from acquisitions. Until now, the answer to this problem was to hire a good compliance person and try to do everything else on your own.
As the risks and liabilities have increased, the value and cost of good compliance staff have gone up dramatically, which eats into the profitability of independent RIA practices. For those even trying to grow through inorganic growth from recruiting, the cost of creating a solid internal recruiting practice or retaining a search firm can also significantly eat into firm margins.
So what is the solution for the independent RIA? We’ve worked with firms in the past like Triad Advisors, Cambridge Investment Research, Wealthcare Advisory Partners and United Advisors, among others, which each offer a solid independent or corporate hybrid RIA platform that also allows for multi-custody solutions. This model could present the wave of the future for the independent RIA.
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These companies deliver a quality service model and have the means to help practices grow through acquisitions and recruiting. Plus, they bridge the gap in cost savings for the do-it-yourself RIA practitioner. By leveraging the broader network, the independent or hybrid firm can get better pricing on everything from the clearing and custody partners to various third-party software and technology solutions like Black Diamond, Orion, Addapar, eMoney and MoneyGuidePro. These costs savings are then passed along, at some level, to the practices that have affiliated with them, making it a win for everyone involved.
With these new affiliations, these RIA practices are now able to narrow the margin gap for themselves by having their new platform firm help manage their compliance, SEC filings, FINRA and SEC audits and more. As a result, the individual practices can run their RIA business unencumbered from these burdensome activities.
Instead, the advisor can focus on what they do best — building client relationships, gathering assets, managing money and acquiring other practices. Ultimately, being able to spend the best hours of the day on the activities that generate real revenue will enable advisors to grow their practices at a much faster rate than those trying to do it all themselves. This is not to say that independent RIA’s can’t and will not be successful — but if they can make the correct affiliation choice, there is a higher likelihood that they can achieve even greater results.
The most successful journeys are never accomplished alone. As the independent RIA advisor navigates the waters ahead, they should seek out partners to assist them in achieving their goals.