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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 numbers.

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 next-generation 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.

TAGS: Technology
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