The RIA market has taken off over the last several years, with assets up some 47 percent versus 2005 to $1.4 trillion in client assets at the start of 2007. Consultants predict there’s plenty more growth to come, but not necessarily for all RIA firms. In a recent report, financial services consulting firm Moss Adams and Pershing, a provider of RIA services, say they expect retail investable assets to rise more than $5 trillion in the next five years, creating an estimated $35 billion in new revenue opportunities. But firms have to be positioned to manage it, the report says, or they could miss out.
The report, titled Fast Forward: The Advisor of the Future, has some suggestions. For starters, RIAs need to focus their efforts to manage growth on three things: change, capacity and culture. Capacity is key: "The RIA firms that will grow the fastest are those that will explore opportunities to increase capacity,” says Philip Palaveev, principal of Moss Adams. “The big years—periods of dramatic opportunity created by changes in consumer behavior or great equity markets—can either jump-start the growth of a firm or, if missed, cause a firm to lag behind its competitors.”
One of the ways to prepare for increases in capacity is to specialize job functions and create career tracks. Principals should consider creating more “sophisticated” organizational structures that include support functions, financial planning and tax experts, the report says. “In addition to hiring the right people, RIAs also have to get the right leadership into their firms,” says Mark Tibergien, managing director at Pershing Advisor Solutions. Preparing employees for leadership positions will not only aid in retention but also help make succession an easier task. “If you have a business that can last, then you have a business that you can sell,” Tibergien adds.
Of course, finding the right balance where capacity is concerned isn’t easy. According to the report, firms that had the highest rates of productivity in 2003 had a difficult time capturing new growth in 2004, while firms that grew very fast in 2003 had excess capacity and lower productivity levels. “When your staff is tied up with existing clients, they can’t capitalize on any new growth opportunities that come their way. It’s like a manufacturing company that keeps taking orders but has no ability to process them,” Tibergien says. The idea is grow the firm without interruption to the everyday procedures of the firm.
The other tough part is that with growth there is the risk of corrupting a firm’s culture. Consultants say that management tends to lose connection with its people as the firm increases in size, and that can lead to the creation of subcultures. While subcultures are not always a negative, they can influence and possibly shift the business objectives and they might create conflicts. The key is to build and maintain a culture that works with the growth strategy. “It’s important for an organization to have a clear framework in terms of what it expects of its people,” Tibergien says. Even more so as the firm expands and the principal’s span of control lessens with additional growth.
The average RIA is expected to triple in size over the next five years, according to the report. That’s some serious growth. You better be ready for it.