There’s a common misconception that smaller RIA firms, those under $300 million in assets under management, are on a path to extinction. The general message is, if your small firm isn’t dead yet, it will be soon.
The buzz is due in part to sensational media headlines, as news outlets are prone to shout “the sky is falling” with every new industry development. Moreover, larger financial services firms, who have the marketing and PR dollars to contribute their voices loudly to the conversation, warn of heightened cost pressures and intense competition while extolling the benefits of being acquired.
Yet the reality is, as an independent advisor, scale is no longer a decided competitive advantage. Smaller, agile firms enabled by technology and independence can provide clients with an exceptional service experience, enable their employees to grow and be excited about the future, and ultimately, build a valuable business that can be successfully transferred to the next generation.
While competition and regulatory pressures are increasing, there are important steps smaller firms can take to ensure they build a thriving firm positioned to grow and succeed in the future. Making the right decisions now and working with the right strategic partners can enhance a smaller firm’s chances for success in the future.
Employing Technology the Right Way
By employing the right technology in the right way, smaller RIA firms are able to create scale in their businesses and enhance their profitability. To do this, having a comprehensive, seamless technology solution is critical.
The foundational structure of the successful small RIA firm should include:
- A turn-key, comprehensive custodial platform that is specifically designed and optimized for the independent advisor. The advisor’s platform should include the best account management, trading and money management technology available. It should also enable the seamless automation of back-office tasks, such as billing, performance reporting and account opening. For example, a turnkey platform should offer multiple strategies per account and be able to achieve a back-office-to-account ratio of one staff member per 500-800 accounts.
- Flexible and powerful investment management tools. A model-based trading platform enables the advisor to manage hundreds of client accounts in minutes, not hours or days. The right platform can help the advisor to develop and manage multiple models in a single account, trade accounts all at once and rebalance hundreds of accounts in minutes with just a few clicks. Trading at the omnibus level, where account-level trades get aggregated into one model-based block trade, and asset-based pricing also help accounts from being eroded by fees.
- Fractional share technology. A platform that enables clients’ portfolios to be invested in fractional shares provides a higher level of portfolio diversification, full investment of every dollar and greater flexibility in managing client accounts. Fractional shares mean advisors never have to think about the price of any individual asset before adding it to the portfolio—trading algorithms do the math automatically.
The right technology can also help advisors control overhead, like staff size. Automating back-office tasks enables firms to handle more clients per staff member.
Outsource Non-Core Competencies
Outsourcing the non-money-making, yet critical business tasks can free advisors to focus on the most important aspects of their business: client relations and growth. Here are two areas to consider outsourcing:
- Money management. Supplementing existing strategies with third-party money managers can help the advisor expand their offering and be more competitive. It can lower investment-management-related overhead and free up time to manage client relationships and grow the business. Adding this capability may also allow the RIA’s reps to offer clients additional investment flexibility and choice to better meet client needs.
- Additional technology tools. The ability to seamlessly integrate technology tools can help generate efficiencies and enhance profitability. This should include a lightweight CRM (customer relationship management [system]) that is inexpensive yet robust enough to automate client account management. Advisors may also want a risk assessment tool that aligns the clients’ portfolios with the appropriate risk levels. A well-designed financial planning software can save advisors time and deliver customized solutions.
Small RIA firms are not on a path to extinction. With technology, lower fixed costs and an ability to achieve efficiencies, smaller firms can gain scale and profitability, and they can continue to serve their clients incredibly well.
Joshua Pace is the president and CEO of Trust Company of America, an independent RIA custodian.