These giant retail brands, branch networks and concurrent product innovation created a powerful competitive edge
for many of these companies.
GREAT RECESSION CONSEQUENCES
Almost a decade later, the Great Recession
hit. Countless customers went bankrupt,
and retail banks took the blame for selling products to consumers who did not
understand the risk or could not control their impulses. This resulted in new
legislation to curtail the abusive behavior, adding to the regulatory complexity. Many firms
changed how they delivered
and proprietary products.
The Great Recession ushered in a new era of growth
for the RIA business model,
with thousands of new RIAs
formed since that time.
Two industry trends also
emerged: age demographics
and business economics.
Most aging RIA founders
failed to plan for an orderly succession.
Many have been forced to sell their companies to ensure their employees and clients continue to be served. Others have
been forced to seek merger partners or
new capital because of changing business economics. While advisor pricing has
remained steady, costs — especially related
to compensation — continue to rise. Only
about 700 RIAs have more than $1 billion of assets under management (a good
proxy for critical mass in this business).
Smaller firms find it increasingly difficult
to compete for clients and staff, and have a
limited ability to grow dynamically.
Advisors who wish to build enduring
businesses today face a set of challenges:
Talent – While the financial planning
schools are producing great young advisors,
the retirement of the old guard means an
even larger demand. Unfortunately, most
firm leaders’ passions and backgrounds are
focused on developing client relationships
and the caretaking of their wealth, not nec-
essarily people management. Their inabil-
ity to retain and develop young candidates
results in high rates of attrition just when
these young advisors reach their peak years.
Advisory firms now struggle to fill a critical
need for talent at a time of rising demand.
Capacity – Technology has contributed to greater productivity for most
firms, but financial advice is still a people business. Each advisor can service
only a limited number of clients. The
best-managed firms use a team approach
to create operating leverage and a better
client experience, but most wait to hire
until they are well over capacity and
therefore lack the time to train and
develop new advisors properly.
Growth – According to the 2018
Investment News Pricing & Profitability
Study, the growth rate for the average
advisory firm is back to double digits — but
much of that stems from market growth,
not organic growth. Most firms still
depend on the founders or principals for
business development as this skill has not
been cultivated among young staff.
Identity – The broker-dealer world
has been living with constraints on their
method of doing business for many years,
but now they are getting even with RIAs
by pushing towards a harmonization of
standards. Many customers cannot tell
the difference between an advisor and a
broker due to the nomenclature they use,
and even the way they charge for servic-
es. Next up will be a fiduciary standard
for registered reps. The definition may
be different for broker-dealers compared
to the standard for RIAs, but both types
of practitioners will be able to declare
themselves advisors operating under
a fiduciary standard. This means RIAs
must distinguish their business model in
comparison to other providers.
Capital – Up until now, RIAs have not
been required to have capital — or even
a balance sheet —because the business
always has been a P&L-driven enterprise.
However, with an increase in retainer fees,
accounts payable, accounts receivable,
equity infusions and lines of credit among
other items, RIAs must consider how they
will fund their balance sheet.
In today’s digital world,
the prevalence of fraud has
become more prominent.
This increases the risk firms
face when money move-
ments and wire transfers
they authorize later turn out
to be fraudulent. The advisor
must cover this cost, espe-
cially if their insurance com-
pany does not accept their
reasoning for the mistake.
No doubt, our industry
faces potential snags: many founders
dying and retiring without a succes-
sion plan, the absence of a systematic
approach to recruiting new people and
the lack of an effective lobbying voice
to fight for our self-interest—alongside
a high volume of passive shareholders
taking large stakes in mature firms.
Nevertheless, this is a great time to be in
the advisory business. We are enjoying an
oversupply of clients and an undersupply
of people to deliver advice. Furthermore,
well-managed firms continue to deliver
compelling economics. Just pay attention to your environment and keep your
ear to the ground. Changing demographics and market forces can disrupt your
business if you do not plan ahead.
Are you prepared?
Mark Tibergien is CEO of BNY Mellon’s
Pershing Advisor Solutions. Tibergien is also
the author most recently of “The Enduring
Advisory Firm,” written with Kim Dellarocca
of BNY Mellon and published by Wiley. He can
be reached at firstname.lastname@example.org.
Next up will be a fiduciary
standard for registered reps. The
definition may be different for BDs
compared to the standard for RIAs,
but both will be able to declare
themselves advisors operating
under a fiduciary standard.