It’s been said time and again—scale is key. However it’s achieved, through technology, acquisition, or something completely different, its importance moving forward is difficult to overstate.
And over the next decade, according to Cerulli Associates, the chasm between the at-scale, enterprise registered investment advisors (RIAs) and smaller, lifestyle practices will only widen.
Scale—and the advantages it affords—will be the primary determinant of success, the Boston-based research and consulting firm reports.
RIA channels have ballooned to 64,743 advisors managing nearly $6 trillion and gradually chipped away at broker/dealers’ market share lead. RIAs’ advisor headcount market share has steadily climbed over the past 10 years, rising 7.4 percentage points from 14.8% in 2009 to 22.2% in 2019.
Although this growth is largely emblematic of advisors’ search for fewer conflicts and greater autonomy, it also illustrates how well aligned the RIA model has been with pervasive trends: the rise of fee-based advice, adoption of financial planning, and heightened consumer awareness.
In the last nine months, however, RIAs have had to contend with factors that may permanently alter their business models—starting with how they use technology to achieve scale.
A COVID quickening
Prior to the COVID-19 pandemic, firms had gradually begun embracing the benefits of automation brought by digitization. The pandemic catalyzed adoption, driving near-ubiquitous use of certain technologies.
“Although adopting new technologies may shrink RIAs’ profit margins in the short term, it will also create efficiencies over time, and will likely be a mainstay of the industry,” Marina Shtyrkov, senior analyst at Cerulli, said in a statement.
It pertains most acutely to client acquisition strategies, she added.
As RIAs evaluate how to maintain growth in a new operating model, technology tools can enable expansion.
“RIAs can target specific investor segments—by profession, interests, or life stage—without the restrictions set by the natural market in their location.”
They will also need to find new ways to differentiate as regulatory changes undermine their ability to lean heavily on fiduciary status.
Due to the implementation of Regulation Best Interest (Reg BI), RIAs will no longer be able to rely on their obligation to act in clients’ best interests as the primary differentiating factor. Additionally, a rise in fee-based advice coupled with growing adoption of financial planning has been beneficial in elevating the RIA model among advisors.
At the same time, it is diminishing the differentiation pillars that RIAs have historically relied on.
“Advisors across all channels are shifting their practices to a fee-based, comprehensive planning model, making it more difficult for RIAs to distinguish themselves solely on these issues,” according to Shtyrkov.
As normalcy returns, there may be a renewed urgency for succession planning among RIAs to ensure their firm’s stability and sustainability.
The turbulence of a health and economic crisis—skyrocketing unemployment rates, market volatility, and full shift to remote work—reinforced the need for not only succession planning, but also business continuity planning, in the event of the unexpected. The earlier RIAs plan for succession, the more options they have and the smoother the process.
“The digital environment hindered some RIAs from closing a deal, but, as this virtual period lingers, we anticipate more emphasis on succession planning as well as increased consolidation,” Shtyrkov concluded.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
