Registered Investment Advisor channels are in an advantageous position, but regulatory changes, the pandemic and new competitive threats have introduced headwinds, according to a new report.
As such, the RIA of tomorrow must be prepared to reckon with the new challenges—and opportunities—stemming from the need to address digitization, client acquisition, value differentiation and succession, Cerulli notes in its latest report, U.S. RIA Marketplace 2020: Exploring Drivers of Change.
Large enterprise RIAs will be able to address these challenges and carry the costs required for growth most easily, while the gap between the at-scale, enterprise RIAs and smaller, lifestyle practices will only widen, the report suggests. As a result, scale—and the advantages it affords—will be the primary determinant of success over the next 5 to 10 years.
“The largest RIA firms are well-capitalized buyers who can provide succession planning solutions to retiring advisors and acquire smaller teams in search of pricing power, support, or access to capital,” the report explains, adding that their professional management teams can institutionalize processes, execute inorganic strategies and build a national brand.
The report notes that one-third of advisors in the RIA channels are planning to retire within 10 years, representing nearly $2 trillion in assets. Among those advisors, 26% are unsure of their succession plan.
Moreover, as the industry converges around a fee-based, planning-oriented business model, Cerulli observes, it becomes more difficult for independent firms to differentiate. “Because of their scale, enterprise RIAs have the budget and in-house expertise to craft coordinated marketing initiatives for effective virtual business development.”
In fact, RIA channels have expanded to 64,743 advisors managing nearly $6 trillion and have gradually dipped into broker-dealers’ marketshare lead. Furthermore, RIAs’ advisor headcount marketshare has climbed steadily over the past 10 years, rising 7.4 percentage points from 14.8% in 2009 to 22.2% in 2019.
Cerulli notes that while this growth is largely representative of advisors’ search for fewer conflicts and greater autonomy, it also illustrates how well aligned the RIA model has been with the rise of fee-based advice, adoption of financial planning and heightened consumer awareness.
That said, RIAs in the last nine months have had to contend with factors that may permanently alter their business models—starting with how they use technology to achieve scale, the report further observes. Prior to the COVID-19 pandemic, firms had gradually begun embracing the benefits of automation brought by digitization, but the pandemic propelled 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,” says Cerulli senior analyst Marina Shtyrkov. This pertains most acutely to client acquisition strategies. 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,” Shtyrkov adds.
RIAs will also need to find new ways to differentiate as regulatory changes undermine their ability to lean heavily on fiduciary status, the report notes. With the implementation of the SEC’s Regulation Best Interest, RIAs will no longer be able to rely on their obligation to act in clients’ best interests as the primary differentiating factor, Cerulli observes.
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,” says Shtyrkov.
Overall, the ways in which RIAs address these challenges will separate tomorrow’s top firms from those that struggle. “When the disruption ultimately subsides, it will leave a long-term imprint on the industry and RIAs will emerge post-pandemic into a new normal that, in some respects, may be permanently altered,” concludes Shtyrkov.