RIAs Must Capitalize on Scale to Compete

November 13, 2020 — Boston

The RIA of tomorrow must be prepared to tackle digital readiness, client acquisition, value differentiation, and succession

Over the next decade, 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, according to Cerulli’s latest report, U.S. RIA Marketplace 2020.

RIA channels have ballooned to 64,743 advisors managing nearly $6 trillion and gradually chipped away at broker/dealers’ (B/Ds’) marketshare lead. RIAs’ advisor headcount marketshare 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.

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,” says Marina Shtyrkov, senior analyst at Cerulli. 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,” she adds.

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,” says Shtyrkov.

As the pandemic rages on, RIAs must reckon with the new challenges—and opportunities—stemming from the need to address digitization, client acquisition, value differentiation, and succession. The ways in which they address these challenges will separate tomorrow’s top firms from those that flounder. “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.

Note to editors

These findings and more are from The Cerulli Report—U.S. RIA Marketplace 2020: Exploring Drivers of Change.

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