It's a time of opportunity- if their business is focused and efficient.
More households continue to enter the realm of the "affluent," and a healthy percentage of them will be seeking professional advice. The low-return market, meanwhile, has underscored the need for strategic and creative investing and continues to turn many do-it-yourselfers into advisor clients. Hence, advisors have seen a steady increase in revenues in recent years.
In summary, reaping investment rewards now takes a lot more work than it did in the 1990s, and that has resulted in investors putting a premium on sound advice.
That, of course, is the rosy side of the picture.
The hard reality is that if advisors are going to take advantage of these opportunities, they'd better get the operational side of their practices in order, observers say. Like investment management, they note, running a business as an RIA isn't easy-as rising operating costs, stiff competition and the demands of clients put extraordinary pressure on profit margins.
"It's a time of dynamic change, but you have your choice," says Mark
Tibergien, a management consultant with Moss-Adams LLP in Seattle. "You
can be ebullient about the opportunity or be depressed about the
challenge. It's a crossroads."
There has, in fact, been a widening gap between the most successful advisory firms and those just treading water in recent years. In a study earlier this year done in conjunction with the Financial Planning Association and SEI Investments, Moss-Adams found that the top 25% advisors were, on average, taking home $250,000 more per year than the other 75% of their colleagues.
"I think there is going to continue to be a separation in the practices," he says. "The ones that will be suffering are those who are not at a level of critical mass where they can digest the extra costs related to compliance and related issues."
That, however, doesn't necessarily mean that small firms are dead in the water. Observers say that it's focus, rather than bulk, that will have the largest influence on a business's ability to grow.
Another important area is a firm's ability to balance the service it
provides current clients with an ongoing effort to recruit new clients,
That represents a challenge, as studies have shown advertising and marketing budgets are usually the first to get the axe when firms try to confront shrinking profit margins.
This financial squeeze play has been so pronounced the past few years
that companies such as Charles Schwab, Fidelity, TD Waterhouse and
other advisor services providers have been rushing out third-party
solutions in a number of areas, including marketing, trust services,
bond trading and transition planning. Investment advisors also have
enjoyed reduced trading fees brought on by competition in the services
industry: Charles Schwab last spring cut the trading fee for a typical
advisor from $29.95 to $19.95, and Fidelity and TD Waterhouse have
reduced trading charges as well.
Jay Lanigan, president of Fidelity Registered Investment Advisor Group, says the most important questions RIAs have to answer for themselves nowadays is, what are their core services and who are they serving?
"They need to figure out specifically what range of services they are providing and make sure the range doesn't get broader" than economic circumstances allow, Lanigan says. "The question is, what do you continue to choose to do?"