This is why, he adds, many fee-based advisors are starting to fold hourly and project-based fees into their offerings, instead of solely relying on asset-based fees.
Unlike in the 1990s, RIAs are finding that having an efficient business model is a necessity, Shaalan says. "Those who did not have a fundamentally sound business model in place-those who really rode the wave a few years ago-I think a lot of them are hurting now and may not remain afloat for long," he says."
How are RIAs adapting to these new business realities? One way is expansion through merger and acquisition, according to industry observers.
At FPtransitions, an online matchmaking service for buyers and sellers of advisory practices, the number of buyers interested in RIAs businesses has increased 33% this year, says David Grau, principal of the company.
While the number of sellers hasn't increased, those who are selling are seeing an increased number of offers and inquiries, he says. "If we list a fee-only RIA on our site, in a metropolitan area, it will pick up between 40 and 60 written buyer inquiries within a 30-day period," Grau says. That's compared to a typical response rate of 25 to 28, he adds.
Most of the buyers are other RIAs looking to expand or are looking to add an RIA component to their business. For example, Grau says, about 8% of buyer inquires are coming from CPAs. "Most are coming from other fee-only, or at minimum fee-based, firms who want to buy recurring revenues and assets under management," he says.
Because many RIAs seeking to sell their practices have experienced as much as a 20% to 25% deterioration in their assets under management, sellers are not seeing the heightened demand drive up prices, Grau says. The research suggests that those seeking to sell are the ones hardest hit by the bear market, but the evidence isn't conclusive. However, sellers are seeing down payment offers of 45% to 50% of the purchase price, up from the typical 25% to 40%, he says. "If anything, I see a general, almost overwhelming sense of optimism in the marketplace," Grau says.
While it's not mandatory that RIAs get bigger to survive in the current environment, it does make running the business easier, says McGinness of Cerulli Associates. Firms with more than $1 million in revenue have more flexibility and more of a financial cushion.
Fewer vendors, for example, are willing to service smaller advisor shops, he says. Clients are also seeking more services and demanding more time of advisors, further putting the squeeze on the small operators, McGinness says.
"We're not saying advisors can't make a good living staying small, because they certainly can," he says. "But it's becoming increasingly more costly to do so." The challenge, he says, is that advisors are looking to cut expenses at the same time that clients are asking their advisors for a broader array of wealth management services.