A year ago in our prior RIA survey cover story, we spoke about the profession possibly entering a golden age where numerous stars were aligned in its favor, including the ascendency of the fee-based model, the increasing attractiveness of going independent and the greater awareness of fiduciary responsibility among the investing public.



And based on figures from Financial Advisor’s 2014 RIA survey, the good times kept rolling along as total asset growth jumped more than 20% last year among the 529 companies we measured. That’s up slightly from the nearly 19% growth during 2012, seemingly confirming that the RIA space is in a nice groove.

“I think RIAs are in a very good place,” says John Furey, principal and founder of Advisor Growth Strategies, a Phoenix-based wealth management consulting firm. “For me, it’s still the best channel to grow in, and I don’t see anything on the horizon to change that.”

But to quote the Grateful Dead, when life looks like easy street there is danger at your door. Many RIA firms, particularly those that didn’t grow through mergers or acquisitions, can thank the raging bull market in equities since 2009 for a big chunk of their recent AUM growth, including last year’s 30% gain in the S&P 500. But that won’t last forever, so then what?

And other threats loom on the longer-term horizon such as regulatory uncertainty, the rise of robo-advisors and the dearth of new talent in a graying industry.


“It’s a sweet period for RIAs, but now’s the time to do some strategic planning,” Furey says. “How do I insulate my firm if the market turns against me? Given the competitive threats, what can I do to make sure the growth continues?”

The economy can also play a role in the well-being of RIA practices, and our survey found a mixed bag regarding financial advisors’ take on whether the local and/or national economy impacted their business. Folks in markets such as San Francisco, New York City and Charlotte, N.C., as well as both Houston and the Dallas/Fort Worth area (and Texas in general) said they’ve benefited from healthy growth in their local economies.

 

Other advisors in less-dynamic places such as Michigan and parts of the Northeast said sluggish local economies have been a headwind. Meanwhile, some advisors said the economy has been a non-factor in their business, while others are following the macroeconomic picture and bracing for potential change.

“We haven’t felt much in the way of any economic impact with the Fed stimulus continuing to bolster the markets,” commented Keys Tinney, managing partner at Aveo Capital Partners, a Greenwood Village, Colo.-based firm with more than $300 million in assets and an AUM growth rate of more than 41% last year. “However, we believe there will be a reversion to the mean at some point in the near future that will have a major impact on client portfolios, and we are planning ahead for such an occurrence.”

The Big Get Bigger
Growth rates among RIA firms varied by size range, with firms in the $100 million to less than $300 million (27.09% AUM growth) and $50 million to less than $100 million (26.74%) categories leading the way. Firms that manage more than $1 billion in assets turned in an average growth rate of nearly 20%, no small feat given their big size. There were 170 such megafirms in this year’s survey versus 143 among the 522 firms from last year’s edition, which made them the largest cohort in the recent survey. That seems to corroborate the notion that the largest firms in the RIA space are getting larger.



One such firm is Halbert Hargrove in Long Beach, Calif., which nearly doubled its assets to $4 billion last year after a concerted effort to not only boost its asset base but also to boost its capacity to serve clients and propel the firm going forward.

“A couple of years ago, we started thinking about what we needed to do to remain relevant and to be sustainable in the future,” says chairman and CEO Russ Hill. “We wanted to develop deeper research manager capabilities than what we had been using.”

That quest yielded two significant results last year. First, after a nine-month negotiation, the firm added a $1.5 billion family office to the fold, which joins an existing family office with about $125 million in assets. Hill notes this new family office comes with a group of active-management investment advisors who he says have consistently generated returns of 250 to 300 basis points over index returns for the past 20 years or so.

 




Second, Halbert Hargrove became affiliated with the 20-20 Investment Association, a group of very large institutional investors among fund companies and pension boards representing roughly $8 trillion in aggregate AUM from across the globe that explore investment opportunities in emerging and frontier markets. The size and research depth of these institutions give them access to high-level government and corporate officials in those countries and enables them to invest more deeply than they would just following passive indexes tracking those markets.

Hill says his firm wants to build long-term portfolios for some of its high-net-worth clients–-particularly for the “legacy money” portion of their assets that they’ll likely never touch but will pass on to their children, church or charity–based on emerging and frontier markets. But it doesn’t believe index investing in those regions will produce the desired result for these types of portfolios. Hence, the desire to gain access to the acumen of the 20-20 Investment Association, which Hill says was basically a two-year process.

“This affiliation [with the 20-20 Investment Association] deepens our knowledge of emerging markets,” Hill says.

The Small Get Bigger
Cliff Demarest started Consilium Wealth Advisory LLC in 2012 with the goal of providing family office-type services to high-net-worth clients at a deeper level than what he says is being offered by larger institutions in the family office space. Demarest, a former chief investment officer at Northern Trust, contends that many advisors in the family office teams at the institutional players are spread too thin because they serve too many families.


“There’s not enough time in the year to do all of the client service protocols needed for a wealthy family if you have 20 to 30 families, he says.

At this point in its brief life, Consilium (a Latin word translated as “counsel,” “advice” or “plan”) has two advisors serving six families totaling 25 clients. Client sizes range from $5 million to a couple of hundred million dollars. To ensure that clients get the full high-touch treatment regarding wealth management, family counseling and other family office services, Demarest has set a limit of 10 families per advisor.

Consilium’s assets grew to $270 million last year on the heels of a stratospheric growth rate of 1,700%. “I’d say one of the reasons we’ve been very successful––and we have about a half-dozen prospective clients now that could add another 50% to our AUM––is because we charge low fees,” Demarest says. Depending on the client, fees are 25 to 50 basis points, which he says is at the low end of industry averages.

Consilium’s small staff includes a Web developer and graphic designer, both of whom do more than just make the firm’s Web site look spiffy. They’re also available to help clients. “We have clients who have businesses, and we’ve advised them not just on estate planning or whether they should choose emerging markets, but also on how to maximize their Web site and about search engine optimization,” Demarest says. “They really seem to appreciate that extra-added service.”

 

M&A
Perhaps the quickest––but not always the easiest––way to grow an RIA is through mergers and acquisitions. The number of M&A deals among RIAs jumped 20% in 2013 versus the prior year, according to Schwab Advisory Services. The largest share of the 54 transactions were RIAs buying other RIAs (44%), and RIA-on-RIA deals tend to be smaller and often take the form of tuck-in acquisitions that help firms expand their capabilities and footprint.



Bridgewater Wealth & Financial Management in Bethesda, Md., did a meaningful transaction when it added former Maryland Capital Management president Stephen Schuler to the fold as principal and chief investment officer.

Schuler’s arrival bolstered Bridgewater’s research chops and brought over more than $200 million in client assets, expanding the firm’s AUM to roughly $470 million. Bridgewater is a partner firm with Focus Financial Partners LLC, a network of independent wealth management firms. Focus served as matchmaker between Schuler and Bridgewater.

“Focus Financial made the introduction to Steve for us,” says Kim Allred, Bridgewater’s chief of investment operations. “We thought it was a good fit.”

Down in New Bern, N.C., D.L. Blain & Co. sought to expand its business, and it worked with FP Transitions to buy another practice. They found a firm that was both bigger and located on the other side of the continent. “My first choice was to find something in the Southeast,” says David Blain, president of his namesake company. “I came across this firm and thought, ‘What do I have to lose?’”



The two principals at the target firm, Pleasanton Financial Advisors in Pleasanton, Calif., planned to retire and wanted to sell their business to someone who wanted both the clients and the company’s existing staff. Blain liked the notion of diversifying his client base while onboarding a seasoned staff who could maintain their existing relationships with those clients. “It was a perfect scenario for me,” Blain says.

A deal was struck, and with the stroke of a pen the company ballooned in size roughly twofold, and it ended the year with assets of $220 million, a 230% rise. The deal enables it to consolidate administrative and operational functions and to deploy new technology. For now, the company is a two-headed entity operating under the two firms’ existing banners, but will soon unite under the company name of BlueSky Wealth Advisors.

Blain says he’s pleased with his purchase but would do some things differently the next time. And he foresees there will be another acquisition down the road after he’s done digesting this deal. “We’ve learned some lessons to where next time it would be more efficient,” he says.

 

Worries, Anyone?
One of the big recent trends in the advisory space has been the rise of robo-advisors, those online advisory platforms that some people believe are a threat to human investment advisors. But others say they might actually cause advisor firms to up their game.

“I think robo-advisors will put a lot of value pressure on the business,” says Russ Hill from Halbert Hargrove. “You better be doing something to add value that’s meaningful to clients other than just putting together a portfolio of index funds. That something could be wealth management or manager research.”

Regulatory issues are another concern. “Regulation is one of the biggest things we worry about,” says Wendy Dominguez, principal and president of Innovest Portfolio Solutions LLC in Denver. “What will that look like, what resources will need to be diverted to comply with increased regulation, and how will that affect our firm?”

Nonetheless, Innovest thrived last year with asset growth of 28%, to $7 billion. Rising financial markets helped, but so did old-fashioned customer service across its main business units of wealth management, foundations and endowments, and retirement plan consulting. “It starts with doing a good job with our existing clients,” Dominguez says. “We have a very high retention rate, and we get a lot of referrals from our clients.”

As it grows, Innovest is creating jobs and helping to bring new blood into the industry. “We keep a constant client-to-employee ratio of 7 to 1, and as we bring on new clients we want to keep that ratio, so we keep hiring,” Dominguez says. She notes that the company typically has two to three interns at a given time working at Innovest, and she anticipates hiring additional full-time staffers during the last four months of this year.

Dominguez says the firm is mindful of a slowdown in the U.S. markets, and as a result is tweaking portfolios and prepping clients to expect lower returns during the next five years versus the prior five years.

“Our outlook is we see sunny skies with possible clouds on the horizon, so we’ve got our umbrella ready,” she says.

And probably the same could be said for the RIA space in general. The skies look mainly sunny now, but it’s a good idea to be mindful of the distant clouds.