Over the next five years, the typical RIA will undergo rapid transformation, and the average RIA firm is expected to at least triple in size. To accommodate such growth, hiring decisions will become critical-stretching far beyond the traditional tendency of firms to simply add more advisors. Clients are becoming more sophisticated about financial matters and demanding more of advisors in the way of advice. Competition among RIAs for top talent is growing. And competition from traditional market adversaries-wirehouses, insurance agents, mortgage brokers and others-is heating up. Consequently, RIA firms will need to rethink growth strategies.
These are among the big changes in the RIA industry being forecast for the future by large custodian firms such as Fidelity Institutional Wealth Services, Schwab Institutional, TD Ameritrade Institutional, Pershing Advisor Solutions LLC and consulting firm Moss Adams LLP. Together, these custodians hold billions of dollars in custody for RIA clients.
Perhaps the biggest trend shaping up today is the explosive growth of the RIA market. "Independent advisors are experiencing phenomenal growth, and the future remains bright," says David Welling, Schwab Institutional vice president of marketing and business management, "because asset and revenue growth far exceeds client growth, which should lead to increased firm profitability."
Rather than a hindrance, experts expect current uncertain market conditions will be a boon to the industry, leading more people to seek financial advice. Studies by Schwab Institutional found that participating RIA assets under management grew a median 20% in 2006 and revenues increased at a median rate of 16%. From 2003 to 2006, participating firms grew their client base by 8% annually with the average client increasing assets by 42%, to $1.04 million. Meanwhile, 76% of advisors are satisfied with the growth they've experienced, and 82% plan to grow in the future.
More than 50% of participating firms' asset growth came from new clients. And 88% of those new clients were generated from either existing client referrals (59%) or professional referrals (29%).
Merger and acquisition activity, meanwhile, is alive and well and expected to continue. 2007 will be the third record-breaking year for M&A activity in the RIA arena; about 65 deals have occurred to date, according to Schwab.
The biggest acquirers of RIAs are holding companies such as Focus Financial Partners or National Financial Partners, Schwab says. Holding companies account for approximately 30% of the deals in the RIA sector. Some of the reasons such companies find RIAs so attractive are the industry's 20% annual growth rate in assets under management and annual revenue and profit growth rates approaching 30% at some of the leading firms.
A few factors driving M&A in the RIA market, says Schwab, include the need for succession planning (the average RIA is about 55 years old), the fact that the industry is largely fragmented and the significant flow of private equity dollars to holding companies to help buy these firms because they have good margins and growth rates.
Among the largest announced deals, Kochis Fitz and Quintile Wealth Management, both large California firms, plan to join forces and say they will attempt to build a national firm. The merger, scheduled to be effective January 1, 2008, will give them $5 billion in combined assets.
The trend is happening on a much smaller scale as well. Wealth manager Keith Newcomb of Full Life Financial LLC, a boutique firm in Nashville, Tenn., says he gets several requests a year either to merge with another small-to-medium-sized firm or join a larger firm. "It usually comes in the form of an invitation to lunch, and during lunch they broach the topic," says Newcomb.
A recent joint Pershing-Moss Adams study forecast that individual RIA firms will grow in number to more than 19,000 in the next five years-up from the current 15,000. Moss Adams also forecasts that by 2012 there will be close to 52,000 independent registered investment advisors practicing inside RIA firms. The study further predicts that the average independent registered investment advisory firm will have more than $1 billion in assets under management by 2012. From an industry standpoint, this expected growth in assets represents a new annual revenue opportunity of $35 billion by 2012, according to the study.
A separate study by TD Ameritrade Institutional predicts that RIA assets for the average SEC-registered firm will grow 256% by 2012, to $1.6 billion. In terms of baby boomers, TD Ameritrade expects savings to double over the next six years-to a whopping $20 trillion.
Driving this growth is the fact that millions of baby boomers retiring today have more liquid assets and complex financial needs, says Mark Tibergien, managing director of Pershing Advisor Solutions, an affiliate of The Bank of New York Mellon. "While there's a lot of speculation about wealth transfer," Tibergien says, "the reality is there will be far more liquidity as people will be rolling out of 401(k) plans, selling out of businesses and liquidating real estate." The upside is more investors likely to seek professional advice.
Peggy Ruhlin, a principal with Budros Ruhlin & Roe, an RIA firm in Columbus, Ohio, managing $1.3 billion in client assets, agrees. She believes much of future industry growth will come from retiring boomers with defined contribution plans, as opposed to defined benefit plans, which have been phasing out. "Previous generations just had a check from their employer instead of a lump sum of cash to invest," Ruhlin notes.
Some of Ruhlin's boomer clients have inherited substantial sums from their parents, she says. One client, for example, inherited not only securities when her mother died, but a multimillion dollar, mortgage-free beachfront home in Florida.
There are some barriers to growth, however. Not the least of them is the fierce fight under way for the client dollar. More wirehouse brokers, insurance agents, bankers, mortgage brokers and others are encroaching on RIA turf, offering services previously exclusive to RIAs. Increasing the pool of hiring talent also remains a serious industry challenge.
Rather than simply adding new employees, the traditional approach for advisors seeking growth, Pershing and Moss Adams suggest in a study entitled "Fast Forward: The Advisor of the Future," that advisors can expand and improve their practices from within by creating more sophisticated organizational structures to include more support functions and dedicated management positions. They can also make use of more outside professionals, such as estate planning attorneys, CPAs and tax professionals who can cater to special client needs. The study points out RIAs also need to bring up employees who can lead and drive cultural change, as well as help boost retention, extend the span of control and ensure succession when an owner decides to make a transition.
Says Philip Palaveev, a principal of Seattle-based Moss Adams, "The RIA firms that will grow the fastest are those that explore opportunities to increase capacity," he says. The big years, those periods of dramatic opportunity created by changes in consumer behavior or stock market changes, can either jump-start the growth of a firm, or, if missed, cause a firm to lag behind its competitors, Palaveev says.
"The real issue here is what got them here won't get them there," maintains Tibergien. "The idea is that through the first phase of their life cycle they have been pretty much in reactive mode, if not in survival mode, and so they would be part-time managers, part-time salespeople, and part-time client-services people. The reality is that their organizations are much bigger, much more complex, with many more moving parts. As a result, in order to ensure responsiveness and growth, they're going to have to redesign their organizations to make sure their business is managed right."
Armond A. Dinverno, co-president and principal of Balasa Dinverno & Foltz LLC, a wealth management firm in Itasca, Ill., says, "As the industry grows, the businesses in that industry have to mature in their thinking of how their organization is structured; take into consideration career paths for their people [and] the sophistication level of their offerings to their clients; and build a culture that people want to be a part of and contribute to." The firm, with $1.5 billion AUM, is the product of a 2001 merger.
Budros Ruhlin & Roe has grown over the past five years by leveraging the talent of existing staff members, says Peggy Ruhlin. "A lot of firms have had the business model of each advisor in the firm having their own clients, eating what they kill. So the growth plan was just keep adding these guys," says Ruhlin. "Now they're seeing the light of just having a collection of tiny businesses. They don't have anything either scalable or salable. What you have to do is institutionalize the client base so clients are clients of the firm, not clients of Joe advisor."
Meanwhile, the lack of an adequate hiring pool of top talent continues to plague the industry. Recruitment, training and retention of new hires are hot button issues in the broker-dealer and RIA worlds today, with a huge race on for top talent.
Indeed, more than one-third (35%) of firms participating in a recent Schwab Institutional RIA benchmarking growth trends study reported that hiring talent was a key challenge, ranking it the second biggest barrier to growth and firm productivity.
"There is an acute talent shortage and the cost of turnover is high," Pershing's Tibergien says. "Advisory firm owners are going to have to be more deliberate in the profiling in selecting individuals to be part of their team, and also ensure they're investing in the development of those individuals once they get them. Market segmentation is one solution, as is matching people to the right jobs so they may have technical segmentation as well."
Pershing recommends the use of psychometric tools to help in job matching. "Don't rely just on resume and job history but try to understand the hardwiring of people. Make sure you have a clear career path for how people develop," Tibergien suggests.
Looking into the future, Schwab's Welling is optimistic despite market uncertainties. "If you look back over the history of the independent investment advisor industry, it has typically seen dramatic growth during and after periods of uncertainty," he says. "Given the current market conditions, and if history repeats itself, the independent advisor industry should continue to grow, because people will be looking for sound, objective financial advice that takes a long-term view."
Bruce W. Fraser, a freelance writer in New York, contributes to many prominent financial publications. A contributor to 60 Things To Do When You Turn 60, he is currently writing a book on millionaires. He may be reached at mailto:firstname.lastname@example.org. Visit him at http://www.bwfraser.com/home.