The wind is blowing in different directions for the registered investment advisor profession—tailwinds in the form of rising demand for financial planning and the desire for fee-based advice, and headwinds from regulatory changes, adjustments posed by Covid-19, competitive threats and digital disruption.
According to a new report from Cerulli Associates, the most successful advisors over the next five to 10 years will be those with sufficient scale to fully benefit from the good trends while being better positioned to address the various challenges.
In Cerulli’s “U.S. RIA Marketplace 2020” report, the research and consulting company noted the RIA space comprised more than 64,700 independent and hybrid RIAs managing $5.7 trillion in assets at year-end 2019, representing a massive increase from the $2 trillion managed in 2009. The RIA advisor headcount markeshare among all advisor channels jumped from 14.8% to 22.9% during that 10-year period.
The report said that while this growth stems in part from advisors’ search for greater autonomy and fewer conflicts of interest in how they operate, it also ties into the RIA model’s alignment with current trends, such as the rise of fee-based advice, adoption of financial planning and heightened consumer awareness of the profession’s offerings.
That said, Cerulli posits, one of advisors’ big challenges is how they use technology to achieve scale. The Covid-19 pandemic has accelerated adoption of automation and other digital tools to serve clients, which can be both good and bad.
“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,” said Marina Shtyrkov, a senior analyst at Cerulli.
In the report, she said technology can help with client acquisition strategies. “RIAs can target specific investor segments—by profession, interests, or life stage—without the restrictions set by the natural market in their location,” she said.
She added that RIAs must find new ways to differentiate themselves because regulatory changes in the form of Regulation Best Interest have chipped away at one of their big selling points: their fiduciary status.
Furthermore, while the rise in fee-based advice and growing adoption of financial planning helped propel the growth of the RIA model among advisors, it has also leveled the playing field in terms of operational models.
“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,” Shtyrkov said.
The upshot of the report is that large, well-capitalized RIA firms will have the resources to tackle the host of issues facing the RIA industry. Cerulli said larger firms can provide succession planning solutions for retiring advisors, and can buy smaller teams looking for pricing power, support or access to capital.
In addition, Cerulli believes that larger firms with deep pockets have professional management teams who can institutionalize processes, execute inorganic strategies and build a national brand that can help advisors differentiate themselves from the crowd.
“Large enterprise RIAs will be able to address these challenges and carry the costs required for growth most easily,” Cerulli said. “As a result, scale—and the advantages it affords—will be the primary determinant of success over the next five to 10 years.”