The staggering differences in growth rates among registered investment advisors is pointing to an opportunity for asset managers to strengthen their relationships with RIAs in the form of growth-targeted assistance, according to Cerulli Associates.
Asset managers surveyed for a Cerulli report entitled “Confronting the Operational Challenges Facing RIAs” said they would be doing just that. In fact, 36% said they currently are offering business consulting services to mid-size RIAs and 18% said they plan to.
“On average, 67% of distribution executives consider the independent RIA channel to be the best opportunity for distribution efforts over the next three years,” the report said. “There is an opportunity for strategic partners such as asset managers, custodians, and practice management consultants to provide additional support as these firms grow.”
In its report, Boston-based Cerulli revealed that RIAs with more than $5 billion in assets under management grew at a 24.7% five-year compound annual growth rate, while overall the channel group grew at a 14.8% rate. And the growth rate for smaller firms, those with between $100 million and $250 million in AUM, was just 3%.
Firms of all sizes said the biggest obstacles to growth were compliance and the time required to successfully run a business. Compliance was considered a moderate to major challenge by 83% of advisors, while the time needed to run a business was a moderate to major challenge for 78% of advisors.
“By recognizing these challenges and addressing them early on, advisors can mitigate their impacts without sacrificing valuable time and resources,” Cerulli wrote in its report.
The challenge of compliance responsibilities hits all firms, regardless of asset level. As such, most firms look to technology tools to mitigate the impact on the firm, Cerulli said.
But other challenges are more tied to asset levels, the report found. For example, the larger the firm, the costlier it is to maintain staff, rent and infrastructure. Some 77% of RIAs with more than $500 million in AUM found this a moderate or major challenge, but only 47% of RIAs between $25 million and $200 million AUM said they felt that way.
On average, RIAs have four professional staff and two administrative team members, but those ranks swell for 68% of large firms with $500 million in assets, the report said. Those firms employ 10 professional staff, with five of them being senior advisors.
One of the best ways asset managers can help RIAs is to produce and deliver content focused on best practices of other advisors, the report found. This peer-to-peer support and learning was considered valuable by 85% of surveyed firms, and far more valuable than details on portfolio construction. Only 74% of respondents found that somewhat or very valuable.
“RIAs often grow in a vacuum; the independent nature of the channel limits opportunities to collaborate with other firms and work through shared problems,” the report said. “Through targeting the pain points of RIAs via value-add programs, asset managers can provide support in the most needed areas while getting in front of decision-makers who have influence over product selection.”