The qualities that have always set registered investment advisors apart are being eroded by industry competition. But adding services in search of deeper relationships is not always the answer, according to Cerulli Associates.
“I wouldn’t recommend firms add services for the sake of adding services,” said Marina Shtyrkov, associate director at Cerulli Associates’ wealth management practice and author of a recent survey, “U.S. RIA Marketplace 2021: Meeting the Demand for Advice.” “It can be very tempting, but you have to be very clear in who you’re benefiting and what their needs are. On average, service expansion will trigger profit margin compression, and that’s the primary reason why it’s not for everyone. You have to consider, ‘Can my profit margins handle this?’”
That profit margin hurdle is a result of the very thing that made RIAs successful in luring assets away from brokerages over the last 10 years—the fee-based structure, Shtyrkov said. As retail investors have become more aware of fee structures, changes to pricing can put RIAs in the vulnerable position of having to justify those fees.
“We’re seeing more RIAs consider service expansion, somewhat to defend against competitive threats and somewhat to take advantage of competitive opportunities, but the vast majority won’t increase or make changes to fees over the next few years,” she said.
Even when they confront the gap between increasing expenses and stable revenue, and the accompanying downward pressure on profit margin, RIAs might suffer from optimism bias. “Many RIAs might rationalize that adding services will drive more clients to the firm, and that will result in increased revenue and everything will be OK,” Shtyrkov said. “But all that work takes time and effort, and it may not pay off.”
The competitive threat for RIAs focuses on the industry-wide shift away from brokerage—and the way brokerages have responded. These traditional RIA rivals have pursued a broader adoption of financial planning and independent business models, to the point where 93% of advisors in all channels anticipate that at least half their revenue will be fee-based by 2023, the Cerulli survey found.
“Advisors have more opportunities than ever before to not only become an RIA, but to operate like an RIA inside the B-D chassis,” the report stated.
To fight off that encroachment, more RIAs are considering expanding services over the next two years, and in particular services that would go beyond differentiation and make them fierce competitors in the great wealth transfer soon to come. The report found that 19% of those surveyed plan to add trust services, 17% to add a digital advice platform and 16% to add concierge and lifestyle services.
Considering that 47% of RIAs have clients with $500,000 to $2 million in investable assets, some might think of trusts, digital and concierge as the kind of high-touch, white glove, up-market services that could inject some pizzazz into their client relationships, Shtyrkov said.
“They might want to tack on one of these services to appeal to more affluent clients and bring them in. But that’s not always advisable,” she said. The truly up-market, high-net-worth client often brings a much more complex situation that requires a whole new level of support, she said. “It’s a lot more than just tacking on a service for these clients.”