Six months into this public health crisis, and it’s clear that the viability of the RIA business model has been reaffirmed.
Many advisors say they are holding more robust conversations with clients in 2020 than they have for several years. That’s a good thing. It’s just too bad it took the worst pandemic in a century to cause these discussions.
In the short span of four months, talks with clients have moved from portfolios to ways people would like to change their lives. For most Americans, the notion of how they plan to live in a post-pandemic world has yet to crystallize.
As Financial Advisor’s annual RIA survey reveals on page 31, the dynamics of the RIA business continue to march to the beat of another drummer, with the forces of consolidation and technology in the forefront. Many firms experienced a big increase in assets under management in 2019, thanks to a strong recovery in equity prices last year.
But consolidation has also been fueled by private equity during its newfound love affair with the RIA business. Most private equity investors in the business are interested in growth, not asset stripping or breakups.
Still, as Creative Planning’s Peter Mallouk tells senior editor Eric Rasmussen, these investors have a different agenda from many RIAs. They aren’t afraid to place a healthy amount of debt on an RIA firm and expect a specified internal rate of return.
If there were to be a sustained downturn in financial asset prices, not a violent, four-week bear market, the private equity model could face challenges, as Mallouk acknowledges.
Beyond private equity-driven consolidation, another group of RIAs are growing very large—those specializing in serving the defined contribution market. Firms like CAPTRUST and Edelman Financial Engines now rival big mutual fund complexes in asset size.
Most advisors have avoided this business because of its low margins, small accounts and the technology investments required to stay current. But these characteristics of 401(k) specialization can be turned to a firm’s advantage.
RIAs focused on this market can use their technology investment on the wealth management side of their business. Moreover, the steady stream of 401(k) contributions provides a consistent source of growth.