More firms are consolidating through mergers, acquisitions and partnerships. When asked about approaches for succession planning, 31% of the firms in the benchmarking study said they were interested in merging, while 29% reported an interest in selling, up from 25% last year.2 What's more, in the first quarter of this year, we saw a 25% increase in the number of mergers and acquisitions in the RIA space and a fourfold increase in the amount of assets acquired.3 This activity came largely from RIAs buying other RIAs (30% to 40% of the total deals during the past three quarters) as well as from large firms acquiring groups of advisors to create consortiums. In the latter case, some of the firms are very loosely affiliated with each other, while others become integrated under a single banner or brand.
The consolidation trend suggests that one day a few large firms will dominate the industry at the expense of everybody else. But we don't see that day coming. The sheer amount of resources enables any advisor of any size to go anywhere the clients are, without being limited to just one neighborhood, ZIP code or state. It's common for firms headquartered on one coast to open an office on the other coast to serve their diverse client mix. We may even see more advisors go beyond domestic multi-coast models to implement multi-country approaches in order to accommodate the lifestyles of their clients. Ultimately, physical size and branding will play less of a role in a firm's success than being where the clients are and giving them what they need.
Managing The Evolving Client Relationship
In the midst of new changes, choices and challenges, one fact about our business has remained steadfast. Relationships with clients are, and always will be, the most important part of the RIA model. Client attrition continued to decline to 2.8% from 3.1% in 2010 from a high of 4.1% in 2009. This means that advisors retained more than 97 clients out of 100 in 2011.
Still, even as the barriers to entry into the RIA space are falling as advisors gain easier access to more sophisticated tools, the bar for client service is being raised.
In a study of high-net-worth investors, more than one-third (37%) said their desire for investment advice has increased during the past four years.4 When asked about important advisor attributes, they pointed to knowledge (71%), advice (59%), investment performance (49%), trust (48%) and service (47%). Clearly, investors are seeking more from advisors than just performance.
We're seeing important niches emerge within the overall high-net-worth demographic-including families trying to preserve wealth through generations; young affluent investors; and affluent women. These groups will become increasingly important to RIAs' growth and bring their own unique needs, expectations and behaviors to the advisor-client relationship. RIAs will need to carefully examine their approach and determine how to structure their practices to serve these investors and instill in new clients the same confidence that current ones have.
Additionally, advisors will need to consider different ways of communicating than they currently do as they reach out to the children of existing clients and younger wealthy professionals. These people will require a more dynamic and diverse approach. Younger investors may not demand as many face-to-face interactions with their advisors or office visits as older investors?but they certainly will expect their advisors to make themselves available on demand through mobile devices like iPads or even through social media. Understanding differences in how client segments prefer to communicate with their advisors and adapting accordingly will be increasingly important as advisors shape the RIA model of the future.
Advisors today must ask themselves what more they can (and need to) offer, and how they can best bring that support and value to clients-whether it is by outsourcing, partnering with other providers or merging with another firm. It may be that today's RIA firms will focus less on financial planning and wealth management and instead offer broader services as multifamily offices. This means they will be working with other professionals and using third-party providers as well as their own in-house capabilities. Firms that allow their service models to evolve around the changing needs of their clients will be the ones who grow and win.
Change Is Inevitable
One thing is certain. Change in the RIA industry is inevitable. Success will come down to how well advisors navigate the change and structure their firms to take advantage of new opportunities. It all begins with advisors defining their firms and creating a vision for themselves and their futures. Careful strategic planning based on advisors goals and the needs of their clients-both now and down the road-is critical. Knowing "who you are" will determine the right next steps for you and where you belong in this large and expanding ecosystem.
Advisors recognize that the true end goal isn't to beat each other but to make the pie bigger. As we move forward and evolve, it's easy to see our $2.7 trillion industry double in size-and keep right on going.
BERNIE CLARK is executive vice president and head of Schwab Advisor Services, a leading provider of custodial, operational and trading support for nearly 7,000 investment advisory firms.