RIAs are defending their market share, but at what cost?
The qualities that have always distinguished Registered Investment Advisors are being eroded by competition in the industry. But adding services in search of deeper relationships isn’t always the answer, according to Cerulli Associates.
“I wouldn’t recommend companies add services for the sake of adding services,” said Marina Shtyrkov, associate director of Cerulli Associates’ wealth management practice and author of a recent survey, “US RIA Marketplace 2021: Responding to the demand for advice”. “It can be very tempting, but you have to be very clear about who you are benefiting from and what their needs are. On average, service expansion will compress profit margins, and that’s the main reason why it’s not for everyone. You have to ask yourself, “Can my profit margins handle this?” »
This profit margin hurdle is the very result of what has allowed RIAs to hijack assets from brokers for the past 10 years — the fee-based structure, Shtyrkov said. As retail investors have become more aware of fee structures, pricing changes may place RIAs in the vulnerable position of having to justify these fees.
“We are seeing more and more RIAs considering expanding their services, partly to defend against competitive threats and partly to take advantage of competitive opportunities, but the vast majority will not increase or change fees over the course of the next few years,” she said.
Even when faced with the gap between increased spending and stable income, and the subsequent downward pressure on profit margin, RIAs can suffer from an optimism bias. “Many RIAs might rationalize that adding services will attract more customers to the business, which will lead to increased revenue, and you’ll be fine,” Shtyrkov said. “But all this work takes time and effort, and it may not pay off.”
The competitive threat to RIAs centers on the industry-wide abandonment of brokerage and how brokers have responded. These traditional RIA rivals have pursued broader adoption of independent financial planning and business models, to the point that 93% of advisors across all channels expect at least half of their revenue to be fee-based by 2023, according to the Cerulli survey.
“Advisors have more opportunities than ever to become not just an RIA, but to function as an RIA inside the BD chassis,” the report says.
To combat this encroachment, more RIAs are planning to expand their 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 to come. . The report found that 19% of respondents plan to add trust services, 17% plan to add a digital advisory platform, and 16% plan to add concierge and lifestyle services.
Considering that 47% of RIAs have clients with investable assets of $500,000 to $2 million, some of them will likely want to add high-end premium services to spice up their relationships with their clients, a said Shtyrkov.
“They might want to add one of these services to attract more affluent customers and entice them. But that’s not always advisable,” she said. The truly high-end, wealthy client often brings a much more complex situation that requires a whole new level of support, she said. “It’s more than just adding a service to these customers.”