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Nine threats to the RIA business and how they can be avoided

The fragmented 13,000-firm army is poised for great things but too much focus on expediency could bring its own problems

Author Brooke Southall November 14, 2011 at 5:24 AM
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Brooke Southall: The RIA business needs to be alert to the danger of becoming something uncomfortably similar to the world of banks, brokerages and trust companies that it is trying to reinvent.

Jeff Spears

Jeff Spears

November 14, 2011 — 2:28 PM

Great summary.

I would add that the success of the independent RIA business model is also based on the advsiors ability to customize solutions. Customization is NOT scalable (read IPO or PE roll-up) and a customized practice has real capacity constraints. Our research shows a high-end advsior can not effectively work with more than 25 families.

Bottom line – this is a relationship business that will fail if the “realtionship” becomes “the brand”. If we let that happen we will look like Wall Street and old school Trust departments.

Elmer Rich III

Elmer Rich III

November 14, 2011 — 4:48 PM

This is good and tracks what we see with clients. We would also say a major weakness we see is disinvesting in the business.

We do M&A consulting with RIAs and find that, especially over the last few years, FUD (fear, uncertainty and doubt) have led partners in firms to stop supporting the businesses and actually take money out of the businesses for personal use of savings. Especially if the owners are nearing retirement.

This can backfire.

Businesses require steady investment, upgrades and maintenance to remain competitive and protect and build the equity in the business.

Business development, technology, people and skills, expert knowledge, etc. all these investments need to continue or disinvestment is happening, silently. Paradoxically, a “down” economy and market is the cheapest time to reinvest in your business equity. But, like your clients, it requires acting against your immediate feelings and FUD, and taking a long-term goal perspective.

We see the penalty when it comes time to sell the business or get a co-investor for continuity.

For a business to be a going concern in the future:

- Someone has to maintain the equity in the operations

- If there has been disinvestment, say the technology has been allowed to lag, the buyer will have to make-up the lost equity investment and spend to bring operations up to par.

- This cost will come out of the price the seller is paid, right now.

- Only if the equity in the business is adequate and kept maintained in the future will everyone optimize their benefits from the business — buyer and seller.

If there is not a suitable and continuous investment in the equity of the business returns to everyone will be sub-par — including clients. It takes discipline.

But the main mistake we see is not a problem or unexpected big costs, but a conscious disinvestment in the business for immediate personal gain.

We not saying that disinvesting, in particular situations, “right” or “wrong” — but it does have consequences.

Stephen Winks

Stephen Winks

November 14, 2011 — 8:39 PM


The advisory services industry has yet to achieve large scale institutionalized support for fiduciary standing largely because it has been a anathema to the brokerage industry and the trust industry is not greated to broad based distribution.

The nine threats cited are easily remedied by large scale institutionalized support for fiduciary counsel that is based on exper authenticated prudent process, advanced technology, work flow management, conflict of interest management and expert advisory services support which provides an unprecidented level of individualized investment and administrative counsel at a fraction of the cost of commission sales. The old brokerage business model is easily outdated and will be supplanted by the new faster, better and cheaper advisory services business model. Cerulli tells us by 2013, the majority of MSSB revenues will be derived from brokers who have control over the investment decision making process—the tipping point of brokerage obsolescence—rendering obsolete massive portions of overhead, that do not specifically add value.

No major institution will immediately or enthusiastically adapt because of the disruptive nature of the necessary advisory services innovation. The massive overhead of the old brokerage model that does not add value by industry design will be replaced by an authenticated prudent process which does. Harvard’s Clayton Christensen observes, the most common mistake made by established firms when faced with industry redefining innovation is to look at innovation in the context of its existing business model, when a new business model is required.

The question is will the brokerage industry adapt or an entirely new advisory services industry emerge which affords a preemptive advisor value proposition at a fraction of the cost?

It is actually easier to start from scratch than trying to fit a square peg in a round hole.

Look to Dynasty Financial and others for much needed market leadership, as wirehouses can not process the order of magnitude of innovation in store necessary to support fiduciary standing as their self interest gets in the way.

RIA rollups and custodians who fear being prescriptive in the advisory services support provided as it triggers fiduciary liability will be vulnerable to those firms which expertly support fiduciary standing. Why pay 60% of your gross revenues to a retail b/d that provides you with a permanently inferior competitive market position. Top brokers and advisors and most importantly their client’s know the difference in value proposition, scale, operating margins, earnings multiple, practice management, sales and marketing and productivity. The best interest of the consumer always prevails.


Mike Byrnes

Mike Byrnes

November 14, 2011 — 10:25 PM

Brooke, solid list. It is well thought out and on point!

When I do SWOT analysis business planning exercises with my clients the threats usually come down to this handful of items:
1. The markets / economy
2. Competition from non-RIAs and the increasing number of RIAs
3. Aging clients (and the younger generations that want to do themselves)
4. The loss of key personnel (a big problem for those without succession plans)
5. Regulatory changes

Mike Byrnes, President of Byrnes Consulting, LLC
www.byrnesconsulting.com @byrnesconsultin

Rick Ferri

Rick Ferri

November 15, 2011 — 2:29 PM

Great list, Brooke.

Rick Ferri
Portfolio Solutions, LLC

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