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Five recent articles that show the RIA business just keeps hitting milestones

Advent buys Black Diamond, Carson goes RIA, Duran champions consolidation, Schwab goes full-out into franchises, Brightscope grades RIAs

Tuesday, June 21, 2011 – 2:44 PM by Brooke Southall
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Dave Welling may play a pivotal role in whether Advent's Black Diamond acquisition makes the combined entity more like the Google or Microsoft of portfolio management systems.

The Spring of 2011 has proved to be fertile for the RIA industry as it makes major strides toward its destiny as a larger, better organized, channel-grabbing force.

Below are five stories that made the biggest impact on RIABiz readers along with some thoughts about why the articles riveted RIA attention and what the events bode for the continued growth and evolution RIAs. See: Tiburon Strategic Advisors’ report pegs RIAs as maturing market

1. Advent Software acquires Black Diamond

Our readers couldn’t get enough news about the industry’s biggest provider of software buying its upstart competitor, known for creating innovative technology that really connects with customers. See: Why Advent and Black Diamond are merging and how advisors look at the deal

Historically, Advent Software has focused on investment managers, so it’s clear that the firm would not have felt compelled to buy Black Diamond had it not begun to see the RIA market in a new light. Advent certainly would not have agreed to pay $73 million for a company that serves a modest 260 RIA practices – and allow it to run the show as far as that segment of the market is concerned – unless it had come to the realization that the RIA market was simply too big a prize to lose.

This is where the story of a big purchase takes on considerable intrigue. Will a company known for calling all the shots allow relative strangers from Jacksonville, Fla. to run a big part of the show? Can Advent take a small-but-feisty tech tiger and confer its big-company strength upon it? Executives at RIA custodians believe the success of the deal may hinge on how much power is conferred upon (aside from the founders of the firms, Stephanie DiMarco and Reed Colley) Dave Welling, Black Diamond’s chief solutions officer and a veteran of Schwab, who knows technology, financial advisors, Advent and Black Diamond. Another person who could make a difference is Charles Goldman. See: A blessing from Charles Goldman helped seal the Advent-Black Diamond deal

With the merging of these two software powerhouses, advisors may no longer look at Advent as the IBM or Microsoft of portfolio management systems but more as the Apple or Google of financial advice. And that could be a positive for the industry.

The X factor is that there is no shortage of companies poised to exploit any weakness exhibited by the Advent/Black Diamond if it either takes on a big company attitude, uses any monopoly-like force, moves slowly to upgrade technology or fails to be responsive to niche needs.

There are big companies like Morningstar Office (Office), Envestnet (Vantage), Schwab [PortfolioCenter] putting their shoulder behind efforts. There are smaller companies like Tamarac , Orion Advisor Services, LLC, AssetBook, FinFolio, Adhesion Wealth Advisor Solutions Inc., Interactive Advisory Software, CapTools, Cornerstone PowerInvestmentTOOLS and Private Client Resources LLC that have big RIA bases of clients and big sales momentum. There are other mid-sized companies like Vestmark that bear watching. See: Giant of the broker-dealer tech world takes aim at Advent

2. LPL’s biggest rep will convert his firm to an independent RIA

As of July, Ron Carson, the number one financial advisor for the number one independent broker-dealer – principal of Omaha, Neb.-based Carson Wealth Management – will establish himself an independent RIA, keeping his assets, at least initially, with his broker-dealer, LPL Financial.

It’s hard not to see it as a milestone when the poster boy for IBD success becomes an RIA. Carson’s firm manages about $3 billion of assets but he also coaches about 500 other firms through PEAK Advisor Alliance, a separate firm that serves many IBD reps and RIAs. See: The top LPL producer has a second RIA-related company that could eclipse the stature of the first one

This turn of events raises some fascinating questions. Since the standard-bearer of IBD success, LPL, now has a different business model from the rank and file, what comes next? Will more advisors convert to the RIA model? And if so, does this make LPL vulnerable to losing some of its best producers? Or does it have the opposite effect of giving LPL a brand that is associated with RIAs so that it can attract big teams that want to straddle both camps? See: Why exactly is Ron Carson forming an RIA and why is it happening now?

Certainly, there are signs that LPL is courting the world of fee advice with greater ardor. The company’s hybrid RIA platform is three years old. LPL is also making its fee-based platform for non-RIAs look RIA-like. See: LPL has a new high-margin, high accolade advisory platform but SAM’s sticking around Whatever LPL’s fate, Carson’s move must be a positive one for RIAs. Much of his motivation behind the move is to tuck fellow advisors into his RIA and create one big organized practice. Some of these advisors would prefer to keep assets at places like Schwab and this draws Carson deeper into the RIA mainstream.

3. Joe Duran believes classic RIA firms face extinction

Speaking of big, organized RIAs, readers were intrigued when Joe Duran, CEO of United Capital Financial Partners, laid out his case for why classic, “craftsman” RIAs are an endangered species fated to go the way of travel agents after online travel sites became the norm. Hundreds of financial advisors are breaking free of the bonds of Merrill Lynch, UBS, Wells Fargo and Morgan Stanley Smith Barney to tuck into RIAs or to form their own firms. Many of them are becoming Mom and Pop shops in order to better serve their clients.

But Duran suggests that breakaway brokers escaping oppressive IBDs will find themselves on shaky rafts. Duran does not suggest that the RIA channel is doomed – only that larger, more organized firms will win the day.

Of course, Duran is the leader of an effort to create a nationwide wealth-management juggernaut composed of smaller RIAs melded into one. It’s an untested model, though Duran himself made his fortune creating Centurion Capital Management out of money managers and selling it to General Electric (Genworth Financial Wealth Management now owns the unit).

The question remains whether an advisor needs to work for a mega-RIA bristling with technology to compete effectively. The big service providers like Envestnet Asset Management and the big RIA custodians are creating scale for smaller RIAs. And clients are known to stick with small RIAs through thick and thin. A big RIA is still a big corporation or LLC. Can independent advice be delivered by a big corporation with its inevitable lowest-common-denominator predilections?

Duran clearly believes it can be done and that advisors who are determined to go it alone will die off. He believes that the advantages of scale can be extended to such things as training processes and a prime example of that thinking can be seen in this article: See: Joe Duran tries out novel financial planning strategy on himself and his wife

4. Schwab spells out the details of its franchise plan

Another story that stirred up considerable interest among RIAs laid out the details of how Schwab plans to make its franchise plan a reality. The Schwab plan has some of the flavor of Duran’s vision of where the advisory industry is headed. Franchise owners will pay Schwab startup fees ranging from $25,000 to $50,000. In return, they’ll gain access to Schwab’s array of technology support and services as well as revenue sharing and corporate support.

In a sense, this article wasn’t about RIAs at all but it’s not surprising that they were eager for details. Schwab is the biggest RIA custodian with more than $740 billion of assets from more than 6,000 advisors, so there are considerable overlapping factors. Many big Schwab advisors receive referrals from Schwab branches. They also – though this is a matter of some dispute – compete with branches for mass-affluent clients.

Duran is convinced that independent advisors ought to see Schwab’s franchises as a competitive threat, going so far as to say, “The average independent advisor where Schwab puts one of these franchises will probably view it as no big deal, but they’re sitting like the frog in boiling water.”

There’s also the “If you can’t beat’em…” angle. In its efforts to find franchisees, Schwab is looking to nab seasoned financial advisors from wirehouses, independent RIAs and advisors affiliated with IBDs. The firm is asking advisors to sign a five-year agreement with an option for two five-year extensions, after which a new deal may be negotiated.

But not everyone in the industry sees Schwab’s move as a winning strategy. Timothy Welsh, president of Nexus Strategy, put his finger on the challenge Schwab faces with this comment: “It’s not like McDonalds where everyone can do it. Financial services is so much different because every customer is different.”

5. BrightScope sticks to its guns as it responds to outspoken critics of its Advisor Pages

No story stirred up more raw emotion during the past several weeks – as evidenced by the long chain of contentious reader comments – than the ones addressing BrightScope’s efforts to rate financial advisors. The La Jolla, Calif-based company launched Advisor Pages by aggregating and making user-friendly SEC and FINRA-generated information regarding financial advisors.

Advisors were livid that BrightScope felt that it could publish incorrect information about them just because the SEC or FINRA had it that way on its forms. BrightScope essentially countered by saying: Don’t shoot the messenger. “If you do something disruptive (in the marketplace), it’s going to be polarizing,” said Ryan Alfred, principal of the company. Though most of the advisor comments would have to fit into the negative category, there were also some industry sages who were willing to see the glass as half full. Ron Rhoades, an advisor and outspoken advocate for the fiduciary cause (in a comment) and Andy Rachleff (in a contributed column) seemed to give BrightScope the benefit of the doubt. See: BrightScope debate has familiar feel of an industry being dragged kicking and screaming into the new world

Another indirect affirmation for Advisor Pages came two weeks ago when Joe Mansueto told our reporter, Lisa Shidler, that Morningstar has one eye on creating its own rating system for RIAs. See: Morningstar’s Mansueto views next horizon: rating RIAs

What makes these ratings important is that it’s both a way of giving RIAs a higher profile and the giving the consumer greater confidence about doing business with one. For all their fiduciary strengths over stockbrokers at wirehouses, RIAs suffer from having little-known brands that are not easy to vet. The people I know – like my mother, who is in her seventies – who seek the services of an RIA are not likely to go searching around on the intimidating SEC website. A more consumer-minded site like BrightScope is a step up. Nobody can know whether the BrightScope Advisor Pages will succeed, but it has put the wheels in motion for the creation of a central clearinghouse of information about RIAs and has gotten Morningstar to express interest in a similar effort.

Not bad for a spring in a down economy; now let’s see how these May flowers blossom as summer rolls in.

For more thinking along these lines, see: 10 things that show the RIA movement is really heating up in 2010: Part I

Part II: The things 11 through 20 that show the RIA market is really heating up in 2010

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Mentioned in this article:

LPL Financial
Asset Custodian
Top Executive: Dan Arnold

United Capital Financial Advisers
RIA Welcoming Breakaways
Top Executive: Joe Duran

Envestnet Inc
Top Executive: Jud Bergman

BrightScope, Inc.
Data and ratings for RIAs

Carson Group
Consulting Firm
Top Executive: Ron Carson

Elmer Rich III

Elmer Rich III

June 21, 2011 — 9:04 PM

The simple fact is that demographics and the increasing complexity of all financial matters – for individuals and businesses — is creating accelerating demand for financial professionals of all kinds.

For the “relationship (not transactional)”-oriented RIA business model, the “demand” side includes: – The population is growing. The Millennial generation is actually bigger than the previous biggest age group the Boomers. We have the great opportunity to “catch” young adults as they start their careers and help them save and invest better than prior generations. – Everyone will live longer. How to finance those longer lives is the exclusive domain of the financial services industry and all advisors. No government has the resources and skills needed to solve this problem. It’s a tough puzzle. – The global financial system is accelerating in velocity, complexity, uncertainty and opportunity. Real problem-solving skills and expertise and raw brain-power is (always) in short supply. We see a “supply” problem.

The challenge we see is RIAs not getting the support they need. Of course, everyone has some solution. But what do RIAs really need, to serve all this demand, as opposed to what’s for sale? Selling an RIA something is not always the same as supporting their business and necessary growth. Ideas?

Note: The “heat” around what BScope does has never been the goals, technology or advances they claim to represent. It has always been about the much less glamorous realities of this specific firm’s day-to-day business practices. We who work in retirement have seen these effects longer than on the RIA/advisor side.

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