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Letter to Our Readers: What to think about the unstoppable RIA movement meeting an immovable black swan

For RIAs the roaring 2020s had a feverish first eight weeks until COVID-19 hit a reset button

Monday, March 23, 2020 – 11:12 PM by Brooke Southall
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The RIA business can stare down a black swan.

Brooke's Note: At RIABiz we are fastening our seat belts like everybody else. We wish the tragedy and disruption of the coronavirus pandemic would blow away like a San Francisco fog. We share the fear of the unknown about how the RIA business will do in this super-squall of disease and the accompanying economic shutdowns and plummeting asset values. But as I got my thoughts down on paper in writing this letter to RIABiz readers, I felt a easing of worry -- and a sense that this abrupt correction will have the healthy effects that last (2008-2009) crisis did. 

The first eight weeks of 2020 unfolded with a blinding fury unseen in the history of the RIA movement, and now COVID-19, a true black swan event, has us questioning everything --albeit with the benefit of 20/20 hindsight born of 2008-2009. 

The RIA movement -- as defined by a core group of classic RIAs, the various mass-market RIA-lite offerings and the vendors who support each -- had it all going on in February, before the crisis hit in earnest. See: What exactly is an RIA?

The RIA M&A market boomed along, making retirements and succession plans a dream finally realized. Incredible valuations got placed on firms like Plaid in the RIA servicing realm, holding out the promise of getting silly-rich in short order. See: Visa gambles $5.3 billion that Plaid will pay Big Data dividends while big-footing Envestnet-Yodlee and beating back fintech banking competitors

RIA friction magically vanished as custodians went to zero fees on all kinds of commissions -- a balm for cutting product makers out of the deal.

E*Trade followed TD Ameritrade into the history books and Schwab loomed large as a buyer of USAA and TD. The bull market greened up pastures browned by the 2008 financial meltdown. See: Reported Schwab-TD merger is a 'blockbuster' combo that creates a 10,000-RIA, $2-trillion custody juggernaut and may signal long-expected industry shakeout

Talking to ourselves

Also never-before-seen was a roaring '20s party schedule in the form of an RIA events calendar flush with events.

Joel Bruckenstein
Joel Bruckenstein has seen his T-3 conferences grow in influence. 

Insatiable demand made successes of every attempt by every constituency -- each one reporting great "energy," which in hindsight might have included some over-exuberant euphoria.

Fanning the flames were new events from publications like InvestmentNews, SourceMedia (Arizent) and CityWire. Big-time bloggers like Josh Brown and Michael Kitces joined the throng of conference leaders. See: The 7 best quotes at WealthStack not uttered by Peter Mallouk, Joe Duran or Barry Ritholtz

T3 was big-time in February. Joel Bruckenstein's conference took the venue and time slot from TD in San Diego and felt nothing like a niche software event. See: Reed Colley reveals his bigger, better second-act plans at T3 conference in San Diego

Most exuberant of all were the growing number of award ceremonies for all kinds of RIA-related categories, from technology to outsourcing to compliance. Bright lights, cigars and tuxedos; there was a jesting quality to it all, but it was very 2019-2020.

Now what?

Black swan events are unexpected and unknowable before they hit. Former Wall Street trader Nassim Nicholas Taleb popularized the concept in his 2001 book "Fooled by Randomness."

Better positioned

The RIA business is feeling the sting of just such an event, COVID-19, also known as the coronavirus. Declining assets under management and the resulting revenue declines that follow are now endemic. 

Like 2008-2009, advisors are working long hours reassessing risk, holding hands and monitoring deteriorating health and financial situations -- and often they are having to do it from living rooms with children screaming in the background.

It's tough all around.

Yet, like 2008-2009, RIAs should know that they are not only better-positioned than the competition to ride out the storm -- but radically better positioned to emerge with market share gains.

RIAs mostly did not add overhead during the boom -- in part, because of a talent shortage that wouldn't allow it and because of a movement to automate or outsource services.

Wirehouses will bleed assets and talent again as the cracks in the brokerage model get revealed -- albeit to a lesser degree than the financial crisis.

Big banks edging toward wealth management may pull back to focus on preserving their core businesses. Asset managers will dig deep to lure advisors with rock-bottom prices.  See: Merrill Lynch retreats from stealth RIA custody business just as major rival Wells Fargo runs for daylight in a bid to keep breakaway advisor assets

Emerging stronger

Bigger picture, expect a world of blizzard babies to be born much the same way it was in 2008-2009 -- and that includes robo-advisors and other software providers that initially looked like RIA threats and turned out to be RIA tools.

And, yes, those of us, like RIABiz, that were born in the Great Recession, never fully abandoned our down-market mentality.

After eight years in our first office, Frank Noto and I expanded to a new RIABiz headquarters in Mill Valley. We both thought paying more rent courted trouble, but ended up paying about $200 more per month. We moved during frothy February. (Only to move straight home in March!)

Most other RIABiz overhead has not grown, other than to pay people more in proportion to our revenue growth. We hope to emerge stronger from this COVID-19 crisis, though that is not foremost in our minds.

Like our readers, the priority is not to get sick or to get anybody else sick and to do our job to make the next six- to 24-months as normal, constructive and even enjoyable as possible -- buoyed by an insider knowledge. 

The RIA business for the most part does not need a black swan plan. It is a black swan plan.



Shirl Penney

Shirl Penney

March 24, 2020 — 4:13 PM
Brooke, thanks for being so present in the RIA ecosystem over the past 10+ years and in particular right now. Adversity builds character; in life and in business. I started my journey into the RIA space in 2008 in the midst of the financial crisis and little did I know that my journey would start by "working for free" for over 2.5 years. But to your point those early lessons on capital stewardship and the scrappy start up mentality serve you well over time. Dynasty was off to our best start to a year ever in 2020, and took steps to position ourselves for the long term last year, that now have us positioned well in the space going forward. Once the "fog" (to use your term) has lifted I think the long term opportunity for the RIA space will be even greater. More people need financial advice (and now more realize it) than ever and for those that get aggressive it will be the greatest organic growth opportunity of their careers. M&A will return with more realistic valuations allowing even more deals to happen. For vendors in the space who have strong businesses coming out of this period of time they will do well as outsourcing increases as RIAs look to further manage their largest fixed cost (people), and the break-away advisor movement will continue as once previously complacent advisors will realize if they want to keep more of the revenue they generate the best way is to go independent. Sure there were be some pain along the way, some firms will not make it, or merge / consolidate; but overall we (the RIA ecosystem) will emerge better than ever. Who better to thrive in challenging and fast moving times than entrepreneurs? Thanks to all the wonderful RIA advisors who are doing such important work right now for people all across our country. Your clients will never forget what you are doing for them right now. Its so inspiring to watch this industry standing and delivering right now! Be well. Shirl
A father and a very concerned investor.

A father and a very concerned investor.

March 24, 2020 — 8:48 AM
While most of the Country is in shelter in place mandate, Schwab is continuing its reckless behavior and utter lack of concern for its employees safety. Shame on Schwab. The Schwab management is calculating the reward with risking their employees lives. The greedy management knows there are many ways to protect employees such as obviously the technology but also staggering personnel and alternate hours. It is understandable that not everyone can work from home but they have been deliberately resistant to let people who can work from home do so or at least minimize the exposure to the office for no reason other than carelessness and laziness. Schwab is asking for a big lawsuit. I’m taking my business elsewhere.

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