Consolidation ahead for RIA industry

Posted: March 5, 2013 in financial advisors, investment advisors, RIA, Uncategorized
Tags: , , , ,

For decades, the backbone of the financial advisory industry has been small Main Street type practices, where a solo advisor assisted by an employee or two picked investments and handled financial planning for his neighbors and businesses in the community. Many of those advisors were brokers employed by a major wirehouse firm, and there was a lot of pride and strength in that association.

But as Financial Planning Magazine reports this morning, an almost paradoxical trend of getting smaller to get bigger is playing out and will accelerate in the industry during the next five years. This involves more break-away brokers, those who previously were at large wirehouses, going independent and forming their own firms. The most successful of those firms are successfully scaling and growing larger and are poised to continue to do so, gobbling up some smaller players in the process.

These larger firms have the capacity to not only offer the products and services that wealth, savvy clients expect, but also to handle the increased regulatory demands being placed on advisors. The smallest practices, those with $40 or $50 million in assets under management, will be under more pressure as fee pressures, regulatory demands and the appetite for wealth management rises.

Here’s what I see as the implications of these trends:

  1. The smallest firms will need to either scale up and add staff and capacity, be in a better position to be acquired by a large firm needing their expertise or location or risk eventually going out of business — the “Darwinism” the article refers to.
  2. Break-away brokers will have more choices than ever before among service providers who can truly understand their business model and offer the services to help them launch and scale rapidly. Players in this space include High Tower, Dynasty and Securities America, notes the article.
  3. Middle-sized RIAs who aren’t scaling need to embrace this trend or risk getting left in the dust and shrinking rather than growing.
  4. Wirehouses continue to suffer a brain drain that could damage their capacity to attract discerning high net worth clients, as it is getting more and more attractive for the best talent to leave at a time when wirehouse brands inspire less and less trust and struggle with profit margins and staffing.
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