RIAs have long enjoyed a specialized status: as fiduciaries, they have cornered the market for the provision of independent advice and (mostly) transparent pricing structures. But their reign is threatened. Here’s what BlackRock’s RIA manager Hollie Fagan predicts for their future and her recommendations on what they can take now to keep them relevant. Comments have been edited for brevity.
Financial planning: What is the biggest threat the RIA faces today?
Hollie Fagan: Being independent and fiduciary will no longer be enough to distinguish RIA companies in the future. The rest of the industry is moving in this direction. The lines are blurring. By 2020, paying assets are expected to represent more than 60% of the sector’s assets, or around $ 20 trillion.
PF: What is the solution ?
Fagan: They need to focus on their highest value-added activities … interact with customers in a meaningful way and identify which part of the value chain they need to outsource to other parts in order to increase the scale of their business – the middle office to companies like United Capital and Dynasty.
PF: What’s another widely fixable problem that you come across frequently?
Fagan: One of the costliest issues facing RIA companies is human capital. If companies aren’t getting the results they need from their human capital, they need to fix it. But it is the most difficult thing to do.
In some cases, it is difficult to replace talent because people are retiring and that skill set no longer exists. For example, managing individual bond portfolios. Most of the people who have done this grew up in the industry 20-30 years ago. Now that is a unique skill set to find. [This is a case where it could be ] it is more economically possible to outsource this to institutional asset managers, freeing up resources that RIAs can use in other parts of their business.
Human capital is the most expensive part of an RIA’s income statement.
There may also be people within the company who are not doing as they should. Founders often focus on growing their business or on customers rather than underperforming talent, those who are unwilling to embrace change.
This is more acute for RIAs as they are small business owners. But some founders need to recognize that at some point their business will grow to a size that they will need to call on someone to help them.
PF: How can small businesses stay competitive?
Fagan: Counselors, at some point, have to decide what they want to be when they grow up. Small businesses may not be able to compete with faster growing businesses. We are seeing businesses over $ 1 billion growing much faster than other businesses. Large companies have the capital to acquire other businesses, they have staff to work on transactions and also invest in organic growth by training advisers. Small businesses will not be able to keep pace.
Of course, an advisor will say, “I’m happy to manage $ 100 million and work six hours a day. It is a lifestyle practice. However, advisors have an obligation to their clients and they also have the regulatory requirements of succession planning so they must decide if they have the resources to anticipate changes in the economic, competitive and regulatory environment to go it alone. or with a partner. They should think about outsourcing.