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For RIAs Pain is Inevitable but Suffering is Optional

September 14, 2017

RIAs are in pain and are looking for the right anesthetic for their issues. Often, pain emerges in one part of your body but its origin started with an injury or incident elsewhere. The same is true with RIAs — the pain may have started with stalled growth or with no thought to succession plans and the senior advisors are looking to retire. RIAs search for their solutions in many different forms. A merger perhaps? Hire different vendors? Buying another firm? Does everyone at our firm have the right role? Let’s change our service model? Do we need wealthier clients?

There may be an answer in there somewhere but it will be hard to find without clarifying exactly what could fix the pain. It often lies in one’s ability to diagnose the problem. Since I have daily discussions with RIAs about their pain points and the solutions they are considering, I thought it might be helpful to identify some of these issues to help RIAs avoid similar mistakes in the future and to determine solutions.

The pains of RIAs are equal but not the same. There seems to be a couple of clear lines in the sand regarding the needs and concerns of existing RIAs based on the size of AUM and the organization itself. With size comes complexity. Like the ripple effect of a stone thrown into a calm pond, issues in a big organization can affect multiple people and their roles as well as actual workflow and service delivery. Lack of size has its own set of issues that often lead to stagnant growth and challenged business operations.

What I have noticed is that there are three distinct floors or ceilings — depending on how you look at your business — of which all advisors and those who support the wealth management industry should be aware. If you educate yourself as an advisor about these segments and the pain points of each, you should be able to diagnose your own pain. Suffering is optional.

Segment 1: Firms That Manage Under $200 Million

The main pain for this segment is a lack of scale and growth. These are one-to-two-person firms with limited growth plans. They are overwhelmed by compliance issues and managing client relationships. Most of these firms don’t have or understand succession planning. Everything that happens at the firm is completely dependent on the owner.

A clear-cut solution for RIAs in this segment is to join a larger firm. This would allow them to create scale, build a succession plan, support operations and compliance, and share the responsibility of leading, managing and growing the practice.

Segment 2: Firms That Manage Between $200 Million and $700 Million

The main pain for this segment is that RIAs at this level are operationally inefficient and have limited brand recognition. They often have multiple owners with different levels of leadership involvement. Their past traditional value to clients is being challenged. Their client service model may be limited by the firm’s personnel handling too many or the wrong roles. They need back- and middle-office support. The compliance process is challenging.

RIAs in this segment can address these issues in a number of ways. They can take steps to professionalize their practice, reassess team talent and roles, standardize delivery of wealth solutions and investment management, and improve technical skills of the team. They should also consider developing a growth plan which may include the acquisition of an advisory firm.

Segment 3. Firms That Manage Between $700 million and $1.5 billion

The main pain for this segment is that RIAs tend to have an unclear growth strategy, operational and organizational disconnects, and difficulty with business investment decisions. Leadership can lack awareness and confidence in decision-making on big investment items such as technology, compliance infrastructure, and the firm’s investment platform. Firms are often overstaffed, cutting into profit and making it hard to scale. Client service offerings are only partially standardized and human capital is intense. Growth strategies may be focused on M&A but many firms lack the capital, sourcing capabilities or the vision to put an appropriate deal together and execute the transaction.

Among solutions for RIAs in this segment are to repurpose enough staff for business development activities, be selective with acquisition opportunities, be creative with merger opportunities, establish creative access to capital, find the proper support for sourcing and executing deals, and create strategic partnerships with firms which can help transition and integrate new practices into the firm.

Segment 4: Firms That Manage More Than 1.5 Billion

The largest RIAs have a different set of problems — often due to their large size and UHNW clients. The main pain points among the largest RIAs include developing and implementing a growth strategy execution, institutionalizing investment and client service offerings, transitioning and integrating newly acquired firms, access to growth capital and developing firm-wide succession opportunities.

Often with extremely large practices the leadership has a well-defined organic and inorganic growth strategy but struggles to execute efficiently. And issues in a big organization can affect multiple advisors and staff professionals.

Most leaders of firms at this level have a knack for identifying and negotiating potential acquisitions, and for closing them. But to reap the benefits of an M&A strategy, the senior team needs to focus on the successful transition and integration of the acquired firm, their advisors and their clients.

And succession plans are an open question at even the most successful firms. Most advisors are still operating without a game plan to pass the business on to the next generation.

As an overarching solution, the most successful advisors in this segment focus on activities they excel at and outsource the rest of the business operations. Institutionalizing investment and client service can be a wise investment for larger firms.

I have found that many of the largest RIAs have named a CEO to develop strategy, determine large investments in the RIA and run the business while the senior advisors focus on managing clients and business development. A CEO can also focus on ensuring acquisitions are transitioned successfully. Regarding succession planning, it’s worth it for large RIAs to step back and determine how the team wants to handle the future of the firm — whether to transition the business to the next generation of advisors or plan an exit strategy.

Even if you believe your firm is firing on all cylinders, it’s important to take time to identify and acknowledge pain points — at whatever level your firm operates on — to ensure the continued success of your firm. Though you may not feel pain today, a reality check of your firm and its progress is paramount. The growing pains of managing a successful and innovative wealth management practice may not fully subside, but suffering is optional.