September 11, 2012

Top RIAs Identify 4 Most Critical Challenges for Advisors

New think tank combines knowledge of six successful RIAs, including Brent Brodeski and Ron Carson

A new think tank of registered investment advisors with inside knowledge of the RIA industry on Tuesday released Tuesday a white paper that flags the four major challenges ahead for independent advisors and lays out what they can do to position themselves for the future.

The white paper is written and published by the Alliance for RIAs (aRIA), a study group that combines the knowledge of six successful RIA firms that collectively manage more than $20 billion of client assets. It can be downloaded free at www.allianceforrias.com and is the first in a series of four, titled Creating Value and Certainty Within Your Independent Advisory Firm. The second paper will be published in mid-November, and papers three and four will be published in the first quarter of 2013.

Group members of aRIA include Brent Brodeski, CEO of Savant Capital; John Burns, principal at Exencial Wealth Management; Ron Carson, CEO of Carson Wealth Management Group; Jeff Concepcion, CEO of Stratos Wealth Partners; Matt Cooper, president of Beacon Pointe Wealth Advisors; and Neal Simon, CEO of Highline Wealth Management. Both Beacon and Highline were selected for AdvisorOne's 2012 Top Wealth Managers list.

John FureyIn addition, John Furey (right), principal at Advisor Growth Strategies LLC (AGS), serves as aRIA’s managing member and was involved in the think tank’s formation. A former director of strategic business development at Schwab Institutional, Furey has been involved for years in the transition process for brokers who wish to become independent RIAs. AGS bills itself as providing “customized business management solutions for independent firms seeking to aggressively grow their business and for financial advisors in transition.”

In a phone interview with AdvisorOne on Tuesday, Cooper and Furey said that the first white paper, The Evolution of Value Creation, presents aRIA’s point of view on how the industry is changing and what successful firms are doing to position their businesses for the future. It includes an analysis of the challenges independent advisors face when breaking away from a wirehouse, growing an RIA practice and creating value in a practice.

“It’s not uncommon for independent advisors to grow their business to a certain point and then to plateau with a certain group of clients that provide them with cash flow for their lifestyle,” Cooper said. “They settle in and do a fantastic job of serving those clients for five to 10 years. What they don’t realize is that while they have the same cash flow coming in, and it may even have increased with market growth, their business is actually degraded in terms of value because the certainty of future cash flows is in serious question because their average client age is now 10 years older.”

Read on to learn more about business value and what aRIA’s white paper identifies as the four most critical areas of concern for independent advisors.

arrowsThe Alliance for RIAs, or aRIA, has flagged these four major challenges that independent advisors may face in the future:

1) Increasing competition from a new breed of market participants.

“The RIA channel has experienced significant growth over the past decades,” Furey said in the phone interview. “Within the channel, there is a new breed of market participants, whether regional or national firms or very large RIAs or consolidators or online firms that are building very scalable entities. As those firms continue to grow, the 22,000 to 24,000 advisors that exist will face increasing competition from these firms.”

2) The age of clients is a critical factor in practice value and transferability of business.

“Clients and advisors are getting older, and one of the systemic issues in the industry is the lack of both continuity planning and succession planning,” Furey added. “Advisors age 55 years and older could face unforeseen consequences when looking to sell or transfer their business if there is an inverse correlation between age and practice value. If you and your clients are older, you may not be able to maximize the value of your firm.”

client meeting3) Independent advisors have more choice than ever in delivering value to clients.

“Advisors have never had more choice with regard to growing and building their businesses, but all of that choice can be confusing if you don’t understand what you are looking at,” said Exencial’s John Burns in a statement. “All of us [in aRIA] have gone through the process of surveying the options, dealing with the players and learning from those experiences.”

4) Understanding the true worth of an advisory business.

“The true worth of an advisor’s business is one of the big questions in the marketplace,” Cooper said. “What do you really own? Do you own an enterprise with true transferrable value that can be sold? Or do you own what is essentially an annuity? One of the big issues that we discuss in this white paper is that the vast majority of advisors out there don’t have any true enterprise value in their business because they are the business. Yet business value is based on the certainty of future cash flows. When the advisor leaves or becomes ill and dies, the likelihood of the clients staying with the firm is not great because the client was attached to that individual person. But if the business is institutionalized, where the clients have multiple touch points and recognize the brand as their advisor and not the individual, there’s much value there for a buyer.”

ARIA’s first of four white papers can be downloaded free at www.allianceforrias.com. Future papers in the series will cover:

  • Taking control of your future: scale, value and uncertainty
  • Myth vs. reality: What is your independent advisory firm really worth?
  • Navigating your path forward and achieving your ideal model 
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