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More than a billion dollars in assets may be considered a dream come true for many RIAs, but it’s not without complications.
In this new phase of their business lifecycle, an RIA that crosses the $1 billion asset threshold essentially transforms from a professional practice to a functioning business, according to a new report from Cerulli Associates.
The new, bigger enterprise requires institutionalization of processes, centralized staff support, specialized roles and a well-defined organizational structure as a growing number of advisors are spread across multiple locations.
“RIAs need to build an entirely new set of competencies to remain competitive,” according to the report. They need to attract and retain advisors, build scale across a large (larger) number of advisors, offer a consistent and positive client experience across the organization and build an executive management team often consisting of a CEO, COO, chief compliance officer and chief investment officer, Cerulli reports.
“RIAs that can overcome these challenges could ultimately become formidable competitors among wealth management firms,” writes Kenton Shirk, a director at Cerulli.
One major challenge that advisors of billion-dollar firms perceive is the cost of infrastructure. Cerulli’s survey of advisors found that a larger percentage of those in firms with $1 billion or more in assets under management — about 22% — viewed infrastructure costs as a major challenge compared with roughly 12% to 16% of advisors with a smaller AUM, as the chart below shows.
Despite these challenges, the number of billion-dollar advisory firms has jumped almost 60% since 2012 to 687, according to Cerulli. But that number is less than 4% of the 18,000 RIA firms in the U.S., and their average annual growth during the five years ended in 2016 was slower than that of firms with less assets: 9.8% compared with almost 12% for firms with assets of $250 million to $499 million and 10.6% for firms with an AUM between $500 million and $999 million.