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While investment advisory firms are optimistic about their business prospects — with close to 80% planning to expand their staffs in the next year — cybersecurity, a potential market crisis, regulations and fee compression top their list of rising concerns, according to a just-released report by the Investment Adviser Association and Cerulli Associates.

The 2018 Executive Outlook Survey, the second in a series of annual surveys conducted by IAA and Cerulli that measures and tracks business sentiment among IAA member advisory firm executives, found that nearly two-thirds of respondents (64.7%) plan to grow their headcounts by up to 10% over the next year, while 14.7% plan to increase their staffs by more than 10%.

(Related: What’s Really Important to New Advisors?)

Developing the next generation of talent was billed by 97.2% of RIA executives as the most important initiative for ensuring firm profitability — with 54.3% calling it “very important” and another 42.9% calling it “moderately important.”

“Many firms believe hiring younger employees is an advantageous way to engage the heirs of current clients (i.e., retain family assets),” Cerulli states in the report. “However, more recognize that it’s a critical component to business continuity planning regardless of whether the junior talent or existing senior partners are currently slated to succeed today’s leaders.”

Indeed, Cerulli notes that it expects mergers and acquisitions to “play an increasingly important role” in many RIAs’ growth strategies.

With nearly half of all RIA advisors within 15 years of retirement, Cerulli states, “one in five expect to sell their practice to an external party and a similar amount are ‘unsure of their succession plan.’”

Succession planning, Cerulli states, “is one of the largest challenges facing the entire industry,” so advisory firms with growth goals will likely turn more and more to M&A.

Ultimately, Cerulli continues, “many [RIAs] may find themselves being more comfortable selling to another RIA, versus a bank or large BD.”

Other priorities include increasing scale (91.4%); improving the firm’s service model (85.8%); reducing costs (80%); and compensation analysis and adjustments (60%).

The executives listed the following “external factors” as looming concerns:

  • cybersecurity (97% moderately or very concerned);
  • a potential significant market crisis (95%)
  • the domestic regulatory environment (85%);
  • fee compression (83%);
  • the country’s international relations (74%);
  • the non-U.S. regulatory environments (58%);
  • tax reform (43%);
  • globalization (43%); and
  • Brexit (35%).

Improving cybersecurity was a “moderate or high” priority for 91.4% of respondents while updating older technology was a priority for 82.8%.

As to fee compression concerns, Cerulli states that while “fee awareness is real, fee compression continues to be exaggerated at the wealth management advisory practice level.”

The fact is, according to Cerulli, “data illustrates that most wealth managers, including RIAs, have either left their fees unchanged or increased their fees.”

As stated in the report, just 8% of RIAs have decreased their fees. “Moreover, of all the high-net-worth practices surveyed independently by Cerulli since 2013, just 13% have decreased their fees, while 28% increased. This may reflect that investment advisors are adding value to their clients in many ways, for example, providing concierge services or a wider range of planning capabilities.”

Other priorities ranked as follows:

  • implementing regulatory/reporting requirements (77.1%);
  • improving data management/analytics (77.1%);
  • improving digital content (62.9%);
  • maximizing resource allocation and distribution opportunities, such as client segmenting and predictive analytics (62.8%);
  • artificial intelligence/data innovation (36.4%); and
  • building or improving social media marketing strategy (48.6%).

Cerulli notes in the report that the Boston-based research firm anticipates that new business lines, including digital advice platforms and automation tools, “will have a greater impact than many currently expect,” as “technology is already proving valuable in attracting new clients as well as streamlining services among existing clients who either require fewer resources or may be less profitable.”

— Check out Cybersecurity Is Still Advisors’ Top Compliance Worry: IAA Poll on ThinkAdvisor.