As they look ahead, many registered investment advisors are focused on expanding their business organically — with internal growth — and inorganically, via mergers and acquisitions.
Last year was “the seventh record year of M&A in the industry along with a very robust breakaway broker pipeline,” said Brian Hamburger, CEO of MarketCounsel at the group’s December event in Miami. “2020 will be the first time in the history of the industry when there will be more independent advisors (52%) than employee-based advisors,” the attorney and regulatory analyst explained.
Still, while the outlook for the overall RIA sector is positive, individual RIA firms must tackle its opportunities while working within the limits of this expanding industry sector. How can advisors and advisory groups best thrive in 2020? TD Ameritrade Institutional’s Kate Healy, who leads the firm’s next-gen outreach efforts, breaks down some growth strategies for the year ahead.
“A big piece for growth and a top challenge for RIAs will be looking at how to grow their firms amidst a [general] talent shortage in the industry,” Healy said in an interview, adding that she sees recruiting demand remaining robust or expanding in 2020.
With 100,000 advisors looking to retire and only several hundred students graduating each year with financial planning degrees, hiring needed talent is not easily done, the managing director points out.
“And it’s hard for RIAs to compete with independent broker-dealers and wirehouses in the talent space, since these firms have large recruiting organizations to showcase their offerings vs. [the resources of] smaller independent firms,” Healy added.
RIAs must “get in early” and pursue talent in the pipeline — mainly by getting to know the financial-planning schools, programs and internships,” she says. “This is an important part of growth. You’ve got to expand talent acquisition. It’s not enough [to rely on having] some of your own people in the pipeline.”
Look Outside the Industry
RIAs also should look at individuals within other industries who have “transferable skills” like sales and marketing. In other words, look critically and creatively at what talents prospective employees already have honed in their careers.
“RIAs also need management experience, not necessarily business development and financial planning,” Healy said. “Individuals hired for marketing, compliance and trading can be pulled in from other industries.”
Embracing this approach is critical, she states: “It’s really time for RIAs to look outside the industry — keeping in mind that most advisors did not go through financial planning programs at universities or have this degree themselves.”
The Talent Within
Still, “It’s easier to develop the talent you already have than to recruit from outside your firm,” according to Healy. Across the industry, the wirehouse firms and other large broker-dealers spend a lot of their resources on grabbing advisors from one another rather than adding talent to the pool, she points out.
“There are new ways to develop talent that’s already there [in your firm]. There can be a natural progress, over five to eight years, for the path to a top advisor role,” she explained.
Though only about 23% of certified financial planners are female, about 46% of the broader financial services industry consists of women, the TD executive says: “There are different roles … such as in administration, operations, paraplanning … and these can lead to advisor positions” for women.
When it comes to M&A valuations for firms, diversity and inclusion among clients and staff — along with factors beyond assets — are playing a greater role than in the past. RIA valuations are closely tied to “the growth mode” of a potential seller, Healy explains, yet 90% of firms have about half of their clients in distribution mode.
“They’ve got to work with next-gen clients and make sure their workforce is reflecting that [younger] demographic and the need for more diversity and inclusion overall,” she said. “[Clients] tend to work with those more similar with themselves — and for advisor teams this is more easily addressed. Next-gen [prospects and clients] are very enthusiastic about making the industry more diverse.”
Though some next-gen prospects may not have a large asset level, their need for advice is as great as those who do, the executive says. Advisors with business models focusing less on assets and more on fees for services “are looking smarter and smarter,” she explained.
“Investing is just a piece of the business, and it’s becoming a smaller part given technology,” and pecific financial planning or related services “can make firms more valuable and more attractive to next-gen [clients and prospects],” Healy said.
To add talent and diversity to their teams, RIAs can look to retiring advisors for some help. “I’m talking to advisors who are looking at the next stage of their careers — some of whom are getting involved with financial planning programs and helping to train future advisors,” Healy explained.
This outreach benefits both veteran and wannabe advisors. “We have to think about what we can do to make our industry more inclusive, so RIAs and the industry can attract needed talent.”
TD Ameritrade Institutional’s RIA Sentiment Survey of some 300 advisors finds that even as they see compliance and regulatory issues as their top management challenge in 2020, 75% expect to grow this year, and 41% plan to grow faster than in 2019.
Survey participants also report that 56% of their clients are interested in environmental, social and governance investments, and 50% want more information about cannabis-related stocks. Close to 30% have turned to third parties to manage client portfolios, nearly triple the number that did this in 2018. Model portfolios are RIAs’ third-party manager of choice, according to the survey.
The past year delivered growth on all fronts for RIAs. Three-fourths of advisors say their revenues rose in 2019, by 14% on average. Eighty-two percent report a rise in assets under management, with 16% percent growth on average.
Seventy-one percent of advisors surveyed brought in new clients last year. National brokerage firms, both wirehouses and independent broker-dealers, continued to be the main source of new clients.
When it came to investing in their own firms in 2019, independent advisors increased their spending the most on technology and on legal and compliance, 38% and 20%. This year, marketing likely will experience the biggest increase in spending, followed by technology, thus acknowledging that a healthy blend of both can benefit RIAs’ bottom lines, according to TD Ameritrade.
Advisors today are spending more time with clients than they did five years ago, but are focused on more than their investment portfolios. The average RIA spends nearly half his or her time with clients on topics outside of investment management.
Two-thirds of advisors surveyed said they expect the pace of industry mergers and acquisitions to accelerate in 2020, but the majority are taking a wait-and-see approach with respect to their own firms. Forty-five percent of advisors have been approached by a potential acquirer; however, 91% said they have no plans to sell their firm in the next two years.
Survey participants are ambivalent about using M&A as a growth strategy, and about a third insist that they would not consider a merger or acquisition at all to boost firm growth.
Janet Levaux is editor-in-chief of Investment Advisor. She can be reached at firstname.lastname@example.org.—Michael S. Fischer and Tim Welsh contributed to this report.