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RIAs Defend Their Turf Through Service Expansion: Cerulli

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What You Need to Know

  • Ninety-three percent of advisors across all channels expect to generate at least half of their revenue from advisory fees by 2023.
  • The number of financial planning practices across all channels grew at a 5.3% compound annual rate.
  • To preserve profitability as they add services, advisors can either raise their fees or add monthly subscription fees or fixed financial planning fees.

An industrywide shift away from brokerage, broader adoption of financial planning and popularity of independent business models are coalescing to erode the RIA channel’s main differentiating factors, Cerulli Associates reported Tuesday.

This has RIAs considering whether to extend their service offerings to deepen their influence with clients and prospective clients, the report said.

To unlock the RIA channel’s success formula and protect against advisor movement to independence, more broker-dealers are developing independent affiliation options, promoting financial planning and increasing opportunities for advisors to conduct fee-based or fee-only business. 

According to the research, 93% of advisors across all channels expect to generate at least half of their revenue from advisory fees by 2023. Likewise, over the past five years, the number of financial planning practices across all channels grew at a 5.3% compound annual growth rate. 

As a result, broker-dealers are elbowing in on what has historically been viewed as largely unique to the RIA channels — an independent, fee-based business centered on financial planning. 

Besides this convergence of business models, investor influence, democratization of services and client acquisition challenges are encouraging RIAs to reevaluate their position in the marketplace. 

Expanded Service Offerings

Some advisors are expanding their service offerings to combat value differentiation concerns and capture emerging opportunities. Over the next two years, the top areas of service are expansion trust services, digital advice platforms and concierge/lifestyle services, according to the report.

“While implementing these additional services may help RIA firms move upmarket and generate greater revenue, RIAs will need to reinvest in the business by hiring more staff, adding technology tools, producing marketing materials or paying a third-party provider for outsourced support,” Marina Shtyrkov, Cerulli’s associate director of wealth management, said in a statement. 

“These expenses typically lower the firm’s profit margins, so by expanding their purview, RIAs find themselves at risk of profit margin compression unless they are able to offset expenses with higher fees, new client acquisition, or additional revenue streams.”

To preserve profitability levels as they add services, advisors can either adjust their fees upward or implement alternative pricing structures, such as monthly subscription fees or fixed financial planning fees — 37% of RIAs charge fixed financial planning fees, separate from investment management fees. 

These nontraditional fees, which are not correlated to portfolio performance, can help RIAs offset the increased costs of delivering added services, thereby reducing profit margin pressure, the report said. For RIAs that offer financial planning, nontraditional fees also ensure that the firm’s pricing is more closely aligned with its value proposition.

Cerulli does not believe all RIAs need to expand their services to remain competitive, though under the right circumstances, added offerings can help firms capture new opportunities and tackle competitive challenges. 

“Like any business decision, the addition of a service should allow advisors to better address their target market and achieve stronger alignment between that segment’s needs and the firm’s offerings,” Shtyrkov said. 

“RIAs will need to consult their strategic partners (e.g., RIA custodians, asset managers, service providers) to help them navigate these choices, weigh the tradeoffs of service expansion, and mitigate the risks of thinning profit margins.”