How to Maintain RIA Independence Amid a Wave of Consolidation

As a founder of Advisory Services Network (ASN), Tom Prescott spends much of his working time grappling with the question of how to help financial advisors structure their practices to optimize growth and client service.

Prescott’s firm provides outsourced back-office support to financial advisors looking to establish or grow an independent practice. Professionals working with the firm receive tools, technology and relationships meant to help them manage and grow their book of business.

Prescott says his firm’s model is unique in that advisors working with ASN retain 100% ownership of their existing and future book of business. ASN merely acts as a service provider partner that helps advisors spend less time on business administration and more time on business development, especially when it comes to asset stewardship and compliance matters.

Speaking in an interview with ThinkAdvisor, Prescott described the competitive landscape facing today’s independent financial advisors as both daunting and exciting. Many segments of the advisory industry have enjoyed record growth in the wake of the COVID pandemic, and Prescott points to substantial consolidation across all segments of the financial services and advisory industry.

Client demands are growing, too, and advisors are having to do more than ever to justify their fees in the eyes of clients and prospects. Prescott says there has never been a better time to be an independent advisor, but firms leaders still have to work diligently to keep their organizations on the right track.

THINKADVISOR: When it comes to the typical client of Advisory Services Network, what kind of operational and competitive pressures are they facing in the current environment?

TOM PRESCOTT: It is both an exciting and a challenging time for advisory professionals, and especially for those firms who are in the marketplace looking for a partner like Advisory Services Network. Many advisors out there are enjoying strong growth, and their biggest challenge is maintaining a high level of client service and just managing the operations of a growing practice.

Many advisors, regardless of where they sit today, are thinking about the best place to plant their practice for the long term. The choices facing a registered investment advisor shop or representative with, say, $300 million or less in assets are still somewhat limited. Aside from starting an independent entity or joining an existing RIA, there are the traditional bank, independent broker-dealer and conventional wirehouse channels.

Each option has historical shortcomings that might include poor support services, limited investment options, corporate branding issues, poor regulatory history and, in some cases, variable payouts that create unpredictable income streams for the advisor.

In this environment, many firms find themselves considering sales or acquisitions, but mergers can be messy, requiring complex technology and cultural integration. This takes time and can create service issues for clients, and frankly, smaller RIAs may find themselves overlooked in this rush to expand.

Today’s advisory practices have different technology requirements and service expectations. In selecting a platform like ours, advisors are looking to align with a team built to address those needs.

What are some of the most common motivations you hear among financial professionals who want to go independent?

They want greater freedom to serve their clients, and they want more time to devote to building their client relationships as opposed to managing a business.

A lot of people in the advisory world might be great money managers, or they are great client people or great fiduciaries. This doesn’t necessarily mean they are great business managers or that they understand enterprise risk, compliance or operations.

This is how we came up with the idea of creating ASN in the first place — as a platform for folks who leave a bigger firm and want to create their own independent brand without sacrificing a lot of the benefits that come along with scale.

I would also point out that bigger firms, like your national wirehouses, tend to have limited shelf space, and their advisors don’t always have a lot of freedom to pick and choose the investments and strategies they can utilize. In a fiduciary-first environment, this could become problematic.

When you go independent and partner with a firm like ours, the range of investments and service approaches that become available to you is so much greater. That isn’t really possible within the risk structures of the larger banks and wirehouses.

Do you continue to see a broad migration away from commission-based business in favor of fee-based investment advisory services?

Yes, this is one of the most significant changes we continue to see in this industry. So many people want to become fee-only investment advisors and focus on more holistic service. We believe this is the right place to be for the long run, especially if you think of where the regulators are heading.

Compensation, generally speaking, is one of the key factors that is driving more professionals toward independence. Not to pick on one firm in particular, but we can recall, for example, how Merrill Lynch has eliminated pay to advisors on client household accounts under $250,000.

Other firms have done similar things. Tightening small-account policies reflect the strategic direction in which the biggest firms want to go, with fewer but bigger clients. The advisors we work with still want to serve these smaller accounts, and they want to be able to do so efficiently and profitably.

Can you speak to the differences between selling a practice to an RIA aggregator versus partnering with a firm like ASN?

The main difference is that we aren’t here to buy practices. We are a service provider that delivers back-office support services for a basis point fee.

When you sell your firm, you lose some control of that practice. You lose some control of the clients. You are still the main advisor facing your clients, but you are having to use the aggregator’s solutions and models, and you are using their research.

On the other hand, every support platform is not for every advisor. The platform provider should be big enough to meet your needs but not so big that you get ignored. Because brand and data are the key drivers of growth, control should remain with the RIA, as should the economics.

Advisors with $300 million in assets or less often have different technology requirements and service expectations than larger competitors. In selecting a platform, they should look to align with a team built to address those needs.