A convergence of business models, investor influence and client acquisition challenges are encouraging registered investment advisors to reevaluate their position in the marketplace, a new report from Cerulli suggests.
A confluence of competitive threats—including an industry-wide shift away from brokerages, broader adoption of financial planning and the popularity of independent business models—is eroding the RIA channels’ key differentiating factors. In response, more RIAs are considering whether to expand their service offerings to strengthen their impact with existing and prospective clients, according to Cerulli’s U.S. RIA Marketplace 2021: Meeting the Demand for Advice report.
To tap into the RIA channels’ success formula and protect against advisor movement to independence, broker/dealers (B/Ds) are increasingly developing independent affiliation options, promoting financial planning and creating more opportunities for advisors to conduct fee-based or fee-only business, the report explains. By 2023, 93% of advisors across all channels expect to generate at least 50% of their revenue from advisory fees. Similarly, over the past five years, the number of financial planning practices across all channels grew at a 5.3% compound annual growth rate (CAGR).
Service Expansion
As such, B/Ds are “impinging on” what has generally been viewed as largely unique to the RIA channels—an independent, fee-based business centered on financial planning. Consequently, in reevaluating their position in the marketplace, for some RIAs this means expanding their service offerings to combat value differentiation concerns and capture emerging opportunities. According to the research, trust services (19%), digital advice platforms (17%) and concierge/lifestyle services (16%) rank as the top three areas of anticipated service expansion for RIAs within the next two years.
And while firms that pursue service expansion may find greater differentiation, the report warns that they will also likely wrestle with rising costs and thinner profit margins. “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,” says Marina Shtyrkov, associate director at Cerulli.
“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,” Shtyrkov notes.
The report shows that 101 basis points is the average AUM-based fee for a client with $750,000 in investable assets. Only 6% of RIAs anticipate increasing fees for this segment by 2023. In addition, 37% of RIAs charge fixed financial planning fees, separate from investment management fees.
Preserving Profitability
To preserve profitability levels as they add services, advisors can either adjust their fees upward or implement alternative pricing structures, the report observes. These nontraditional fees (e.g., fixed financial planning fees, monthly subscription fees) are not correlated to portfolio performance and can help RIAs offset the increased costs of delivering additional services, thereby reducing profit margin pressure, Cerulli notes. And for an RIA that offers financial planning, nontraditional fees also ensure that the firm’s pricing is more closely aligned with its value proposition.
Ultimately, value differentiation challenges will become a question of firm economics—one that RIAs must be ready to answer, the report emphasizes. While Cerulli does not believe that all RIAs must expand their service set to remain competitive, under the right circumstances, additional 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,” says Shtyrkov. “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.”
