With so much uncertainty and negativity pervading our lives, it’s helpful to imagine a future where we witness positive effects of the crisis on the RIA industry.
While we all may be hoping for things to “get back to normal,” that expectation is unrealistic—no matter what industry you’re in. The attack of the virus on our lives—both personally and professionally—is one that’s left an indelible mark, unlikely to disappear for quite some time.
Yet there are some positive effects coming out of this. In the RIA space, the ability to provide continuity with respect to client service, scaled communications and team management means that firms of all sizes could be nimble and flexible in their responses to this crisis. And while these practices are serving the firms well now, they will pave the way for more efficient and innovative ways to conduct business in the longer term.
Many RIAs will naturally find a new equilibrium, one that is based on what was learned from the experiences of the crisis, with these changes remaining in place well into the future—an absolute positive for the industry. For example:
- More advisors will lock in continuity plans—According to the Financial Planning Association (FPA), only an estimated 41% of advisors self-report having a documented succession or continuity plan. This crisis will certainly be a catalyst for advisors to create a comprehensive plan that protects key stakeholders in the event of a health issue or unforeseen circumstances going forward.
- Industry-leading firms will get stronger—Elite RIAs who have cracked the code on marketing, strong business management and succession planning—and have not relied on the markets for growth—will be the ones that recover faster and present more compelling value propositions to prospective sellers. For instance, in March of this year, when most businesses came to a grinding halt, serial acquirers HighTower, CapTrust and Emigrant Partners announced new deals. Conversely, haphazard buyers or those just interested in acquiring for financial gain will fall off as access to deal financing becomes more challenging.
- Strong sellers will stand out—Those who have built “all-weather firms” with diversified businesses, strong organic growth rates and institutionalized processes that can absorb lower cash flows and valuations can still expect strong interest from the right buyers. With greater demand driving valuation, they will also be rewarded by having a greater opportunity to hit earnout provisions or growth hurdles structured into transactions. Based upon transaction data from 2009 and 2010, and the industry’s record rate of consolidation precrisis, M&A activity is expected to sustain itself, which helps prospective sellers.For example, Matt Cooper, president of $11 billion Beacon Pointe Advisors, an actively acquiring RIA firm in Newport Beach, Calif., believes that postcrisis there will be more demand and premium valuations paid for the most attractive sellers. That is, those who have been able to grow absent market conditions and are looking to continue growing. On the downside, some “lifestyle” practices will be less attractive to top-quality buyers, as these owners are typically not looking to be “a part of something bigger than themselves.”
- M&A transactions will be completed for different reasons—Those business owners who value scale, being part of something bigger, tapping into an organic growth engine and being able to better serve clients in a more complete way will remain interested in merging with other like-minded firms. Similarly, those who are more focused on the economics of a transaction will likely back off for a period of time while their values rebound.
- Advisors will form deeper relationships with clients —Being a calming presence and a trusted advocate during difficult times reminds clients of their advisor’s value beyond financial management and also increases the likelihood of referrals. In a recent podcast interview with Mindy Diamond, David Bahnsen of $2.1 billion Newport Beach, Calif.-based The Bahnsen Group talked about the importance of going above and beyond, especially in times of crisis. He finds that part of his firm’s role includes a level of “emotional care,” which in turn strengthens the bond they have with their clients.
- The expansion of services—Many RIA firm owners are finding this crisis to be their motivation to expand their services beyond portfolio management, showcasing noninvestment-related, value-add services like tax preparation, estate planning, business services or bill pay. For example, NorthRock Partners, the nearly $3 billion RIA firm in Minneapolis, has found its expanded services to be beneficial, particularly through the crisis. As Managing Partner Dominic Knauf explains, NorthRock offers “a comprehensive, fully-integrated approach, coined the Personal Office, positioned to deliver superior value in all conditions.” And in recent weeks, its in-house tax experts have been expeditious in uncovering and implementing tax strategies and preparing returns for nearly all clients.
- The emergence of next generation leaders—In crisis, leaders step up by adding value and alleviating some of the workload from the C-suite executives. As soon-to-be retiring firm owners take stock of their team members, they will have a better idea of the viability of an internal succession plan or have enough data to decide on an external succession solution.
- Significant pools of assets will be in play—This crisis will shed light on the value that professional advisors bring to the table. As such, self-directed investors and those clients with advisors who were inefficient and nonresponsive during the crisis will seek new representation.
- Cutting-edge technology platforms and tools will be fully embraced—Firms and clients of all generations who were initially skeptical of new technology have had no choice in this crisis but to move forward and adopt modern tools and platforms. For example, the ability to hold virtual client meetings and implement remote access capabilities allowed firms to maintain continuity, while improving productivity and staff morale. As firms experiment with new technologies, they are likely to see their value and make these tools a bigger part of their businesses.Technology firms are also rising to the occasion, making it easier and more affordable for firms to deploy solutions. Addepar, for instance, announced an innovative fee credit for new clients to offset the platform’s cost, so more RIAs can be armed with data-driven insights to keep pace with increased client demands.
- Business owners will gain much-needed perspective—The crisis has given owners the opportunity to take a step back and view what’s working and what’s not in their businesses. Some will double down on those practices that have the greatest impact, and others will seek to address deficiencies that come to light. For example, some firm principals will learn they are personally responsible for far too many nonrevenue-generating activities and stretched too thin when their clients needed them the most. Conversely, others see their firms firing on all cylinders and realize they have excess capacity to onboard advisors or acquire businesses.
- The adoption of new and improved marketing and communication practices—Social media, text and video will be de rigueur for communicating with clients, leading to an enhanced ability for advisors to connect with millennials who value on-demand access to their advisors. Firms have also learned the importance of one-to-many reach—making creative marketing on a variety of platforms and mediums a more critical component of their strategy going forward. And the impact of trying different communication tactics throughout this crisis has turned skeptics into believers. Take David Edwards, president of the $300 million New York-based RIA Heron Wealth, who never thought his clients would be interested in attending a webinar. But eager to try new ways to reach more than one prospect at a time, he recently launched three webinars. As a result of these efforts, his firm gained several new clients, and Edwards learned the positive impact that leaving his marketing comfort zone could provide.
- Firms will realize who their true partners are—Custodians, platform providers, wholesalers and other vendors who added value throughout the crisis will be rewarded with client loyalty and renewed contracts. The goodwill provided by firms—like Sanctuary Wealth Partners offering advisors a white-labeled wellness and nutrition program for clients, and Dynasty Financial Partners rolling out their exclusive Paycheck Protection Program (PPP) for advisors to business owner clients—will last well beyond the crisis.
We have a new future before us. The question remains: Will those in the RIA channel take advantage of today to create something greater for tomorrow?