However, the continued expansion of the channel is undeniable. This means B/Ds and asset managers must embrace the permanence of dual registration as a business model and align their service model accordingly, Cerulli said.
For advisors moving into the RIA channel, breaking away from a larger firm may result in decreased wholesaler coverage, forcing the RIA firm to justify coverage on its own assets.
At the same time, reduced wholesaler relationships create the opportunity to draw a greater percentage of the advisor's assets. Cerulli said asset managers should standardize transition efforts between channelized wholesalers to ensure relationship continuity for breakaway advisors.
Challenges and risks come with the growth. The RIA channel has to prove its sustainability by hiring new advisors rather than relying on advisor transition to generate growth. According to the report, new hiring will increasingly become a priority because of its cost effectiveness compared with the capital required for advisor recruitment.
Although scale benefits RIA practices, limited access to capital has restricted merger and acquisition activity, the report found. It said firms with access to capital–either via private equity, a banking affiliation or through other methods–are dominating the transactions in the industry.
At $1.5 million in client assets, the majority of RIAs charges less than 100 basis points on those assets, but a few advisors are able to maintain pricing power despite increasing assets, according to the report.
Cerulli said asset managers must be similarly fee conscious when dealing with advisors who service high-net-worth clients. Advisors whose fee consciousness extends into their own revenue should be additionally cautious regarding manager fees.
The report's key recommendations:
- Service agents should consider acting as a matchmaker for clients with less than $100 million in investable assets, marrying them to existing firms so they can move under the regulatory purview of the SEC rather than be subjected to state-by-state regulation.
- Cerulli noted a desire among high-net-worth providers to bring their strategies, including alternatives, down market. However, advisor education, product track records and quality managers are needed to develop confidence in existing products.
- Distribution organizations that target RIAs should consider the quantitative skills of their field force to match up prospects by practice size. The relationship-based wholesaler will achieve more success in the middle market, while the data focused wholesaler will achieve more traction in the multi-billion dollar segment.
- Wholesalers can help support growing practices by matching buyers and sellers in their territory. The efforts would deepen relationships with expanding practices by serving as an integral component of the practice's growth strategy.
Wholesalers' perception of the factors that influence product selection is divergent from that of advisors. Emphasis on top performers is not a major RIA concern, and thus should not be the leading sales pitch. Rather continuity, reputation and, if necessary, price should be differentiators for asset managers.
