Leading RIA firms understand that the key to profitable growth is to optimize their ability to specialize in their core business functions of client management and business development, while effectively managing the complexity of growing investment and back-office operations. But, as evidenced by the shifting RIA playing field, where the larger firms are growing the fastest, it requires massive scale in order to achieve it.
With their greater access to capital, larger firms have been able to add their own specialization, thereby creating scale from within. For smaller firms seeking to gain the advantages of scale while maintaining their independence and control, their best solution may be to offload specialization to service providers that operate as partners with the firm.
Growth Challenges for Small RIA Firms
Smaller firms that wish to remain “boutique” and grow organically, as well as those with aggressive expansion plans that include recruiting top-tier advisors, have several challenges to overcome. First, they need to be able to differentiate themselves and establish a reputation of trust, quality and “advisory heft” without the benefit of big budgets.
Secondly, they are challenged in the way in which their systems have evolved incrementally over a number of years. In order to compensate for the shortcomings of off-the-shelf products while adding new clients, operational and technology components are often added as needed in a piecemeal fashion. The resulting complexity of their systems becomes a severe drain on resources just to maintain them without adding meaningful value to the firm.
In their struggle to achieve critical mass, smaller firms are often diverted from their core competencies, which are typically on the qualitative side of their business, in order to deliver on the quantitative side of their business. It forces the principals into a tactical mode when they need to spend time in a strategic mode. The goal is to deliver a well-balanced blend of both which is not easy to accomplish in a small scale business. No matter the type of business, it’s difficult, if not impossible, to be excellent in all facets of the business.
The Relationship between Scale and Specialization
RIA firms intent on maintaining their independence while building their own brand face an unusual chicken and egg dilemma. They need to achieve critical mass through scale in order to increase their capacity to grow without sacrificing their commitment to excellence; yet, it requires specialization in order to institutionalize scale to the degree that it can be sustained.
However, smaller firms may find it too costly to add specialization without first having achieved some degree of scale. While it is possible to build scale without specialization, it may not create the efficiencies needed for sustained growth if the internal costs and resources required to maintain it outstrip any revenue increases.
How Advisors are solving the Scale/Specialization Dilemma
Advisors who recognize that the race to scale cannot be won without specialization, and that the time horizon to get there is short, are turning to three alternatives that can provide them with immediate access to both:
- Acquiring books of business
- Being acquired
- Partnering with a specialist
Acquiring books of business
A growing trend among smaller RIA firms with more aggressive expansion plans is advisor acquisition utilizing a strategy referred to as “tuck-in.” The tuck-in strategy is attractive to breakaway advisors and independent RIAs because it offers the entrepreneurial advantages of an independent RIA without the heavy lifting of creating an infrastructure from scratch. Of course, in order to attract the right kind of talent, the acquiring firm needs to be able to present a value proposition that includes the advantages of scale and specialization – another chicken and egg dilemma.
The years 2016 and 2017 have seen a marked increase in the number and size of RIA mergers in which major aggregators are quickly achieving a level of scale rivaling that of regional wirehouses and some of the larger independent broker dealers. The obvious advantage they offer growing RIA firms is instant scale, world-class specialization in areas of technology, human capital and processes, and the opportunity to grow and build their own brand.
The overriding issue for target RIA firms is how well their own plans for growth nestle with those of the new mother ship. Cultural and management style differences can also plague the relationship, especially as the aggregators begin to cross into wirehouse-sized territory.
Partnering with a Specialist
Recent advancements in technology have ushered in a new breed of outsourced specialization that offers a more comprehensive investment management solution capable of accommodating an advisor’s entire book of clients. With a comprehensive outsourced portfolio solution, it is now possible for advisors of any size to offload the entire operational aspect of investment management while maintaining control of the client relationship and the strategic direction of their firm. The result is immediate access to massive scale managed by a team of dedicated specialists that bring customized solutions to all aspects of the firm’s operations.
Outsourced portfolio solutions have been available for several years, enabling advisor firms to offload all or a part of their investment management needs and other back office operation. However, a new generation of providers is emerging that operate well beyond the scope of typical vendor-firm relationships to establish a partnership of specialization. Outsourced specialization combines access to market-leading technology with the consultative expertise of highly-skilled implementation specialists that frees advisor firms to specialize in their core competencies of client service and business development.
In a true partnership of specialization, customized solutions implemented and managed by dedicated specialists enable advisor firms to leverage the substantial investment in scale-quality technology while preserving the distinctive client service model of the firm. To that end, a specialization partnership becomes an enabler of excellence.