RIAs: The struggle for advisory firms to maintain growth

RIA firms shouldn't expect the good times to last. After benefiting from strong equity markets in 2009 and 2010, registered investment advisory firms will be battling head winds for the next few years as they seek further growth, observers predict

RIA firms shouldn’t expect the good times to last. After benefiting from strong equity markets in 2009 and 2010, registered investment advisory firms will be battling head winds for the next few years as they seek further growth, observers predict.

Returns from stocks — and bonds — in the near term are expected to be moderate. That will put pressure on fee-only firms to bring in new assets, either through organic growth or acquisitions, as well as improve efficiencies and make the right hires.

This state of affairs comes after two years of good growth. At the top 50 advisory firms (ranked by discretionary assets under management), total assets under management increased 22.8% last year, on top of a 17% rise in 2009, according to research firm RIA Database. Those positive years followed a disastrous 2008, when assets among the elite firms fell 14.3%.

“Advisers won’t get the lift from the markets that they used to,” said Mark Tibergien, chief executive of Pershing Advisor Solutions LLC, which holds $92 billion in custody for 640 advisory firms.

“Before 2008, the market camouflaged a lot of sins,” he said. “Advisers saw 20% per-year growth just from the market lift.”

Advisers also will have to deal with the increasing costs of regulation, higher head counts and more expensive rents. As a result, the advisory industry should expect to see compressed margins, Mr. Tibergien said.

DODD-FRANK ADDING TO COSTS

Compliance costs are the main concern among advisers. These worries are driven largely by the uncertainty over the implementation of the Dodd-Frank Act.

For example, the possibility of a self-regulatory organization for advisers still is up in the air and more than 4,000 advisers will be moving to state registration. Many of those will have to register in multiple states. (See the latest Top RIA rankings.)

“The more the Dodd-Frank requirements kick in, the greater the burden on firms,” said Peter Mafteiu, founder of Sound Compliance Services.

“In the post-Madoff era, regulators are more attuned to disclosure — what you do and how you charge,” said John Scuteri, chief operating officer at Veritable LP, a high-net-worth firm which has $10 billion in assets and is No. 2 on the list of top firms.

Mr. Mafteiu thinks many advisers skimped on their compliance budgets after the financial crisis and will have to play catch-up.

“Firms are going to be challenged, finding the balance between doing business [and] compliance,” Mr. Mafteiu said. “It’s going to be tough.”

“Advisers will have to increase some of the controls and perhaps dedicate more resources [to] compliance,” said Bernie Clark, head of Schwab Advisor Services, which holds $689 billion in custody for 6,700 advisers.

New compliance requirements are the biggest concern for TABR Capital Management LLC, said Steve Medland, a partner at the firm, which manages $170 million.

Along with new rules come annual tests, audits and reports, said Mr. Medland, who added that the firm is in the process of beefing up its data security procedures.

“One of the dangers is that we might need a full-time compliance officer just to keep up,” he said.

TECH CHALLENGE

After regulation, advisers often mention technology as their biggest operational challenge.

As their firms have grown, advisers “now need to look back and make sure all the technology components are integrated in a way that allows them to reach the next level,” said Loren Morris, director of RIA services for Dynasty Financial Partners LLC, a platform provider for RIAs.

Firms such as Dynasty, as well as consolidator firms and major custodians, are doing everything they can to provide practice management help for their RIA clients.

Despite the difficulties of expansion, “to a firm, they’re all really focused on growth,” said Michael Durbin, president of Fidelity Institutional Wealth Services, which holds $496 billion for 3,300 advisory firms.

And increasingly, firms are looking to acquire or merge with other advisers, Mr. Durbin said.

“We’re seeing more acquisition activity among our 20 firms,” said Richard Gill, a vice president at Focus Financial Partners LLC, a consolidator that provides consulting and financing services.

The majority of deals involve what Mr. Gill calls subacquisitions or “tuck-ins,” when one adviser or broker joins an advisory firm.

Mr. Tibergien sees the same trend: “I think the pattern of mergers, rather than acquisitions, will continue.”

Despite some talk that the breakaway trend has slowed, custodians say the flow from both wirehouses and independent broker-dealers continues.

While wirehouse turmoil has stabilized, “the trend of going independent isn’t going to change — it didn’t start in 2008,” Mr. Clark said.

The financial crisis caused a spike in recruitment, which has since come back to normal levels, Mr. Durbin said.

“But the average size [of breakaways] continues to go up,” he said.

Consolidators and RIA platform providers are becoming more active players in helping large wirehouse teams make the transition, Mr. Durbin added.

E-mail Dan Jamieson at [email protected].