The consolidation contradiction

Smaller firms can still flourish amid the rampant M&A activity, but they need to employ targeted client development and strategic outsourcing.

As consolidation continues in the registered investment advisor marketplace, the assumption is that smaller firms will be unable to compete and eventually will need to roll up into larger, better-capitalized organizations. But are the reports of the death of the boutique RIA premature?

With targeted client development and strategic outsourcing, these smaller firms can continue to succeed.

It won’t be easy to come out on top in this environment. But if they carefully allocate their resources, boutiques can exploit the consolidation contradiction and compete for clients with any firm — and win.

CLIENTS WANT CHOICE

If wealth management were a one-size-fits-all proposition, then all clients would be satisfied working with the handful of wirehouses, where brand recognition, scale and standardized operations are the norm. But we know that’s not the case, as the wirehouses’ market share continues to decline.

The independent broker-dealer channel originally grew from the desire of advisors, and their clients, for choice, flexibility and freedom. When IBDs began getting too big and losing their unique nature, advisors started breaking off and forming their own RIAs and taking their clients with them. Now, with RIAs consolidating into national brands themselves, clients who are still looking for a truly personalized experience may seek out advisors at smaller firms.

While many potential clients will continue aligning themselves with the prestige of a larger company, others want a more local, homegrown feel that only a small company can provide. Boutique RIA firms can attract this type of client through targeted marketing that stresses the benefits of small.

By serving far fewer clients, advisors at boutiques can build stronger and deeper relationships, tailoring their services to the clients’ specific needs. Many boutique RIA firms also target a niche clientele, allowing them to deliver even more personalized services and targeted expertise.

COMPETING THROUGH OUTSOURCING

However, there’s a reason consolidation continues unabated in this space: The push for scale delivers efficiencies, especially in the development of technology, legal and compliance platforms, systems and tools.

This has been seen as a disadvantage for smaller firms in the past, but times have changed. Myriad best-in-class third-party vendors make it easier to compete in the digital technology game at a fraction of the cost of building it all in-house. Smaller firms also aren’t constrained by legacy technologies that are expensive, time-consuming and complicated to replace. By finding the right mix of partners, smaller firms can get to market much faster with game-changing services for their clients.

But boutiques need to do their due diligence and be judicious about how they deploy their limited capital to make sure they are outsourcing the right services to the best partners. This process will become even more important if the SEC’s proposed rul e ch ange to the Investment Advisors Act of 1940 regarding outsourcing take effect in the coming year.

Smaller firms need to make an honest assessment of what they’re good at and be willing to look elsewhere to backstop any weaknesses. Clients will be willing to give up some bells and whistles for the benefit of a more intimate experience, but there are several table stake services that even the smallest RIA needs to be in the game.

Many RIAs realize that their time is better spent working with clients as a financial planner and “life coach,” rather than as a portfolio manager, IT department and compliance team.

Using a third-party investment manager allows the advisor to provide clients with access to a vast number of model portfolios and investment solutions, along with institution-level management. Additionally, using outside information technology platforms for everything from digital account opening to compliance and marketing can help level the playing field and ensure that boutiques can compete. Other outsourced B2B industry experts can help broaden a firm’s offering in areas such as banking, investment research, trading, custody, compliance and insurance. It can be a win-win for both advisor and client.

By leveraging outside resources and focusing on a narrow and deep strategy that gives exceptional service to a more selective group of clients, smaller firms can grow their businesses on their own terms. Being successful without being big is possible in today’s marketplace, and really not a contradiction at all.

Mitch Avnet is founder and managing partner of Compliance Risk Concepts.