5 Hot Tips For Selling to RIAs

This is a summary of a panel from the Money Management Institute’s 2014 Annual Convention.   The session was targeted at anyone who has investment advisory firms as customers such as service providers, broker-dealers or asset managers.

Moderator: Kian Rafia, VP, Product Development, Cetera Financial Group
Panel: Mark Pennington, Partner, RIA Services, Lord Abbett
Michael Partnow, Director and Financial Solutions Consultant, Pershing, LLC, a BNY Mellon Company
Michael Bryan, Senior VP, Advisory Services, Triad Advisors

The panel was composed of experts representing broker-dealer, product manufacturer, and investment supplier firms who provided these useful tips for selling into the Registered Investment Advisory (RIA) market.  As a consultant who regularly helps clients develop strategies for this space, I was impressed with the depth of knowledge and usefulness of the advice offered in this session.

1. Focus on Their Areas of ConcernDart Board 3

There are currently two drivers of change in the RIA market; organic growth and margin compression, Partnow began.  Growing their business organically is the primary driver for elite RIA firms.  You should be thinking about how to partner with them to help them achieve their goals.  Margin compression is due to the combination of a continued low interest rate environment, as well as margin and mutual fund fee waivers, he stated.

Pennington agreed that there is a squeeze on margins and quoted research from Envestnet that said 77% of advisors are moving to the RIA channel to increase their compensation.  Distribution companies, asset managers, sponsors, providers, platforms and broker-dealers need to react to that.  Clients want independent thought, especially the true entrepreneurs who want to be on their own, he said.

2. Let Your Clients Define ThemselvesFun House Mirror2

If you want to penetrate the RIA market, the first thing you need to do is to define it, Bryan proposed.  He recommended thinking “fee first” when looking at the RIA marketplace to highlight the point that if you want to service fee-based advisors, you need to know where they are coming from, he explained.

Bryan explained that the following advisory business models can be referred to as ‘hybrid’:

  • Indy RIA – An Investment Advisor Representative (IAR) operating under an independent RIA using a discount broker-dealer for their custodial relationship. there are a lot of these out there, but they are hard to capture.
  • Dual registrant – Has both fee and commission licenses, segmentation can get funky, inside this space there are advisors operating under a broker-dealer or insurance company’s RIA (corporate RIA), as well as IAR’s operating under an independent RIA (independent from the broker-dealer). These RIA’s may or may not custody assets with the broker-dealer.  This segment represents the largest revenue opportunity for broker-dealers today.

Hybrid is more of a marketing term than a compliance term, Partnow insisted.  It really should be defined as whatever your client wants it to be. Advisors are attracted to the hybrid model since it offers more flexibility to offer products to meet the needs of different end investors, he stated.

Some advisory firms do not want to be referred to as broker-dealers.  They prefer to be called an “RIA with a broker-dealer” or even simply a “wealth management organization,” Partnow reported.

3. Partner With CustodiansTeamwork and team spirit

There has been a shift in the independent contracting segment, according to Partnow, with ACAT’s leaving independent broker-dealers and going to the primary third party custodians.  This is forcing the broker-dealers to choose between fighting the custodians or partnering with them, he said.

Elite advisory firms are transforming their organizations into wealth management firms to better support independent RIA’s through and keep the assets from going to the custodians, Partnow reported.   Firms that can not change are forming affiliations with custodians to attract top-producing IARs who are looking for services such as practice management and individual business consulting, he noted.

Advisors are looking for economies of scale but don’t want to disrupt their business, so they look for a partner with similar infrastructure, Bryan pointed out.

Partnow explained that there are two opportunities for broker-dealers to position themselves to gain additional business from IARs:

  • Through their clearing entity
  • Through third party affiliations (i.e. Schwab, TD, Fidelity)

4. Convert Regulatory Issues into Sales OpportunitiesOpportunity Door

Since 2008, the industry has been experiencing what Bryan termed a “tsunami of regulations.”  Although, the fall of the Merrill Rule was not necessarily a bad thing for those in the advisory space, Bryan stated.  This is because it highlighted the differences between commission-only and fee-based advisors.  More recently, Dodd-Frank and the Department of Labor’s (DoL) recent rulings that impact commissions can be seen as a drive to improve transparency, he stated.

Everyone should be brainstorming ways your firms can help advisors to navigate these waters, Bryan insisted.  A big shift occurred when the SEC required firms with <$100mm in AUM to register with state regulators.  At some point, many of these advisory firms will become fed up with trying to comply with the myriad state regulations, and you should be there to help them, he advised.

However, fee-based advisors have been managing this for a long time, Bryan continued.  Use these new regulations as an opportunity to help support advisors.  The compliance environment has become more complex as new rules have come from ERISA, DOL, and even FINRA.  Ask yourself how you can help advisors to continue serving retirement plan assets and stay compliant?  You will receive an enthusiastic welcome if you bring solutions to your clients that make it easier to navigate the regulations, he noted.

The top focus of the SEC this year is dual-registered advisors, Pennington warned.  Specifically, the regulator will be looking to ensure that advisors are putting clients into the proper product for them, whether it is fee-based or commission-based.

Rep as PM (RPM) programs are undergoing additional regulatory scrutiny, Partnow insisted.  Many firms have gotten themselves upside down in the independent contracting space and are seeing almost 2/3 of their new advisory business being directed towards RPM.  When you create new products (i.e. alternative funds or new mutual fund share classes) think about how your broker-dealer clients will be able to leverage them.  Reducing their platform fees is important to them, so try to provide mutual funds without transaction fees, he recommended. 

Dually-registered firms increased their AUM by over 21 percent from 2011 to 2012 and now manage nearly $1.1 trillion in assets, according to Cerulli Associates.

5. Keep an Eye on Industry Trendsmarket trends2

Is there a trend of advisors shifting away from independence and back towards working for broker-dealers?

According to Bryan, his firm has supported the independent RIA model for a long time, but in just the past 18 months, the number of IARs under Triad’s corporate RIA has increased 100%.  There are now 20% under the corporate structure and 80% under the independent structure.  This is a substantial shift.  Some broker-dealers are moving away from the independent model entirely and forcing out any advisors that want that model, he added.

Of the roughly 15,000 RIA firms in the US, Pennington explained, 11,000 of them (73%) have less than $100 mm in AUM.  In 2011, there were 160 firms with over $1 billion in AUM.  Now there are over 600, mainly due to the intense M&A activity that has taken place over the past few years.  It is almost impossible to have a six-fold increase in these firms based solely on organic growth, he stressed.

Advisory firms with over $1 billion in assets control 54% of the market, up from 42% in 2008, according to Cerulli..

The advisory business has become very concentrated.  90% of assets in the RIA space are controlled by just 10% of firms.

BONUS. Don’t Create a Separate Salesforce for RIAs

Cerulli is forecasting growth in RIA channel headcount of 140% between now and 2017, Pennington noted, with dual-registered expected to grow 160%.  It has gone from a trickle to a flood of new hiring, he observed.

Lord Abbett has a good reputation in the RIA space for marketing and client segmentation and yet they do not have a separate sales force just for RIA’s, according to Pennington.  Their independent broker-dealer sales people cover the RIA channel.  He recommends identifying salespeople who can be chameleons.  Give them the right training and they can sell anything, he insisted.

Pennington used to run the SMA business at Lord Abbett and resisted pressure to create a separate SMA sales force.  It is an advantage to be a privately-held partnership since it allows them to be more flexible with roles.  The quality of your investment products will ultimately drive your long-term success and it must be surrounded with a service model that caters to the needs of your clients, he explained.

Channel AUM 2012 ($Bil) Increase from 2011 to 2012
Wirehouses 5.4 12.5%
RIA’s 2.3 14% (very strong EQ year)
IBD’s 2.2 11%
Regional BD’s 1.9 2%
Bank BD 629mm 4.6%
Insurance BD 434mm 2.4%
Total 12.8B 10%

 

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Finding the Keys into Sponsor Platforms (2/2)

This is a summary of a session from the Money Management Institute’s 2012 Fall Solution Conference. This is part two of a two-part series.  You can read part one here.

Moderator: 
Panelists:

What is the makeup of your analyst team?

Raimer’s due diligence team is comprised of six people, all with very different backgrounds.  Some are CFAs, some are MBAs, there’s a former wholesaler, a former relationship manager, and a former product manager.  They play off each other’s strengths and also do a lot of cross training, he said.

Managing a portfolio manager’s time is always a challenge, Raimer observed.  If an analyst insists on meeting with the portfolio manager, Raimer first tries to deflect, by reminding them that they would rather the portfolio managers spend their time researching future trades.  Everyone on the team can deliver the introductory discussion around every investment strategy that they offer and this takes some of the workload off the portfolio managers.  They also have portfolio specialists and product managers and try to do everything they can to only take the PMs away from their desk when they really need to, he insisted.

Finding the Keys into Sponsor Platforms (1/2)

This is a summary of a session from the Money Management Institute’s 2012 Fall Solution Conference. This is part one of a two-part series.

Moderator: 

Bill Broderick, Principal, Investment Advisory, Edward Jones.  They launched their SMA program back in 1993 ($2.5 bil AUM), Mutual Fund Advisory (MFA) was launched 4 yrs ago and now has over $83 billion in assets, last year launched UMA ($1.2 billion AUM).  All programs are home office-driven with very limited investment lists.  There are no Rep as PM programs.  Research team consists of 20 analysts based in St. Louis, MO who build the fifty supported models.  All of their models are GIPS-compliant.

Panelists:

Steve Raimer, Partner, Director of Due Diligence, Lord Abbett & Co.  They are an independent money management firm based in Jersey City, NJ.  $127 billion in AUM.

Jeff Holland, Executive VP, Head of Capital Markets, Cole Real Estate Investments.  Cole has been in business over 30 years and has $12 billion in real assets.  They focus on long-term, high-quality,  income-producing real estate.  Jeff has been with the firm for two years and is the gatekeeper for their platform and is responsible for driving advisor adoption of new products.  Prior to Cole he was COO of Equity Trading at BlackRock.

Anthony Ciccarone, Managing Director, Head of National Accounts Business Development, Nuveen Investments.  Nuveen has around $210 billion in AUM.  Ciccarone has been at Nuveen since 2005 and in National Accounts for three years.  Prior to that he was in Nuveen’s Product Development Group for four years.

What is some initial advice for getting onto your platform?

Holland proposed that the industry is coalescing towards a 2×2 matrix; advisory vs commission and discretionary vs non-discretionary.  When moving into discretionary platforms and home office models there is a higher level of due diligence, he warned.  Does your firm have the rigor to get on these platforms?  Even in discretionary products, some firms require client approval before investing in alternatives such as REITs, he advised.

How can managers better position themselves versus their competition?

According to Raimer, there are three things that are critical for a manager: 1) know your products; 2) know the sponsor landscape; 3) know the competitive landscape.  Are you a better or complimentary solution?  Unless you are contacted as part of an active search by the sponsor, then being a complimentary solution is better.  A manager should be able to demonstrate to the analyst how they can improve their recommended list, he said.

For small managers, such as Coles, who are focusing on alternatives to the standard 40 Act funds, it can be more difficult, Holland described.  Coles has developed what they believe to be an innovative product, which is a managed account wrapper around commercial real estate.  When making the value proposition, you have to make analogies to existing products so they can understand how you fit into their platform.  A big challenge for innovative products can be just finding the right people to talk to at the sponsor, he said.

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