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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Why Demographic Differences Define How Advisors Should Talk to Clients

“If I had dropped out of college when I was a freshman, I would be a billionaire now. But my mother forced me to finish my education, so now I’m only a millionaire.” — Andrew Mason, Founder and former CEO of GroupOn

This quote was provided by Marilyn Moats Kennedy, CEO of Moats Kennedy Inc., who is a career consultant based in Chicago. She used this quote as an example of how the Millennial generation has a radically different mindset from others. Dropping out of college to pursue your dream is seen as a failure by Baby Boomers, but as a valid option by Millenials and one that could even be the catalyst to make you rich.

Financial advisors must craft their messages differently, depending on the target demographic that they would like to reach, Moats Kennedy explained. Through the use of extensive surveys, she has found that each age group not only views the world through different paradigms, but have different fears, different life goals and different ways they prefer to communicate.

This article is a summary of a session from the Money Management Institute’s 2014 Annual Convention, which was held in New York City.

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The top tier asset management firms have demonstrated success in their efforts at sales and product distribution.  They also oversee a loyal advisor base and have solid partnerships with key accounts.  Understanding their best practices and incorporating them into your firm can help you on the road to emulating their success

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7 Best Practices of Successful NextGen Advisors

This is a summary of a panel from the Money Management Institute’s 2014 Annual Convention.  The panel included representatives from a wide range of distribution channels, including a wirehouse, insurance broker-dealer and an online advisor.

Moderator: David Berkowitz, President, Lincoln Financial Network
Panel:   Eli Broverman, Co-Founder & COO, Betterment, LLC
James J. Detterick, Managing Director, Corporate Client Group Director, Morgan Stanley
Andrew J. Wigzell, Senior Financial Planner, Barnum Financial Group, MetLife

How important is it to establish relationships with children of Baby Boomer clients?

Over the next decade, Baby Boomers will be retiring at the rate of 10,000 per day.  Since Boomers make up a large percentage of most advisors books, if they don’t reach out to their children, eventually they won’t have clients left at all, Wigzell pointed out.  As a 41 years old advisor, Wigzell will be retiring sometime in 2037.  He said that he plans to keep adding clients who are younger than he is so that he will have clients to manage when he retires.

Wigzell is used to working with clients in the 49-65 year age bracket, so he recently added a Gen Y’er to his team to focus on reaching younger generations through the use of technology. 

In sharp contrast to the other panel members, the median age of Betterment clients is a mere 35 years old, Broverman reported. The firm’s methodology of engaging with investors through digital means is the primary reason for this, he stated.

Broverman quoted a statistic that 71% of Gen Y’ers would rather visit the dentist than go to a physical bank branch.  (He didn’t mention who came up with that unusual question or how many people were surveyed, but I would imagine they have very healthy teeth)  While it’s well-known that younger people are more inclined to use technology, another statistic he cited was that 4 out of 5 people across all demographics prefer to bank online.
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3 Tips for Helping Clients Deal With a Crisis

After a financial crisis, how do you think about what comes next?  How will your clients react and how can you help them?  What are they feeling and why are they feeling that way?  The Hartford Funds has partnered with the MIT Age Lab to study how the changing demographics of aging will impact consumer decision making, preferences, communication.

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Diehl started by explaining that during a financial crisis, most clients will experience some combination of stress, fear, and\or anxiety.  Studies have shown that people under stress experience tunnel vision, auditory exclusion, and a reduced capacity to learn.  All of which make it harder for an advisor to communicate with them. Continue reading

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As the world has become flatter due to the effects of globalization, investors have felt pressure to diversify beyond their domestic markets.  Most financial firms met this demand by offering assets registered in multiple jurisdictions, however, this was usually only for non-discretionary programs.

Sponsors have recently been adding global capabilities to their managed account products as well such as multi-currency, F/X hedging and trading in foreign ordinaries.  Along with these expanded offerings comes additional layers of complexity.

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Going Under the Hood of Models-Only Programs

This is a summary of a session from the Money Management Institute’s Fall Solutions Conference that was held in October 2013 in New York City.

Moderator: Heeren Pathak, CTO, Vestmark

Panelists:

Are some asset classes better suited for use in models-only programs?

Asset classes that are more liquid are usually easier to trade in a model, Lasker observed.  Communication is important here since some assets can become illiquid for short periods of time and the managers need to know when there are problems implementing model changes, he stated.

While some strategies are more challenging, most obstacles can be overcome so that they can be included in a model, Overway commented.  Fixed income is a good example, since the models are often provided in the from of a list of characteristics instead of individual securities.  This entails more communication between the Natixis overlay management group and the model manager about which securities would be acceptable in the model portfolio, he pointed out. Continue reading