practice management | PLANADVISER March/April 2017

Assessing Independence

By John Manganaro | March/April 2017

“Small B/Ds without scale are at higher risk,” warns Kenton Shirk, associate director at Cerulli in Boston. “It is likely that some of these boutique firms will be unable to support new regulatory costs, resulting in an increase in firm consolidations.” Shirk adds that smaller B/Ds may be acquired by larger ones, may choose to combine operations, or may “affiliate as an Office of Supervisory Jurisdiction [OSJ] with an independent firm to realize cost synergies.”

Many approaches can work, moving forward, but, under increased regulatory pressure, any firm touching retirement accounts governed by ERISA must double down on transparency and fairness, experts stress.

“Cost reduction, decreasing business risk, and effectively leveraging time and resources remain the main focuses of the adviser industry[—for both RIAs and brokers],” Shirk observes. “Clients increasingly favor fee-based business, so the majority of advisers surveyed plan to increase its use in their practices.”

Fee Compression
It should be noted that RIAs are by no means getting an easy ride in the advisory marketplace at the expense of affiliated brokers. Independent firms, too, are feeling the fee pressure.

Relevant data in the “2016 Fidelity RIA Benchmarking Study” shows that many independent advisers also feel they are facing a period of unprecedented change, driven by numerous forces. Among the more than 400 RIA firms surveyed, there is a “persistent organic growth challenge,” Fidelity reports. Organic growth dropped to 6.7% in 2015, the lowest level in the last five years.

“In this context, firms prioritized marketing and business development, but lack a strategic focus on pricing, which may prove costly,” Fidelity points out. “Median revenue yield dropped 4 basis points [bps] to 69 bps in 2015 after years of stability.”

Part of the growth problem, according to Fidelity, is the “tremendous variation in offerings and fee models across firms.” This state of affairs “creates major challenges for investors interested in comparing RIAs,” Fidelity explains, noting that the top driver determining an RIA’s pricing approach should be “a deep understanding of value delivered.” The Fidelity study further suggests “there is a misalignment between offerings, pricing and delivery. Segmentation, unbundling and use of minimum fees are key opportunities.”

Among the factors driving a need for both RIA and B/D pricing evolution, Fidelity says, are the increasing commoditization of investment management; increasing value placed on all types of planning, beyond just stock/mutual fund picks; increasing influence of newer, younger clients; advancements in available investment management technology; changes in the regulatory environment; and many other factors. The impact of “robo” and digital advisers on both investors and firms is also significant and puts additional pressure on established firms to adapt and reform their businesses, the study says.

Key Takeaways:

  • Whether advisers go independent or affiliate with a B/D, they should recognize that they need the support of a well-rounded team and examine what model works for them.
  • The fiduciary rule is prompting many advisers to become independent RIAs, freeing them from ties to in-house investment products or commissions, as well as giving them greater control over compensation models and what products they recommend.
  • In light of the regulatory and legal climate, some B/Ds are helping advisers analyze investment products more impartially, and research firms such as Cerulli and Morningstar expect more advisers will adopt flat fees over commissions.