The Myriad Of Challenges Facing Independent Advisors In 2024

How Independent Advisors Can Overcome Headwinds In Fee Compression, Compliance, The Labor Market, Client Expectations And Technology Costs
Matt Regan, President, Wealthcare
Matt Regan, President, Wealthcare

One of the most powerful trends in the wealth management industry is the flow of advisors and assets to the independent channel over the past decade. Driven by the benefits of flexibility and pay at independent firms, advisors have steadily exited the employee channel of wirehouses, banks and broker-dealers. The goal of creating true enterprise value through the creation of their own RIA has led advisors to make the jump in growing numbers.

Although there are several firms that offer “supported independence,” many advisors make the decision to establish their own SEC- or state-registered RIA and take on the responsibilities associated with running that business. Back-office tasks like compliance, operations, trading, marketing, investments and billing become part of their day-to-day – all on top of their ongoing client and business development work. For those that succeed, the rewards can be outsized: true independence means unfettered flexibility, freedom of choice in products and services, and increasingly attractive multiples at the time of an exit.

Running a successful RIA is unquestionably hard work, but for many of these business owners it is a labor of love. They provide their clients with great outcomes and nurture a culture of excellence within their practice, while creating a second generation of advisors who will ultimately serve the succession plan.

That’s the pretty picture.

Common Challenges

While that may be the experience of some, it certainly is not universal. Depending upon timing and other exogenous events, headwinds can appear that make the decision to go fully independent less than ideal. I’ve spoken to numerous advisors who made the leap to independence in the past four years and faced challenges outside of running the day-to-day business.

I’ve spoken to numerous advisors who made the leap to independence and faced challenges.

Consider an advisor who established an independent RIA in 2019 or 2020. Tailwinds in the market likely led to steady AUM growth through 2021, but the market turn in 2022 likely set back the firm’s revenue and organic growth. Although the 2023 rebound helped, other trends in the industry present potentially unexpected challenges, such as:

  • The rising costs of compliance, including the skyrocketing cost for cybersecurity. The SEC is focused on cyber protection in a world where attacks on client private personal information (PPI) escalate daily.

  • The arrival of the long-anticipated fee compression. We are seeing real pressure on the 1% fee, particularly with larger client relationships.

  • Expanding expectations for client servicing. Simply put, clients expect more from their advisors each day without paying more for that work.

  • A rise in the cost of technology. Clients expect a more digital, interactive and real-time technology stack that forces advisors to stay on the leading edge – an expensive proposition.

  • Challenges in the labor market. Whether it is finding a successor or hiring an office manager or operations expert, the cost of labor has increased, and the market remains tight.

Solutions For RIAs

These challenges don’t mean that a decision to go independent was wrong, or that the rewards of running a successful RIA don’t remain in place over time. These are just realities that entrepreneurs in every industry face, and to the extent that they are addressed and overcome, success can follow. Solutions are available to help RIAs navigate less than calm waters.

There are a number of credible outsourced compliance firms that provide guidance as well as hands-on work for independent advisors, including SEC filings. Piecing together a compliance solution for cyber protection, email and text message capture and storage, as well as more mundane regulatory responsibilities, can be like choosing a technology stack, but independent advisors should investigate the bundled offerings from their custodial partners and their portfolio management and recordkeepers (PMR) as a first step.

When it comes to fees and service delivery, it is important for advisors to ensure that clients understand the holistic nature of their advisory offering. While 1% cannot be justified for asset management alone, it is a fair fee for comprehensive financial planning, estate and tax guidance, and family coaching and retirement planning.

These are just realities that entrepreneurs in every industry face.

Independent advisors must be efficient and analytical when it comes to their technology stack. A CRM like Salesforce is likely much more expensive and includes much more functionality for all but the largest RIA firms. Cheaper and more than adequate alternatives exist. Again, leaning on custodians or a PMR is a smart place to start.

Labor costs fluctuate and the current market is tight, but having a strong team and succession plan in place is critical. The number of degree-granting institutions that offer financial planning and wealth management majors has increased greatly in the past five years as the market attempts to address the dearth of younger – especially female – wealth managers in the industry. Mentoring a newly minted CFP straight out of college can take extra time, but the long-term benefits can be significant.

If these challenges are overwhelming the business and organic growth and profit margins are being impacted significantly, it may make sense to look at alternatives to the stand-alone approach.

Affiliating with an RIA that supports independent advisors can shift these non-revenue generating and time-consuming tasks to the home office. An independent IAR of a larger platform RIA cedes the compliance responsibilities to their partner firm and relies on the larger firm to stay on the cutting edge of technology, cybersecurity and comprehensive service, but maintains the ownership of their clients, brand, practice and enterprise value. Outsourcing these items to a partner also frees the advisor up to work with clients and prospects to focus on organic growth – the most effective antidote to fee compression.

Independent advisors should remember that flexible affiliation models and platforms that support independence continue to proliferate, and a good business owner should always look for solutions that can help them address these challenges.

Matt Regan is President of RIA platform Wealthcare.

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