Succession Planning

RIA alliance serves up dire industry outlook

Dec 2, 2012 @ 12:01 am

By Dan Jamieson

Owners of small RIA firms, beware: You may be falling into a complacency trap, content to make a nice living while your practice succumbs to declining profit margins, recruiting and retention challenges, and degradation of enterprise value.

This dire outlook comes from members of the Alliance for Registered Investment Advisors. The six large firms that make up the alliance are on the acquisition hunt, looking to pounce on small ones that find it tougher to compete.

The alliance members may have their own agenda, of course, but they are run by savvy operators who know something about where the industry might be headed.

The group has produced two of four planned white papers on the critical strategic decisions RIA firms must address (available at

InvestmentNews caught up with three of the aRIA principals at Schwab's Impact 2012 conference last month: Brent Brodeski, chief executive of Savant Capital Management LLC; Ron Carson, chief executive of Carson Wealth Management Group; and Neal Simon, chief executive of Highline Wealth Management LLC. The alliance's consultant, John Furey, founder of Advisor Growth Strategies LLC, also joined the conversation.

The following is an edited transcript.

Q: All of you told the Impact audience that big firms such as yours will be competing more with smaller RIAs. Why is that going to happen, and are you seeing it yet?

Mr. Carson: Yep. We're taking accounts from smaller firms all over the place. Small firms are not investing in the cool stuff that clients want, like a higher level of transparency, a higher level of proactiveness. I did a client event for our first tuck-in adviser the other night. Clients came up to me in droves and said, “This is amazing.” And one prospect said that because of the things this adviser can now do, he is moving to us from another, smaller adviser.

Mr. Brodeski: It's like the traditional doctor practice from 20 years ago. You'd come out of medical school, you built a practice, and everybody in town trusted you. That model doesn't work anymore. The doctors are now employed at organizations or they're specializing at places like the Mayo Clinic. By putting that doctor team together, they can diagnose better. That smaller adviser, the solo shop, they just don't have the tools; they don't have the expertise. They just don't have the capability to deliver a more robust value proposition.

Q: It sounds dire for small firms, but isn't your motivation to get them to sell to you?

Mr. Carson: We started out as a study group to share best ideas. But sure, all of us are in acquisition mode. What I get out of it is that people look at us and know we're out there. They may look at us as an option. But a big part of it is, we're giving back to the industry with our white papers.

Mr. Brodeski: Part of the motivation is [that] by talking and writing about it, our alliance helps us execute our own strategies better. For some people, going with a financial buyer is better than merging with one of us. Others might figure they'll just run their practice into the ground and figure their clients can go find a new adviser. What we've said is, there's a path by going RIA to RIA — you combine with another RIA and you jump-start the process. Maybe it makes sense for only 10% of RIA firms. But if they don't know about it, they're not going to do it.

Q: Would the founder of a small RIA be willing to give up control?

Mr. Simon: For some, the answer is no, they won't do it. There are some people out there who put a high premium on being totally independent. They care more about lifestyle elements than about creating enterprise value.

Mr. Brodeski: There's an upgrade opportunity, like our combination in April with The Monitor Group. Its president [Glenn Kautt] was in his mid-60s and didn't have the time frame or energy to make those bigger investments. But he saw the big picture. By merging, just like that — he got better technology, [a human resources] department, a better website and career tracks for his people. It was tough because he had to turn over the reins. But he was at a point where he wanted to. Someone else with a lifestyle practice may say, “Hey, I've milked this, and if we can grow faster with Neal's firm, then we can create value for everybody.”

Mr. Furey: As a sound business manager and a fiduciary, wouldn't you want to look at a different way to deliver scale, a different way to deliver value? We're trying to say that it's not OK to stick with the status quo, assuming you want your business to have longevity.

Q: What is the market going to look like with more mega-RIA firms?

Mr. Furey: When I was at Charles Schwab & Co. [Inc.] back in 2007, 50 firms had at least $1 billion in assets. We thought that was incredible. Now there are more than 300. I think there will be a continuation of that trend. There will be a new category of $10 billion RIAs that have a fiduciary service that's better for the client, and they'll have brand capability like a national wirehouse. In 10 years, smaller advisers will start getting squeezed out because they will either lose their value proposition or retire. The demographics are just there. Twitter: @dvjamieson


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