Outside voices and views for advisers

Three big trends top advisers need to focus on now

Apr 9, 2014 @ 11:33 am

By Michael Nathanson and Adam Birenbaum

advisory, consolidation, human capital, practice, business, practice management
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Forward-thinking independent advisory firms have no shortage of substantive industry trends on which to focus in 2014 — from increasing uncertainties in the regulatory environment to the unyielding pace of technological change to new outsourcing opportunities and even new cyber and competitive threats. For smart advisers, there's a veritable smorgasbord of challenges and opportunities awaiting them, seemingly custom designed either to keep them up at night or get them up in the morning, depending on their perspective.

Emerging from this expanded list, however, are three specific trends that we see gaining the most traction and creating the greatest potential and impact in the near term:

• Increased pressure for consolidation across the industry;

• Significantly more competitive and complex personnel;

• The continued evolution of “advisory practices” becoming true “advisory businesses”

Let's unpack each one of these.

Trend No. 1: Industrywide consolidation

In the highly fragmented industry of independent advisers, there is intensifying pressure to address some of the more foundational issues caused by such fragmentation. These issues often include relative inefficiencies, scarcity of resources and of course, challenges with sustainable leadership and service succession. Simply put, independent advisers of all sizes are finding that strategic hires, mergers and other forms of consolidation increasingly are necessary and effective to ensure that their primary constituents — clients, employees and shareholders — are in good hands over the long term.

(See also: Merging for the right reasons: Fundamental considerations for RIAs)

Recent years have seen an uptick in firms more proactively seeking to combine forces in smart ways so as to secure the collective resources, expertise and experience needed to serve their clients optimally. They also seek synergies that can improve overall profitability. With the right transactions, resources can be enhanced and profitability can be improved, leading to better systems and technology, deeper research, and the attraction and retention of better talent. Firms that continue to believe they can compete effectively with lower budgets and incomplete resources often do so at their peril and their clients ultimately will judge for themselves whether they are successful in doing so.

Of course, consolidating transactions within the industry also can help to address the growing challenge of succession planning — an issue fueled in large part by the inevitable retirement of the first generation of advisers who, in many ways, began the independent advisory movement. Internal succession can work effectively in many firms but not all. Mergers, acquisitions and strategic hires, when implemented successfully, can facilitate the gradual redistribution of interests held by larger owners and, in turn, can increase the ownership interests, retention, and dedication of the next generation of leaders and key employees.

Trend #2: More competitive and complex personnel issues

As service businesses, independent advisory firms increasingly have come to understand that their people are not merely “human resources” but rather the “human capital” that drives every aspect of their businesses. This idea has come into focus in recent years as the economy has improved, top talent within the industry has been in short supply, and client demand for independent, fiduciary-based advisory services has been on the rise. Independent advisers are finding the employment markets to be more competitive than ever before, challenging their abilities to attract and retain the best available talent.

These challenges are brought to the surface even more when considering the overall generational transition occurring within the industry. Advisers must now recruit, train and retain entire teams of people who possess the service, leadership and business-development skills and experience necessary to replace the pioneers who launched the industry over the past three decades.

(Don't miss: Goals-based planning takes flight)

In order to compete most effectively for talent in today's increasingly complex environment, advisory firms must offer far more than simplistic, “traditional” compensation and benefits. They must be prepared to offer clear, long-term career paths, opportunities for meaningful ownership, mentorship programs, and ample training and development. In short, they must be prepared to offer not only the prospect of economic fulfillment but also the opportunity for professional fulfillment and accomplishment.

It's also vital that advisory firms embrace the myriad new tools that enable targeted, effective searches for new talent. The use of online search and recruitment tools, social media, psychological profiling and a growing number of specialized professional consultants and recruiters are increasingly common, even among smaller advisory firms.

Top advisers and advisory firms understand that, given the scarcity of good people, they must be both highly selective and highly prepared to invest in their human capital over the long term.

Trend No. 3: From “practices” to “businesses”

All of the challenges and opportunities described above, coupled with the natural evolution of the industry, have led to an increasing number of advisory firms embracing their inevitable evolution from advisory “practices” to advisory “businesses.” A growing number of independent advisers now have dedicated management and operational teams responsible for ensuring the proper and efficient functioning of the company, separate and distinct from primary client responsibilities.

(More: As RIAs grow, more hiring chief operating officers to manage their firms)

At many independent advisory firms, it has traditionally not been uncommon for a single individual to serve as chief executive, chief operating officer, chief investment officer, chief compliance officer, chief development officer and of course, chief client service officer. Now many larger independent advisers have one dedicated professional assigned to each of these responsibilities, thereby allowing for greater specialization, greater efficiencies and, when implemented correctly, greater effectiveness.

These newly evolved businesses are enthusiastically adopting more traditional business practices such as strategic planning, financial reporting and measurement, sales and marketing initiatives, and training and development. They also are embracing new technologies to advance their platforms, scalability and levels of client service. By doing so, they often grow faster, achieve greater profitability and compete more effectively in the marketplace. More traditional, smaller advisers must recognize this evolution and consider how they will compete against these new businesses that are leading the industry forward.

As we sit today, it seems fairly clear that these trends show no sign of abating or diminishing. While there are inevitably many approaches prudent firms and advisers can take to address the challenges facing them, it is our belief that those firms who recognize and embrace these trends — who see the value in evolving and growing along with them — will be those best positioned for success.

Michael Nathanson is chairman, CEO and president of The Colony Group; Adam Birenbaum is principal and CEO of BAM Advisor Services.


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