$1 billion in assets? For some RIAs, it's not as good as it sounds

According to a new study, growth often means spending more, hiring execs and outsourcing services

Jul 16, 2018 @ 4:44 pm

By Jeff Benjamin

Be careful what you ask for. New research shows that once advisory firms reach $1 billion in assets, they face new challenges they may not have anticipated.

A new study from Cerulli Associates claims that once a firm reaches that milestone, the deck is reshuffled, with owners and executives forced to face a host of new challenges.

While a lot of advisers might view growth as a good problem to have, Cerulli director Kenton Shirk said the realities often include managing advisers across multiple locations while trying to centralize services and resources in a way that is similar to a broker-dealer.

At $1 billion, he added, firm owners need to build entirely new sets of competencies to stay competitive, which is why some larger RIAs can hit a growth plateau.

"They face new challenges, such as attracting and retaining advisers, building scale across a large number of advisers, enhancing adviser productivity, and offering a consistent and positive client experience across a large organization," Mr. Shirk said.

Operating at this level, he added, means building an executive management team and filling C-suite positions.

Elliot Weissbluth, founder and chief executive of HighTower Advisors, recognized the challenges that come as firms get larger, but said the issues facing $1 billion firms could start as early as the $500 million mark.

"The solution for firms that reach any scale point is hiring subject matter experts, which means chief financial officers, chief technology officers and chief investment officers," he said.

Mr. Weissbluth recommends outsourcing things that are not differentiating.

"If you have something that's truly differentiating, like advisory services, you insource it," he said. "But if something is not differentiating, like hosting a website, or cybersecurity, you should outsource it to a provider in the business of doing that every day."

Carolyn Armitage, managing director at Echelon Partners, agreed that growing advisory firms will start to feel the capacity issues well before the $1 billion mark.

"We find that firms are entering the valley of doom much earlier than $1 billion," she said. "At half a billion, they are in need of building up the infrastructure of people, processes, technology and operations to support the goal of reaching $1 billion."

Ms. Armitage said it is not unusual to see profit margins peak when a firm has around $500 million in assets because firms start "dipping into profits to reinvest in the business, then they come out the other side at $1 billion, which is the magical number."

InvestmentNews' proprietary research shows a similar dip in owner income as firms grow into $1 billion under management.

On average, owner revenue at firms managing $1 billion can be about 6% lower than the owner revenue at firms that are half that size, according to InvestmentNews Research.

One of the reasons for this is new expenses that come with size, according to David DeVoe, managing director at the investment bank DeVoe & Co.

"When you hire a business development officer, for example, that is going to be a pure expense for the better part of a year," he said.

But a necessary expense, if the plan is to grow to the next level.

"As you move from a sustained to an enterprising business this is the stage where you need to hire different functional heads in different areas to unlock a lot of power," Mr. DeVoe said. "Some firms do that, but it's not uncommon for some firms to continue to run like they ran at $200 million, which can really restrain growth."

Amit Dogra, founder and chief executive of Third Seven Advisors, touched on the cultural impact of growth, and how ignoring it can be detrimental.

"If you don't have buy-in from everybody about where you're going, you don't have a firm anymore," he said. "Just because it impacts the bottom line doesn't mean it's a good decision."


What do you think?

View comments

Upcoming event

Sep 10


Denver Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched


Finding your edge from Tony Robbins

Guru Tony Robbins has helped a lot of people, but armed with his psychology Financial Advisor Josh Nelson has helped his practice soar.


Finding innovation in your firm

Adam Holt of AssetMap explains how advisers understand they need to grow, but great innovation may be lurking right under your nose.

Latest news & opinion

Couple in Morgan Stanley advisory account wins $519,000 arb case over unsuitable investments

Plaintiff's lawyer says junk bonds, futures contracts and derivatives were inappropriate for his clients.

The growth of factor-based investing

Advisers are making decisions about clients' portfolios by using the same characteristics that govern factor-based ETFs.

Finra makes its list to target hundreds of rogue individuals

The regulator sees patterns in the behavior and disclosures of high-risk brokers.

LTC insurer offering co-pays to blunt soaring premium increases

John Hancock policyholders would get a discount on their premium in return for agreeing to pay a bigger portion of their claims in the future.

Goldman Sachs acquires United Capital

After a payday of $75 million or more, CEO Joe Duran plans to join Goldman in a senior position.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print