Will the small RIA go the way of the dinosaur?

The large wealth management firms continue to purchase and roll up small advisory shops at a rapid clip, yet new firms are being created at about the same pace as they are being gobbled up.

A year ago, if you asked me if there was a future for the small, independent wealth business, I would have replied with an emphatic, "Yes."

Today, I’m not so certain. In fact, if I were a betting man, I would put money on it that the future of most financial advisers is being part of a mega-RIA and not being in a one- or two-person shop. There’s a high likelihood that the small, independent RIA will go the way of the dinosaur.

Why do I believe this? My conviction is that the small RIA will not be able to offer the depth of products and services that tomorrow’s consumer will expect.

It wasn’t too long ago that a financial adviser could get away with simply offering a basic asset allocation for a client and the client would be satisfied. That evolved to financial planning along with investment management. Both of these are now commodities. Today the top advisers offer investment and financial planning, but also tax planning, tax compliance, estate planning, insurance guidance, etc. This is what consumers want and are coming to expect. If you don’t believe me, just look at where the flows have been going (hint: not to the small firms). Clients vote with their wallet.

The AI boom will have a dramatic impact on every industry, including our own. We will be much more efficient, which may provide a temporary increase in profits, but competition will eventually drive down fees and we’ll all have to serve substantially more clients than we do today in order to maintain our revenues and margins.

There are three main reasons I believe the small firm is at a disadvantage. The first is most small firms cannot offer the breadth of services that the large firms do. They may be great at financial advice and investment management, but they won’t have expertise in many of the other areas that tomorrow’s consumer will demand.

Second, the small firms won’t have the range of in-house experts that exist at larger firms. These experts range from investment, tax, financial planning, charitable giving, legacy planning, corporate retirement plans, insurance, etc. A wealth planner at the larger firms can call upon any of these specialists when a client has a need. A small RIA will have to build a network outside of their firm, which doesn’t provide seamless client experience.

The third area where small firms will have a difficult time is keeping up is with technology. The typical adviser already has to bolt together a couple dozen applications to run their office. It’s next to impossible to keep up with the latest AI and implement that into their business. The large firms have teams of experts that are constantly scanning the marketplace for solutions and are able to procure new technologies and train their advisors at a rapid clip.

If I were in my early 50s with a few million saved, I wouldn’t hire an independent two-person shop. I’d go with a large firm that gave me confidence it could take care of all of my financial needs, both today and the decades to come.

Scott Hanson is cofounder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA.