Navigating the RIA ecosystem

Picture a tree in a forest. You’re likely picturing this tree as a singular entity. But, there’s a vast and unseen network of interconnectivity beneath the surface. Several years ago, scientists discovered that trees communicated through their roots, even using third-party fungi to do some of the back and forth from tree to tree. They found an entirely unseen but very much thriving world that exists underneath our feet, if we were to pull back the soil and take a look.

This discovery is top of mind when I think of the RIA profession, and all the ways in which the “RIA ecosystem” has evolved over the past three decades. Entire industries have sprung up around RIAs, growing together and entangling their roots as they established a growing, thriving ecosystem. Let’s take a step back to marvel at it.

It’s a jungle out there

Twenty years ago, if you wanted to start an RIA, you only needed four things: an adviser to do the investing, a lawyer to file the ADV, a custodian to safeguard the assets, and hopefully at least a few investors.

Flash forward to today, and the ubiquity of choice across technology, business models, platforms, practice management, client experiences solutions, compliance services, chief operations officer services, and more can be overwhelming. RIAs have endless options in constructing their businesses, which have grown from small lifestyle practices to professionalized, multibillion-dollar enterprises.

And beyond the RIAs themselves, there’s a fringe industry of offerings designed to support them. Whether it’s marketing support, technology, compliance, or even industry influencers, the world of services for RIAs has proliferated. It’s even grabbed the attention of outside investors, as evidenced by the multiple private equity investments in RIA compliance services in 2018 alone.

Eco-what?

The concept of the business ecosystem was first discussed by Dr. James Moore in 1993. Moore discussed the idea that there are four stages within every ecosystem — birth, which is the creation of key service providers; expansion, which is when the industry increases scale and scope and begins to standardize key market segments; leadership and authority, where increased complexity and collaboration spikes; and lastly two options — self-renewal or death, which is either the implementation of new ideas to evolve the ecosystem, or a failure to evolve which results in the decline of the entire system.

The 2000s, and even more so the 2010s, have been somewhat of a heyday for RIAs. Data from the Investment Adviser Association and National Regulatory Services indicates a 95% increase in the number of firms since 2001, with nearly 13,000 firms today. Death isn’t on the horizon.

The RIA ecosystem is entering self-renewal. By no means do I think the industry will look the same in 10 years. I expect there to be consistent, and perhaps even unconventional, adaptations in what advisers do and what tools exist to support them.

Survival of the fittest connected?

Michael Nathanson, head of The Colony Group, reminded me recently that Darwin never spoke about survival of the fittest in his “Origin of Species.” Rather he spoke about the need to evolve in order to survive — which is exactly what firms like The Colony Group have done — by bringing in professional management, offering new services, and creating a distinct employee value proposition.

I propose that the firms that maintain open architecture and touch points across the ecosystem will be the firms that endure and grow. Independent advisers can choose to operate within a vacuum but should consider whether their firm will sustain within a silo, or if it could benefit from engaging with its surrounding universe.

RIAs no longer compete with just wealth management firms, and today’s overlapping offerings and financial services “turf wars” mean that competition is everywhere — think about disruptive, nontraditional market entrants like Amazon. We believe advisers can lean into these competitive advances as evolutionary cues, rather than remaining steadfast and risking extinction.

We’ve seen what happens when businesses operate vertically — not across the ecosystem — in other industries. Even back in 1993, Dr. Moore discussed how Apple’s open-architecture approach established a thriving ecosystem that worked to advance itself, as opposed to Tandy’s closed system where the machine manufacturers mandated software and programs. A defunct brand of IBM computers, Tandy can serve as a cautionary tale for firms that have, to date, avoided ecosystem engagement. At the same time, we can see the evolution of Apple’s open-architecture approach today through the app store, which provides a platform for a multitude of developers and firms to distribute their content through Apple devices.

There’s been some discussion on the evolving role that custodians play in all of this, and the notion that custodians are being pushed out of the center of the RIA relationship by new entrants. But I argue that we’re bringing those players together, connecting the dots in an overwhelming ecosystem of options for advisers.

Just as advice is being commoditized and advisers are asked to deliver higher levels of value, custodians, too, must shift their value propositions upward. We’re no longer focused on just the safekeeping of assets, we’re adding value in much more significant ways like cyber security resources, consulting services, and business development introductions. We aim to serve as wise counsel to advisers as they navigate these interconnected complexities.

Getting back to recent forestry findings, scientists discovered that it was the oldest and largest trees that were the most connected to others in the forest — and I think there’s some merit to that in our world, too.

Can you see the forest through the trees?

Contrary to common belief that trees compete for sun and try to shade each other out, scientists learned that trees across species share their food via their roots. They send warning signals and share nutrients with their neighbors in need. Likewise, I pride our profession on working together for the common good.

RIA firm leaders come together to advocate for the profession overall, help new entrants join the ecosystem, and most amazingly, are willing to share best practices with their competition. At a recent Fidelity Think Tank Day focused on talent, I was amazed by the openness of RIA principals who freely shared their recruiting and employee development strategies with a room full of businesses (some would say competitors) focused on recruiting the same, small pool of talent.

We talk a lot about what will change in the ecosystem, but we can’t lose sight of what will remain steadfast, and that is an increasing demand for all manners of financial advice. So please, join me in helping us advance the ecosystem by continuing to innovate your offerings and services. As nature has taught us, where there’s a need, a solution will evolve — with or without us.

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David Canter is executive vice president and head of the RIA segment at Fidelity Clearing & Custody Solutions.

Related Topics: Fidelity Investments, Registered Investment Advisers