How smaller RIAs can compete in a rapidly consolidating industry

Smaller registered investment advisory firms face an uphill climb competing against the rapidly consolidating giants of the channel — but they have some advantages, too.

More than 90% of RIAs manage fewer than $1 billion in client assets and have fewer than 10 financial advisors and other employees, according to a study released earlier this year by research firm Cerulli Associates — which also noted that the billion-dollar firms have 71% of the customer holdings and 47% of the advisors across the channel. Figures like that show how the continuing record numbers of RIAs reflect a fragmented field in which advisor independence can take on many different meanings, and some critics are concerned about the giants' dominance.

For smaller firms, the business can be "very difficult," said Kevin Thompson, CEO of Fort Worth, Texas-based RIA firm 9I Capital Group and moderator of a panel at this week's Future Proof conference on how the less-big advisory companies can thrive in the industry. Many RIA founders launched their firms with the intention of breaking away from the giants of wealth management, Thompson noted. "We are at a position right now where, in my opinion, if we don't acknowledge where we're at, we're going to become the industry that we ran from," he added.

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The path to success begins with understanding the limitations and opportunities specific to smaller firms, according to Thompson and other panelists.

"We can use our size to our advantage," said Ryan Hughes, the founder of Rancho Santa Fe, California-based RIA firm Bull Oak. "I think that that's something that we really don't talk enough about. I feel like this industry is changing very rapidly. There are a lot of changes going on out there, and so we can do something that bigger firms can't do, and that is adapt very quickly."

That means using resources wisely when adding new team members or using other collaborative strategies, said Chelsea Ransom-Cooper, the chief financial planning officer of Philadelphia-based RIA firm Zenith Wealth Partners. She pointed out how many large firms have certified public accountants or lawyers on their teams.   

"If you're a growth-based firm, and you're not trying to run  a lifestyle practice, and you truly are focused on growth, I believe you'd need a team," Ransom-Cooper said. "I think there's a way that, if we team up together, especially if we're seeing we're successful, we can build that in these smaller, growth-oriented RIAs that don't have to succumb to joining these big conglomerates. Like, we can do it through partnerships as well."

On the other hand, the smaller firms' lesser resources entail a simpler plan for, say, the technology used by their advisors and clients, Thompson said.

"When I first started, I remember getting too much technology and then noticing that I only had one client log into something," he said. "You've got to keep it lean. That's one thing I've learned building strong relationships as a small RIA firm — which makes it a little bit easier from the standpoint of transitioning and being able to move when the tides change."

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Limited resources underscore the importance of strategic planning for smaller RIAs — which often "don't really have a process" behind their operations, Hughes said.

"You've got to have a process," he said. "Whatever you promise your clients, you've got to stick with it. If you're going to promise a client, 'Hey, we're going to deliver excellent value. We're going to be doing X, Y and Z throughout the year,' you've got to actually live up to it. And so whether that's your CRM or project management tool, or whatever it is that you're using, make sure that you actually stick to it."

Thompson asked Ransom-Cooper if smaller RIAs should worry about the prospect of the giants continuing to gain market-share in the channel through M&A deals. She answered "yes," but only with respect to the short term.

"In the long term, I would say no," Ransom-Cooper said. "I think, in the short term, a lot of people will sell who are older and who are looking for an out. I have a hard time believing, though, that some of those clients will stay in those spaces, because this is a people business. … People want to work with those advisors who inspire them, who encourage them more, continuously adding value, not necessarily just because their old advisor got a large multiple and now they feel like they have to stay there."