The need for RIAs and custodians to adapt to a changing environment is a hot topic of conversation, and for good reason.
The number of RIAs has grown steadily over the past 12 consecutive years, according to the June 20 report, “Investment Adviser Industry Snapshot 2024” from the Investment Adviser Association and COMPLY. The report stated that there were 15,396 RIAs registered with the SEC in 2023, topping a previous, all-time high of 15,114 in 2022.
At the same time, M&A volume continues to grow, according to Biz Equity’s “2024 Wealth Management Industry Outlook” of Feb. 8. This draws the wealth management industry closer to stage 3 of the “consolidation curve,” a concept described in a December 2002 Harvard Business Review article – “The Consolidation Curve” by Deans, Kroeger and Zeisel – based on a study of more than 1,300 large mergers over a 13-year period, which concluded that most industries around the globe predictably pass through four stages of consolidation:
Stage 1: Opening. Single start-ups emerge, or perhaps there’s a newly deregulated or privatized industry. Competitors quickly arise, and market share of even the largest companies drops to as low as 10%. Companies focus on building scale, generating revenue and prioritizing market share over profit.
Stage 2: Scale. Businesses pursue growth through M&A. Major players emerge and buy competitors. Market share of the top three players increases to between 15% and 45%. Companies focus on protecting their core culture and merging product offerings as they consolidate.
Stage 3: Focus. Megadeals and large-scale mergers form with a focus on consolidation and expanding core business to aggressively outgrow the competition. Likely, a few major players emerge to dominate the market.
Stage 4: Balance and alliance. Large companies may band together as they struggle to grow. Market leaders have to defend their positions, navigate industry regulation and avoid the temptation of complacency.
Amid the ongoing M&A activity, independent and hybrid RIAs are expected to continue to grow. Cerulli Associates projected in its Oct. 30, 2023, “Cerulli Edge—U.S. Advisor Edition” that these channels will control nearly one-third (31.2%) of intermediary asset market share by 2027. This underscores the need for RIA custodians to evaluate how effectively they serve RIAs and aggregators. The Harvard Business Review article maintains: “Ultimately, a company’s long-term success depends on how it progresses through the stages of industry consolidation. Speed is everything.” This is a dangerous place to be, and the stakes are high, as rushed service can compromise customer satisfaction.
Customize Technology And Recognize Its Limitations
While technology can drive efficiency, successful implementation often requires an effective integration process. Poorly managed technological integrations can cause firms to prioritize profitability at the cost of service quality. Consolidation among platform providers can exacerbate the issue as it appears to reduce competition, potentially leaving advisors with a one-size-fits-all technology bundle that may not meet their unique needs. Such a shift risks making the RIA world resemble the very segments of the wealth management industry from which it once sought to distinguish itself.
Such a shift risks making the RIA world resemble the very segments of the wealth management industry from which it once sought to distinguish itself.
At the same time, wirehouses and broker-dealers appear to be investing heavily in client retention, potentially increasing the pressure on RIAs to evolve and remain competitive. Against this backdrop, RIA custodians must transition from being mere service providers to becoming more of a strategic partner. This could mean helping RIA aggregators navigate an increasingly competitive environment, so they can do the same for their advisors.
To provide the most value, custodians should prioritize increased personalization to meet consumer expectations, which may include offering more human interaction and tailored solutions. They should also focus on technological advancements that drive efficiency without compromising service quality. This may involve automating routine operations, improving cybersecurity and working to ensure regulatory compliance to help free up advisors to deliver customized service that addresses their clients’ unique needs.
Deliver Value By Narrowing Focus
With proper support from RIA aggregators and custodians, advisors should be able to focus on differentiating their practices where it counts the most: building relationships and playing upon their strengths. After all, investors can get advice anywhere, but what many truly value is a trusted source they can rely on for personal, human interaction.
A dose of reality advisors may find hard to swallow is that they cannot single-handedly run every aspect of their business. They usually fare much better by recognizing their strengths, acknowledging where they need help and relying on a third party, such as an aggregator or custodian to fill in the gaps.
The shift to an aggregator and custodian support model becomes even more critical when one considers how quickly the industry seems to be approaching stage 4 of the consolidation curve. According to SEC data collected in the June 21, 2023, report “Investment Adviser Industry Snapshot 2023” by the Investment Adviser Association and COMPLY, total assets under management fell 11% in 2022 from the previous year, which was the first decline since 2008. The 2024 report shows that the AUM figure has since rebounded, but that appears to be attributable to market returns.
When seeking assistance from their custodians, they may be funneled into call centers.
As the race for scalability continues, many companies are consolidating and reluctantly adopting technology aimed at expediting transactions. However, many firms struggle to maintain service levels for a growing customer base. When seeking assistance from their custodians, they may be funneled into call centers, where they may get stuck on hold for far too long or forced to navigate through a web of chatbots.
Rise To The Challenge By Strengthening Partnerships
This points to a potential opportunity for custodians to evolve. To meet the growing demands of RIAs, custodians may no longer act as mere service providers. Instead, they must step up as strategic partners. Amid broader industry consolidation, client satisfaction is key to long-term success. Custodians who embrace their elevated role as strategic partners should not only help their RIA clients survive the changing landscape but also position them to endure the test of time.
Scott Victoria is Chief Operating Officer at TradePMR, a provider of custodial service and technology for RIAs.
