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These Top Priorities for Advisors Are Also Keys to Success

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These Top Priorties for Advisors Are Also Keys to Success

Registered Investment Advisors say their top priorities are: growth, recruiting new talent, strategic planning, and leveraging technology to improve productivity.

So said the 2015 Scwhab RIA Benchmarking Study for 2015. (Get your copy here.)

“More than half of the RIA firms in the study are now embarking on their third decade in business and the data shows that they are doing so from a position of competitive strength,” says Jonathan Beatty, senior vice president, sales and relationship management, Schwab Advisor Services.

“As RIAs and the industry-at-large continue to mature, firms are learning from each other and sharing best practices to help build scale and fuel growth. The independent model is clearly winning today among high net worth investors, and RIAs are also preparing themselves to capture future opportunities.”

1. Prioritizing Growth

According to Schwab, leading RIAs invested, on average, 2.4% of their revenue on marketing and business development activities: working on marketing plans, improving the sales process, and developing centers of influence.

A recent survey by BenefitsPro mirrored the Schwab report regarding priorities. “38% of RIAs said they would put them toward growth, while 25% said they would invest first in technology. That’s far ahead of any other concerns: just 13% said their top priority is employee and talent management, 12% thought client service could use that extra investment money, 8% said it should be operations and processes.” Just 4% thought compliance warranted a top priority.

Size matters, too. Growth is an even bigger priority for RIAs that manage between $10 million and $100 million in assets — 45% of those put growth at the top of their priorities, according to BenefitsPro.

The survey also showed where RIAs felt confident adding value. “76% of respondents cited retirement planning, 69% said it’s in growing assets, 59% picked protecting wealth, and 56% said wealth transfer.” By contrast, only 39% were confident of their ability to assist with elder care planning.

Demographics matters, too. The BenefitsPro survey found that baby boomers primarily wanted retirement advice, Gen Xers wanted to know how to pay for their kids’ school, and millennials were most concerned with taxes and buying real estate.

2. Differentiation

How RIAs differentiate remains a key to success, as always –  based on demographics, occupation, or interests. A few ways RIAs key in on specific personas: Heron Financial Group primarily counsels business owners, attorneys, and corporate executives; Jeff Rose, CFP, Founder of Good Financial Cents, caters to Generation X and Generation Y investors; and Brittany Castro, CFP, and founder of Financially Wise Women, focuses on, well, can you guess?

3. Social Media

Social media – LinkedIn, Twitter, Facebook, and Google+, Instagram – may likely continue rapid adaptation by many advisors. Can social media impact ROI? While difficult to pinpoint, the answer is generally yes. “Social media is the force multiplier of a really good marketing program.,” said David Edwards, founder of Heron Financial Group. “If you don’t have a good marketing plan, having a good social media platform won’t help you.”

As for compliance concerns, some firms may have an extensive checklist of dos and don’ts. Primary among them: don’t recommend specific securities or mutual funds to buy or sell; don’t use client testimonials; don’t use words like promise or guarantee; and do archive all social media communications.

4. Recruiting

“One in four firms (26%)” according to Schwab, said “Recruiting is among their top priorities in 2015 with an eye toward increasing a firm’s skill set and capabilities. In particular, firms are bringing in professional management in order to better manage the challenges associated with increased operational complexity.

Firms in the Schwab study reported “Recruiting to add skill and increase capacity” to be the third highest priority among strategic initiatives for the year ahead.” Most RIAs were looking to hire for growth positions: 76% of firms planned to add either relationship managers or investment professionals. And “10% of firms sought to add ‘dedicated management’ to focus on running business operations, which can add capacity for other professionals to focus on client service and new business development.”

5. Optimizing Client Referral Strategies

Cloning the best clients has been and remains a priority for most RIAs, and why not? According to a 2014 study by Investment News, up to 50% of new assets under management for RIAs came from current clients. In general, the larger the firm, the better they were at optimizing referrals. 68% of firms with $10 million or more in annual revenue had a formalized referal process; 52% of firms with up to $5 million in revenue had a process in place to gather referrals; and on average only 43% of RIAs had a process for gaining referrals.

6. Fee Compression

Fees continue to go one way, generally lower, thanks mostly to new entrants seeking the industries’ high margins, and to the rise of the robo advisor. “Average asset-weighted fees shrank from 46 basis points in 2006 to 39 in 2012, according to Casey, Quirk & Associates, a Connecticut-based investment management consulting firm.

According to Institutional Investor, “The good news for advisers is that the very wealthy aren’t so price-sensitive. We have seen an increasing trend among mass-affluent investors to shift toward fee-only advisers but also to make lowering the total fees paid the most significant part of the selection process. Once the investible assets rise above $2 million, however, we see fees become less important than factors such as service level and investment performance.”

7. Robo Advisors

By way of definition, the CFA Institute defines a robo-adviser “as an adviser that exclusively leverages software to service a client, whereas a traditional RIA setup involves a human being delivering guidance to a client.”

Are robo-advisors a challenge, or a potential benefit to RIAs? Wesley Gray, PhD, Founder of Alpha Architect, has outlined this scenario:

”Consider the case of John Doe, a financial adviser who is providing investment management services. Let’s say John is sitting in his office one day, and he gets two emails. The first email is from Bill Baby Boomer, who has $1,000,000 to manage, and the second email is from Mark Millennial, who has $10,000 he wants managed.

“John can charge Bill 1.00% on the $1,000,000, which means John will earn $10,000 in fees every year. This compensates him for the time he would spend managing Bill’s portfolio. The situation with Mark is more problematic. If John charges a 1.00% fee on Mark’s portfolio, he will only earn $100. John cannot justify opening an account for Mark because he can’t cover the fixed costs of his time.

For John to justify an advisory relationship with Mark, he would need to charge him upwards of 5% or perhaps 10% of assets, which would equate to $500 to $1,000 in annual fees, or one tenth the fees generated by Bill’s account. In effect, Mark’s lack of assets shuts him out of the financial advice market.

“With robo-advisers, Mark is back in the game. Asset allocation, tax efficiency, and other high net worth “classics” can now be provided to all consumers. Robo-advisers are creating a lot of value, and it is the customer, not the adviser, who is capturing the lion’s share of it.”

8. Maintaining High Operating Margins

According the Schwab 2015 study, “Operating margins are a key component of the RIA success story. Over the past five years, the standardized operating margin for top-performing firms has risen from 19% to 38%, but as more firms employ best practices and operate with greater discipline, the median standardized operating margin has increased 36% over the last five years, reaching 27% at the median for 2014, up from 20% in 2010.”

9. Cybersecurity

The SEC has focused on potential cyber attacks, and so should RIAs. According toInvestment News, “Cybersecurity policies should be designed to protect the firm’s networks and information. They also should address how the RIA will deal with the risks related to remote customer access, as well as funds transfer requests.” The cost of a cyber attack on client information – in trust, dollars, and reputation would be too coslty to calculate.

10. Succession Planning

Many advisory firms have been more concerned with growth than with succession. Continued success, however, creates long-term succession and exit planning issues.

Rob Thompson, founder of TruCore Business Development in Houston, TX, first asks advisors:  “Have you identified a successor, such as a partner, family member, or externally? If you have partners, do you have a buy-sell agreement in place? Does it cover multiple triggering events, such as death, disability, bankruptcy, and retirement?”

Mr. Thompson also asks advisors “Do you know the current market value of your business? Do you know how to calculate its value? How much equity and/or control are you willing to relinquish? Will your succession plan ensure sufficient income and liquidity when you retire?”

In structuring the transition, Mr. Thompson asks RIAs to “Consider whether the purchase will involve cash, equity, notes, or a mix of assets. You may want to initiate performance triggers based on growth and client retention. It is also essential to explore the tax implications for both buyer and seller. You may consider an installment sale to spread out the taxable gain.”

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