September 25, 2023

For registered investment advisors (RIAs), building a successful business means knowing how to manage growth in a healthy way. Grow too fast, and advisors risk diluting their value proposition. Or, if they invest in the business early on but fail to shift those resources as the firm matures, their business may stagnate.  

Advisors—like all entrepreneurs—must learn to pivot from working in the business to working on the business. Unfortunately, advisors don’t always know when it’s time to forge a partnership, bring a service in-house or invest in a new piece of technology, which makes it more likely that they’ll hit a plateau. The statistics say it all. 

There are more than 14,000 registered investment advisors, but a recent report by Cerulli Associates found that only 687 retail-focused RIAS have at least $1 billion in assets under management. According to the same report, 72% of RIAs are much smaller, with an average of around $100 million in assets.

The gulf between the largest RIAs and most other firms underscores the problem: Advisors have been successful setting up their businesses but have had more difficulty growing an existing client base.


Organic vs. Inorganic Growth

While growth is good, not all growth is created equal.

In the first few years, advisors should focus on perfecting their processes and fostering a strong culture. For an advisor to build a sustainable business, they must stand out in a sea of sameness.

If an advisor is prematurely focused on acquiring other businesses, it can backfire, as it’s important to build a strong foundation before bringing in firms with differing cultures and systems. In the early years, advisors should focus on carving out differentiation, building revenue and setting up repeatable systems so they can move into a growth phase further down the road. Studies have found that between 70% and 90% of acquisitions fail. The reason? The inability of the two companies to integrate.  That’s why developing a strong value proposition is critical before introducing another firm into the mix.

When a firm reaches about $250 billion in assets under management (AUM) and has achieved a steady growth rate, it may be time to start thinking about acquiring like-minded firms and investing in new areas of the business.   


Invest in People & Technology

The two biggest investments RIAs will make in their business are in people and technology. A recent tech survey found that, over the past 12 months, 68% of advisors prioritize tech spending over all other practice needs. However, almost half of those surveyed say they aren’t confident in their chosen technology.

Early on, advisors often work with a turnkey asset management platform (TAMP) that charges a percentage of basis points, usually between 85 and 250 bps. A survey of 359 U.S.-based financial advisors found that 65% of respondents used a TAMP as the foundation of their technology strategy. When advisors are small and just starting out, this may make sense. But as an advisor grows, those fees add up, and they should consider investing in technology that will help them drive business.

Before making an expensive purchase, advisors must be thoughtful. Test out technology and invest in systems that can scale with the business.  Advisors tend to think they need to make huge investments. But often, they can revisit their existing systems to see if they can get more out of what they already have. If a vendor is worried about losing a customer, they may be willing to provide updates at no cost or for an incremental fee. Saving on technology will allow advisors to invest in other parts of their business that can deepen and expand their relationships, which more directly affects the bottom line. And check with your custodian before you make any commitments – they may have recommendations, or even better, in-house technology that you can leverage for a considerably smaller investment.

It may also be a good time to consider hiring new talent, bringing in compliance professionals and others with specialized skill sets. Advisors can create stickiness with clients by either bringing new services in-house or partnering with a firm with a like-minded approach and complementary capabilities.

At every stage of growth, advisors must continue to invest in people and technology and shift resources to best meet their long-term business goals. As firms mature, the size of their investments should be commensurate with the size of the firm. 


Be an Inch Wide and a Mile Deep

Most RIAs offer roughly the same services, usually, it’s some combination of investments and financial planning. But advisors can stand out by setting themselves up as specialists, whether by serving a niche clientele such as widows, medical professionals, or even pilots or by expanding into adjacencies like health and wellness.

As their firms mature, advisors must consider how to build on their strengths with complementary services. Can they deepen relationships by adding tax and estate planning to their roster of services? Do they lack a core competency that they can fill by partnering with a like-minded firm?

Beyond traditional banking services, advisors should lean into their passions. Today, advisors are expanding beyond investments and financial planning to areas such as mindfulness and meditation, financial education, and coaching. With the rise of robo advisors, which, as of 2021, increased to $4 billion and is expected to grow at a compound annual growth rate of 29.7% through 2030, advisors must always find new ways to add value to justify their fees.  


Look to the Future

Successful advisors think about the long-term future—one that will exist after they’re no longer actively part of the business. 

Clients want to work with a financial partner that is going to serve them for the entirety of their financial lives. What’s more, most financial advisors’ wealth is tied up in their business. Creating a succession plan—either purchased or earned—creates a powerful incentive structure. When employees have the same “skin in the game,” they deliver value far exceeding what an individual can achieve on their own.

Every RIA has a lifecycle, and advisors that successfully grow in a healthy and sustained way know that building a business is a long-term endeavor. By investing in the business throughout every growth stage, advisors can create a scalable model designed to serve current and future clients and the many generations that will succeed them.

Mike Watson is SVP and head of RIA custody for Axos Advisor Services, a non-competitive RIA custodial partner that delivers personalized integrated custodial and banking solutions that fuel advisor growth.

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