In light of the myriad challenges facing RIAs today, Capital Group’s RIA Advisory Board recently convened to discuss strategies for operating resilient practices during volatile market and business cycles. The group’s discussion provided several insightful takeaways that RIA leaders can leverage to improve their approach.

Capital Group’s RIA Advisory Board is made up of 12 external industry practitioners and leaders and three Capital Group representatives who meet on a bimonthly basis to examine, debate and provide objective perspective on how RIAs can face challenges and take advantage of opportunities to build robust practices for the future. Three new members recently joined the board, further differentiating the valuable perspective of the group.

For the Advisory Board’s meeting on August 18, 2022, members were joined by three RIA industry leaders — Lisa Crafford of BNY Mellon | Pershing, Matt Matrisian of AssetMark and Gordon Ross of Dynasty Financial Partners — to discuss how RIAs can “future proof” their practices to better withstand challenging business cycles. The group’s discussion highlighted five key strategies for building more resilient practices.

1. Seek diversity of revenue streams and fee structures

The recent market downturn has highlighted the value of diversifying your revenue sources. For many advisors, this means revisiting the range of services you provide. It could also mean rethinking how you structure your fees.

“Downturns provide meaningful lessons about future-proofing your fees,” said Lisa Crafford, head of business consulting at BNY Mellon | Pershing. “Ahead of any potential downturn, RIAs should clearly understand how much cushion they have before they would need to cut services or make changes to their operations. Fee minimums or moving to retainer or fixed fee models can provide healthy revenue stability.”

“Having a diversified revenue stream can help you mitigate the impact of a market downturn,” said Matt Matrisian, SVP and chief channel officer at AssetMark. “Many advisors are shifting a portion of their client accounts to a fixed-fee structure rather than an AUM-based fee. But it’s a balance — don’t rush to make a wholesale shift to a flat fee or subscription fee model, because you want to retain upside.”

The board discussed several ways to approach it with clients. For firms who take an educational, consultative approach, conversions could be focused primarily on larger clients with complex portfolios and adjusted over time to keep them parallel to the level of service provided. Another option is a hybrid approach through which clients pay a fixed fee for services like estate planning and a smaller AUM-based fee for investment management.

“While a fixed fee structure can create more of a value-based fee arrangement, there are serious drawbacks to keep in mind,” cautioned David DeVoe, founder and CEO of DeVoe & Company and a member of Capital Group’s RIA Advisory Board. “If you don’t tie your fees to your level of assets, you may sacrifice a lot of upside, especially if you end up deciding to sell your business.” 

2. Consider expanding your core services … and outsourcing others

One way to diversify your revenue is to offer additional services for clients. “Service expansion is absolutely critical,” Matrisian said. “It gives you a better chance to increase your fees and creates diversity of revenue across your organization.”

What services are common focus areas for expansion? Trust services, tax planning services and concierge services are three areas highlighted by the RIA Advisory Board.

“Less than 20% of firms provide concierge and lifestyle services, less than 25% provide trust services, less than 40% provide elder care planning, and less than half provide business or intergenerational planning services,” Matrisian added. “Many leading RIAs are adding those services.”*

Before you expand services, however, it is critical to start with a narrow definition of your ideal target client and examine whether your range of service offerings is structured appropriately for them. “If you don’t know who you’re serving, how do you know what services to add?” Crafford pointed out. “Know your clients and the ideal types of clients you want to serve. Then, determine which services to offer in-house or on an outsourced basis based on their specific needs.”

Larger firms generally have the resources in place to offer added services in-house. Smaller firms, however, may benefit from outsourcing noncore functions and leveraging partnerships to expand their service offerings. “Firms that outsource are growing faster than firms that don’t,” Matrisian said. “RIA leaders should think carefully about where you want to spend your time as an organization and which core competencies you need to own. Outsourcing noncore competencies can give you room for additional growth.”

3. Leverage a downturn to invest in growth

What do the most successful firms do during downturns? They tend to double down on growth investing.

“Assuming they have healthy profit margins, we are seeing many strong firms invest in growth,” Matrisian said. “More than two-thirds of firms say market downturns are great times to look for new business, because many clients may be dissatisfied with their current advisor relationship.”

Particular areas of focus for growth investing include marketing and business development. Many leading RIAs have had success creating a thoughtful digital marketing approach to reach potential clients — and advisors who may be interested in joining their practice.

Building a strong referral strategy is another promising area for growth. “Several firms have excelled through the use of a robust referral system,” said Gordon Ross, managing director of the enterprise group at Dynasty Financial Partners. “Based on our data, firms that have a deliberate referral strategy have much greater success acquiring clients and growing assets relative to firms that don’t have one.”

4. Focus on your employees’ professional skills to drive exceptional growth

A strong human capital strategy is instrumental to the future growth of a firm. “Invest in your best employees’ professional futures and your firm will grow with them,” said Crafford. “A robust staffing strategy should focus on reducing the operational and administrative drain on your company. By focusing your hiring efforts on professional staff who can bring in new clients and help grow your firm’s assets, you can drive exceptional growth.”

Many leading RIAs have found ways to leverage technology in ways that limit their need to hire additional operational staff, allowing them to focus more of their hiring budget on adding skilled professionals.

5. Emphasize financial planning

Interestingly, despite the level of volatility and uncertainty since the start of the COVID-19 pandemic, advisors reported that they haven’t experienced a significant amount of angst from clients. RIA Advisory Board members believe this may be because advisors have recently been so focused on strong communication around financial planning and maintaining a long-term perspective.

“Leaning on the financial planning aspect can help frame client conversations extremely well,” Matrisian said. “Many RIAs have emphasized thoughtful and customized financial planning and keeping a long-term perspective. This emphasis has benefited advisors in the recent volatile environment because advisors have kept clients’ stress levels lower than they likely would have been otherwise.”

Find out more about Capital Group’s RIA Advisory Board and their insights on exit strategies amid M&A activity, building an exceptional UHNW team, organic growth strategy, and how to create a more diverse and inclusive firm.

*Source: Cerulli Associates. The Cerulli Report, U.S. RIA Marketplace 2021.