3 STRATEGIES FOR RIA PRACTICES TO DIFFERENTIATE AND WIN MORE CLIENTS IN 2023
While there is a rise in demand for financial planning and fee-based advice, today’s wealth management landscape presents three distinct challenges to financial advisors and RIA practices:
- a narrowing ability to differentiate,
- declining margins, and
- the looming transfer of wealth.
Although most advisors aim to provide exceptional client service and investment advice, many of the elements of the value chain are today seen by clients as a commodity, mere table stakes. Providing great client service is no longer a significant differentiator. In addition, regulatory changes such as the Regulation Best Interest have diminished the fiduciary status label many RIA practices previously held out as a form of distinction from their traditional bank and wirehouse competitors.
Declining margins (fee compression), alongside a rise of passive funds and robo advisors, have become a significant threat to the typical advisor fee structure. Combined with the rise of regulatory changes and technology adoption, the result has been an increased need for advisors to understand how they can offer their clients scalable, differentiated value and demonstrate said differentiation.
The final leg in this trifecta is a massive transfer of wealth on the horizon. According to Cerulli Associates an estimated $84 trillion in assets may change hands between now and 2045. The source of much of that wealth will come from high net worth baby boomers, although their parents, the silent generation, still have over $15 trillion to give. That is an astounding amount of assets to win—or lose.
With more of their value proposition becoming “undifferentiated,” RIA practices must evaluate the pillars of their advisory practice and consider how they can deliver a differentiated platform, tailored to the needs of the future inheritors of wealth, in a cost-effective way. With more data and information at their fingertips than ever before, tomorrow’s clients are keenly aware of what their needs are and how the market trends in rebalancing, tax management and alternative investments impact them. In order to be at the forefront of client growth, your RIA practice needs to be aligned with solutions to these client needs.
The primary objectives of rebalancing are to maintain intended exposure and portfolio diversification. In order to achieve these objectives, reasonable tolerance bands must be established in which exposures are allowed to deviate before taking any rebalancing action. Most RIA practices today operate on a calendar of rebalancing—quarterly, semiannually, or annually. Regardless of the time frame set, it is likely that rebalancing is addressed during end-of-year portfolio reviews. Recent market volatility has brought this methodology into focus. While calendar rebalancing may be the most time effective for advisors, is this really the best client-centric approach?
Today’s clients, particularly high net worth investors, demand an approach that addresses rebalancing in a customized way. Ideally, a client’s individual portfolio allocations would be evaluated on a daily basis to determine if any rebalancing action is needed. For RIA practices attempting the “do-it-yourself” approach, you need to be prepared to explain your approach to monitoring and appropriately rebalancing individualized portfolios to clients, taking into consideration how fewer liquid investments might be handled.
For high net worth investors, taxes are their single largest cost. 2021 was the kind of year that highlights the importance of tax management. According to Morningstar, 81% of U.S Equity funds paid capital gains distributions at year end, with the average distribution at 12% of NAV. That was the worst year for distributions since 2001.
Today, investors know there are techniques available to offset current and future tax liabilities, and if their financial advisor is not speaking to the impact of taxes on their portfolio, they are missing a critical focal point and concern of the client. It is no longer enough for the advisor to simply tell the client they will “quarterback” the relationship with their accountant. Clients today demand a strategic plan that integrates and aligns household tax management with their investment approach.
Retail investors are leaning into alternative investments at a pace previously unseen. According to an independent survey of RIA practices, financial advisors, alternative asset managers, and other professionals conducted by CAIS and Mercer, 85% of respondents said their clients are looking to invest in new products or structures within alts. As a result, nearly nine out of ten financial advisors indicated that they plan to increase their allocations to alternative asset classes over the next two years.
Alternatives provide the opportunity for unique exposures not available in traditional fund formats that may increase alpha and income and certainly provide further diversification to a standard traditional portfolio. More sophisticated and higher net worth clients desire less of an “out of the box” investment option, and alts provide an excellent solution. The potentially unique risk/return qualities of alternative investments can address gaps in a more traditional-only portfolio, in addition to having possible tax benefits. The challenge for most RIA practices is the time and expertise needed to perform proper due diligence on this asset class. The private nature of these investments can make identifying and analyzing them a big obstacle for RIAs to navigate on their own, which makes outsourcing complex investment strategies an attractive solution for most RIA practices.
A strategic approach to practice differentiation can be an overwhelming amount of work on the plate of an advisor, who is already tasked with finding new prospects and guiding them through the journey to becoming clients. The three differentiators highlighted here present a golden opportunity to RIA practices, which are better positioned to adapt to changing investor needs than wirehouses or traditional broker-dealers. RIAs should consider how best to deliver these services to clients in a scalable and cost-effective way. As the expertise, time, and technology to implement these strategies is significant, outsourcing will likely be the best approach for the typical RIA practice.
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IMPORTANT DISCLOSURE: The information contained in this report is informational and intended solely to provide educational content that we find relevant and interesting to clients of Fountainhead. All shared thought represents our opinions and is based on sources we believe to be reliable at the time of publication. While we continue to make these reports available, we do not update past reports in light of subsequent events. Nothing in this letter should be construed as investment advice; we provide advice on an individualized basis only after understanding your own circumstances and needs.