From M&A to Technology: RIAs Shift Strategic Focus

Written by: Alicia Chandler | Oak Street Funding

A recent survey of Registered Investment Advisors (RIAs) has revealed a shift in strategic priorities across the industry. Past surveys have indicated that RIA firms were most focused on growth through market expansion, mergers and acquisitions (M&A), and succession planning. The latest survey, however, showed new trends.

How is the RIA industry finding strategies to achieve growth and success in a fast-changing environment?

Survey results

Nearly 70% of those surveyed named market expansion as their main strategic priority. While M&A and succession planning will continue to be important strategies for reaching that aim, respondents indicated they are now focusing more on improving their technology so they can compete against larger firms with more advanced technological tools.

When asked about pain points, RIAs listed talent acquisition as their number one concern, followed by client engagement across digital channels. Technology implementation came in third. And these issues all sit against the backdrop of concerns about an increasingly competitive environment.

Changing nature of M&A

Consolidation in the RIA sphere continues to be a fact of life. Fintech software company ETNA notes that approximately 50% of assets are managed by only 2% of RIA firms.

Smaller practices that want to remain competitive against larger firms must differentiate themselves with top-level service, advanced technologies, or partnerships with firms in adjacent industries. Focusing on these key areas also makes smaller firms more attractive to buyers when owners decide to sell.

Talent acquisition as job #1

According to the survey, RIAs see talent acquisition as their biggest challenge. This should come as no surprise, as McKinsey has forecast a shortage of 100,000 advisors in the industry by 2034. With more advisors retiring from wealth management than joining the industry, current practice owners are looking for new ways to fill the gap and meet their client’s needs.

Top strategies for addressing this issue include:

Engaging potential advisors while they’re still in college through mentorships and university partnerships
Proactively recruiting women to the profession, which is especially important as females control a growing percentage of assets
Improving productivity using AI and other technologies so fewer advisors can serve more clients
Creating teams of advisors with complementary skills who can work together to meet clients’ needs
Promoting retention by offering flexible work arrangements and the potential for early-career equity opportunities

Engaging clients in the digital environment

Advisors list digital client engagement as their second-greatest pain point. Clients expect the convenience and transparency of electronic access to their portfolios, but they also want to receive personal advice, especially when making more complicated decisions about their investments. How can wealth advisors provide the right mix of digital and in-person interaction? What’s more, how can they tailor those interactions to match the preferences of different generations of investors?

Effective digital engagement programs include:

Security – No matter how powerful a website or app is, security should be its most important feature. Advisors should carefully vet any software vendor’s cybersecurity systems before connecting them with company or client information.
Access across platforms – Clients should be able to access the system on whatever platform they prefer, including desktop and mobile, as well as all operating systems (Windows, Mac, iOS, Android, etc.).
Consistent look and user interface – Information should be easy to access with simple-to-follow navigation tools. If clients interact with multiple systems, they should be as similar as possible to reduce confusion.
Simple steps to reach an advisor – When investors want to communicate directly with an advisor, multiple options should be provided within the digital environment. A client should never have to look far for a button or menu item allowing them to send an email or request a call (which of course should be returned ASAP).

Technology and AI utilization

While technological advancements emerged as the main strategic priority for RIAs in the poll, technology and AI utilization were only listed as the third-biggest pain point. That may explain why only 44% of respondents reported implementing technological changes. Half said they are slowly but surely modernizing, and 1% felt they did not need to change.

Interestingly, a small but growing percentage (5%) said they were hesitant to implement new technology, but not because of financial constraints. Perhaps they are waiting for the pace of change in AI to slow or for industry-dominant systems to emerge.

Putting strategies into action

Deploying AI systems requires financial investment, but it can pay off in short order by increasing advisors’ productivity and improving client satisfaction. Many RIAs turn to working capital loans to finance new technology investments.

When considering a working capital loan, look for a lender that is experienced with the RIA business model and can lend using future cash flow as collateral. Today could be a good day to move from strategy to action.