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Q&A: Learning From The Industry's Growing Group Of "Super-Ensemble" Advisory Firms

Eliane Chavagnon Editor - Family Wealth Report March 23, 2015

Q&A: Learning From The Industry's Growing Group Of

A group of around 250 "super-ensemble" firms, those with over $1 billion in AuM, are setting new standards for the advisory industry, according to a new report. This publication looks at what have been described by Pershing as leading growth strategies and how smaller firms can mirror the success of their larger peers.

A recent report by Pershing Advisor Solutions claimed that a group of around 250 “super-ensemble firms”—those with over $1 billion in assets under management—are fast setting new standards for the advisory industry.

Pershing said "super-ensembles" scale primarily through strategic and organic means, although they are also interested in growing through acquisitions and mergers. Indeed, over a third are “actively searching for acquisitions” and 6.3 per cent are interested in a merger with a similarly-sized firm. Other steps to success, the firm said, involve strategic partnerships and aggressive marketing, as well as: recruiting individuals with experience working in larger organizations; focusing on culture; and dedicating resources to management (even if this is unaffordable full-time).

Family Wealth Report asked Gabe Garcia, a director at Pershing Advisor Solutions, to expand on what some of the main points highlighted in the report - entitled Super-Ensembles: The Firms Who Are Shaping the Future of the Industry - suggest about the industry's changing landscape from both a client and business perspective.

What do the insights gleaned from the super-ensembles report suggest about how rapidly the structure of the US wealth management space is evolving? 

We are clearly in in the transition from first generation to second generation in the independent advisor space. As the industry matures and transitions, the pace of change will continue to accelerate. The combination of new leaders with new ideas, the changing demographics of wealth and financial needs – combined with new technology to engage and deliver services – is exciting.

How are end-clients responding? Or to what extent are they aware of change taking place?

We are at the tip of the spear in 2015. Clients are responding with their dollars. They know how they want to be served and the experience they desire. However, the public at large is unaware that the RIA model exists.

The loyalty displayed by high retention rates and organic growth of clients and new assets demonstrates that, when clients find out about this model, they tend to choose it.

The reality is that they can get access to everything through an RIA that is available through a large corporate brand. That has leveled the playing field when it comes to choice. Unfortunately the marketing spends are disproportionately tilted to the large brands. As far as the evolution of the business and the business changes, those are things not readily apparent to investors at large.

If the future of the industry is indeed being shaped by around 250 (perhaps more) advisory firms, which kinds of players do you anticipate will be the biggest winners and losers?

The biggest winners are clients. Firms may benefit from bigger open-architecture platforms, access to the best technologies, professionally managed firms, as well as quality and qualified professionals to serve the complex needs. I don’t believe there are losers, only choices that advisors and advisory firms need to make.

Whether firms choose to aspire to be $10 billion in AuM or remain a $500 million firms with 10 FTE, the lessons and best practices will benefit all.

The report mentions industry consolidation coupled with fewer clients that don't already have an advisor – what evidence is there of the latter? And do you think consolidation is good for the industry as a whole and particularly end-clients?

According to Spectrem Group, only 28 per cent of affluent and high net worth investors don't use an advisor. It stands to reason that as wealth management has been prominently available to the affluent and HNW, those who have decided to do this on their own are very likely to stick to that decision. Similar reports from Spectrem from back in 2001 were reporting 30-40 per cent use of advisors and many more self-directed investors. Overall, it seems that the affluent and wealthy have been exposed to advice for quite some time and have made their choices.

Furthermore, AdvisorImpact Surveys report that only 2 to 5 per cent of clients who have an advisor are unhappy with that choice – meaning fewer are switching.

Given the seemingly aggressive nature of super-ensembles, is there scope for potential entrants looking to break into the wealth sector? Is there a risk of diminishing appeal to go solo in light of fiercer competition?

According to Cerulli, there are 3,000 mega-teams in the wirehouse channel and super-ensembles account for 1-2 per cent of the RIA community; there appears to be plenty of scope for those who want to be entrepreneurs and plenty of advisors capable of it.

The risk is not the diminishing appeal due to fiercer competition, although that does play a role. The greater issue is the economics of running a solo business with respect to the regulatory requirements and pressure on operating margins.

The report goes into considerable detail about the strength of super-ensembles and their leading growth strategies. But what would you say are their main challenges today? Besides each other, who are their main competitors?

One of the biggest challenges is cultivating and maintaining a growth culture. The largest contributor to growth for RIAs is referrals. Tapping into that engine in a proactive manner and avoiding the old-school “who do you know” transactional question is critical.

Advisors who focus on cultivating referrals, and institute a program with tools and skill development, will not be subject to the serendipitous referral, but a continuous referral stream. This all needs to be supported with target marketing efforts that speak specifically to an advisors optimal client or niche.

What we observe as the primary source of new clients and assets are not other RIAs, but the validator/do-it-yourself-er at a discount broker or clients served by the traditional financial services mega-brands. Advisors experience very low attrition so the competition tends to be one sided, the challenge is getting the at-bat.

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