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Are RIAs headed for their own taxi medallion moment?
George Tamer, 08/23/2019
Managing Director, Strategic Relationships, TD Ameritrade Institutional
In 2013, taxi medallion sales in New York City peaked at a lofty $1.3 million.
By 2018, according to national news reports, the once coveted permit was trading for as low as $160,000. Why the precipitous fall? Technology-driven ridesharing apps like Uber and Lyft that offer a better client experience, often at a cheaper price. As we all know, things haven't worked out well for the taxi owners.
Is the RIA marketplace headed for a similar fate? It's no secret that robos are disrupting the financial services industry by using technology to drive a digital client experience at scale—and for pennies on the dollar of what advisors charge. The ingredients are similar. But when I look around the landscape I see RIAs that will not only survive but thrive, in part by pushing the technology envelope themselves.
First, the backstory. The financial health of RIAs is good. Median growth from 2013 to 2017 averaged 12.1 percent and operating profit margin remained steady at 20.9 percent.1 Meanwhile, the revenue per revenue-producing role was up year over year, which means advisors are spending more time with clients and bringing in more business. You can't do that without using technology that builds in more efficiencies and more bandwidth.
Advisors are already doing some things well. Reports1 show 66 percent of RIAs have some form of data integration between systems and 46 percent say they are operating under capacity, meaning there's slack in the system to do more without hiring staff. The vast majority of advisors, 85 percent, are also using a CRM system to manage client contacts.2
That's all good, but using technology to drive efficiency isn't enough to ensure relevancy into the future. Here are three steps advisors can take to help futureproof their businesses.
Expand your technology
When I need to go to the dentist, I schedule an appointment online. Same with the eye doctor. My own financial advisor uses an app that shows when he is free to schedule time—and that time together often takes place via video conference. Advisors must adopt already widely-used technology that's a staple in other retail industries. Clients expect these conveniences from other service providers and will expect the same from you.
Here's what forward-thinking advisors should consider adding to their technology-smart office: online scheduling and appointment booking; paperless account opening and agreement signing; video conferencing, online chat and screen sharing; and an all encompassing client app that tracks things like budgeting, expenses, brokerage and savings accounts, mortgages, credit cards and financial plans.
Technology has come such a long way. Yet I'm still surprised at how little advisors have adopted video conferencing and screen sharing in their offices when it's ubiquitous out in the world. My kids video chat with their grandparents easier than a lot of advisors do a video conference with their clients. Frankly, a client will likely be just fine using the video call feature on a tablet. We try to over complicate the process when it doesn't have to be complicated.
Review alternative pricing models
The industry is still too dependent on AUM fees with 89 percent of firm revenue tied to them since 2011.1 The headline: Clients are accustomed to alternative pricing in other aspects of their lives. Think Netflix, Apple Music, the subscriptions you pay for some phone apps. So it's a terrific time to explore new models like a flat planning fee or subscription pricing.
On average, an advisor reaches out to clients on a quarterly basis. Consider charging a quarterly subscription fee. It could be as simple as taking the AUM fee today and dividing it by four. You're just charging differently and in the event, for example, of a 30 percent drop in the market, the impact may not be as severe because your quarterly fee hasn't gone down 30 percent.
Another alternative is to turn the AUM fee on its head by charging for the financial planning with a flat planning fee and including the investment management for free. Thanks to a 10-year bull market, fees have gone up every year because they're tied to AUM. The fact is taxi cabs didn't think they had to change and all of a sudden a simple to use technology upended their business. It's a cautionary tale.
Invest in the next gen
GenX and millennials are the largest generation in the workforce. And, as Cerulli Associates points out, they're set to receive close to $68 trillion from their baby boomer parents and they already control close to $10 trillion in assets.3 In all likelihood, there are younger advisors and core staff who can relate to these clients far better than you. What are you doing to attract those employees, those clients?
This is a special group with specific needs that are different from previous generations. As an example, the New York Federal Reserve reports that millennials have over $1 trillion in debt, most of that in student loans. Twenty years ago, when I started in this business, it was all about picking the right stocks and portfolios and making sure you were beating investment returns for the sake of making money.
That's not what this generation requires. It's time to focus less on that approach and more on how you can take the income and future earnings potential these folks have and create a financial plan that meets their needs. Their burning questions are: How do I pay off my college loan? How do I put my four kids through college? When can I finally buy a house? How do I pay for my parents' elder care? What should my plan be when it comes to retirement savings? The bottom line: Advisors will need to reset their thinking with a focus not on asset management but on financial planning.
1. FA Insight People & Pay 2019 (https://fainsight.com/)
2. 2019 T3 survey (https://t3technologyhub.com/wp-content/uploads/2019/01/2019-T3-Software-Survey-Report_02-05-19.pdf)
TD Ameritrade and the mentioned third parties are separate and unaffiliated and not responsible for each other products or services.
FA Insight is a product of TD Ameritrade Institutional, Division of TD Ameritrade Inc. FA Insight is a trademark owned by TD Ameritrade IP Company, Inc.
Content provided is for educational purposes only and is not intended to be advice for any firm.
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