Thinking of going independent? How smaller RIAs can win despite disruptive tech  

The list of financial advisors deciding to take greater control of their practices with an independent RIA firm is ever growing, but is now a good time to take the plunge?

Despite current economic challenges, together with the disruptive impact of technology including artificial intelligence and embedded finance, the business development director at Advisory Services Network sees great opportunity.

Trey Prescott has shared his insights with InvestmentNews, providing a view of the landscape for smaller RIA firms, a key focus for the firm which now boasts advisors with almost $7 billion AUM, growing from $5.2 billion twelve months ago.

ASN was founded by Tom Prescott and Dave Paulukaitis, who began providing consultancy services to the industry at Mainstay Capital Market Consultants more than 20 years ago and has evolved over time to focus mostly on RIAs rather than broker-dealers.

Recently ASN has engaged with an increasing number of advisor groups, 184 in 2022 and more than 260 in 2023, with over 30 groups and/or individual IARs launching their own practices to attain independence.

“ASN envisions this trend not only continuing but gaining momentum,” Trey Prescott said. “Advisors are recognizing that they have access to a comprehensive list of tools and services which allows them to transition away from wirehouses, IBDs, or RIAs that no longer align with their needs. Further, the economic benefits are being felt exponentially.”

OPPORTUNITY AND CHALLENGE

Prescott believes that there is opportunity for those who have a thirst for gaining autonomy and being the architects of their own success.

Read more: Why is it important to work with an RIA?

“The RIA space serves as a powerful role model for entrepreneurial success, fostering the creation of enduring businesses for advisors and laying the groundwork for generational wealth,” he said. “Observing this transformative process and actively contributing to the evolution of this industry brings genuine satisfaction.”

ASN has a focus on smaller and midsize RIAs and Prescott is optimistic about the firm’s growth potential, with close to 700,000 financial professionals who could decide independence is for them but need the tools and support that ASN provides.

However, he points out that transitioning to an independent practice is not without risks and challenges.

“A significant obstacle revolves around the dilemma concerning pricing and partnerships,” he said. “Developing technology and platforms requires substantial financial resources. Advisors are faced with the decision of whether to create their proprietary solutions or collaborate with established industry competitors. Negotiating fair pricing, without the scale of larger firms, poses a considerable challenge for individual advisors.”

The involvement of private equity in the financial advice industry presents both opportunities and risk too.

“While it can bring capital, scale, and innovation into the industry, it also carries the potential to reshape the landscape in terms of ownership, control, and the long-term execution of an adviser's business plan,” said Prescott. “Private equity involvement may lead to significant changes in cash flow and adviser payout. Navigating these opportunities and challenges requires strategic foresight.”

TECH VS. HUMANS

Disruptive technologies are also trying to take a larger slice of the financial services sector, and the wealth management and advisory space.

But while embedded finance and fintech firms want to use artificial intelligence and other emerging technologies to offer nonfinancial industries a chance to grab market share, Prescott says the power of human advisors should not be underestimated.

“It's crucial to remember the fundamental essence of our industry is driven by human connections and relationships,” he said. “Trust, personal rapport, and sound advice remain the cornerstones of success. Fintech brings immense value in streamlining and enhancing processes as a tool for the advisor.”

Maintaining the supply of humans for the industry is another ongoing challenge though, especially as older advisors retire, making it more important to attract younger people into the industry.

And Prescott says simply replacing industry veterans with young blood is not the right way forward as experience should be passed onto the next generation through mentorship and continuity.  

“A comprehensive solution should focus on preserving and transferring the invaluable institutional knowledge accumulated over lengthy careers,” he said. “The industry's prosperity depends on the coexistence of seasoned professionals and emerging talent. Institutional knowledge plays a pivotal role in molding future industry leaders, emphasizing the need to establish a bridge between generations and fostering a supportive environment for mutual learning.”