Sirianni Op-Ed: Predictions 2019
It’s an appropriate time to look at what’s in store for our Industry next year and beyond. I’ve broken down my predictions via the three industry players that will have the most impact on our business in 2019: RIA’s, Wirehouses, and the New National firms.
RIAs have led the industry in growth and received much of their increase at the expense of the Wirehouses in a 5-year battle over culture and platform that the RIAs have essentially won. As I note below, they have not yet won the war.
The New National firms are the new disrupters in our industry. They have piggybacked on the cultural and platform victory of the RIAs to become among the most popular options for advisors. They have size, scale, and balance sheets to ultimately win the war, and they are just getting started in the recruiting Game of Firms.
- RIA channel will continue to grow at expense of the wires:
Outflows from the wires will continue unabated. Wires should have regrets about opportunities missed to heal culture, ham handed legal tactics, and transparent efforts to create teams for the benefit of the firm rather than the client. For RIAs, pressure will come from the New National firms with large balance sheets, competitive payouts, and highly differentiated models.
- Model proliferation will slow:
The creation of the “RIA of the day” will slow down as regulators catch up with smaller RIAs. RIAs will need to band together for scalability in pricing as they face increased regulatory scrutiny and its inevitable expense. They can also force better deals with custodians once they hit the multi-billion dollar mark.
- Trades will go to zero:
Just ask your Custodian – it will happen.
- Largest breakaway indies will break again for full independence:
Many of the largest billion dollar plus teams that helped fuel the breakaway movement will break again into their own “true” RIAs. Most of these teams relied on aggregator firms to make the transition to independence and help with legal issues and platform creation. They will realize that they no longer need home office guidance, and that their size and large team structure is ready made for full independence. The good news for RIA aggregators is that million-dollar producers, with limited teams, will still need aggregator firm scale to manage independence effectively.
- RIAs can still lose the war:
RIAs have won the battle for legitimacy versus the wires, who initially refused to get into a character debate with a bunch of small gadfly firms. They also took away the mantle of culture from the wires, BUT they have not been the only ones to inherit it. Culture passed as well, and maybe even more firmly, to the New National firms as a result of the RIA battle.
Poking the Wires in the eye will not win the war however. Funding will decide the long-term fate of aggregator firms (the best road out of the wires to Independence) and RIAs alike. Wires are well capitalized while RIAs are not. If vulture/venture capital takes over the RIA space to help fund growth, they will destroy RIA firms’ inherent value and leave their equity (a main reason to join a firm) in tatters. Then, if the wires would only wise up, they could retake the initiative.
- Wires will raise production bar:
As Wirehouse real estate issues lessen and they consolidate offices and get out of 10-year leases, they will need 750k and under producers less and less. Keeping the biggest teams and the best clients happy, and locking them into structured products and lending scenarios, will pad bottom lines enough to do without “smaller” advisors and maximize profits with lower real estate and branch expenses.
- Wires will embrace AI/robo models & kill FA training:
On the flip side, Wires will embrace smaller accounts. They will use salaried licensed advisors and robo/AI offerings to get the mass market share that their parent banks can easily absorb. In this way, they will compete directly with their own advisors for smaller accounts.This will effectively eliminate the training of entrepreneurial new advisors, except for those that can be placed (as anchors no doubt) on existing teams. Think about it, how will newbies fight against the discounting at their own firms while chasing smaller/emerging clients to start a biz?
- Wires will move to European model:
All team agreements, that add layers of legal structure for every additional teammate are solely designed to keep assets in house. Sunset agreements as well, while possibly helping the retiring advisors, almost always condemn their teammates to perpetual servitude in the firm he/she retires from.This will lead directly to a European model of salary and bonus for the teammates left behind, without true ownership of the clients they serve, and bound, document by document, to the firms they are imprisoned by.
New Nationals (Stifel, Edward Jones, LPL, JP Morgan, Dynasty, etc.)
- More unique New National firms will develop quickly:
New Nationals can be Super Regionals like Raymond James and Stifel, or independent like Dynasty. They have unique platform designs and culture. They can be quirky and non-traditional. They are among the biggest brokerage firms in the country like Edward Jones and LPL. They cannot be ignored.Many firms with strong balance sheets and unique offerings that have traditionally only grown organically have taken a look at the growth of the non-traditional New Nats and decided to try their hands at recruiting breakaway advisors as well. Like Edward Jones, many have always grown internally, but they see the fractured advisor landscape and their chance. Expect to hear from many new players with familiar names in the recruiting space in 2019.
- New Nats will start to supplant traditional RIAs:
The New Nationals have done what the Wires would not do. They have taken the lessons that the Indy movement has taught the industry and applied them to their businesses.RIA growth has shown that culture matters, and its huge diaspora of makes and models has shown that culture has different meanings to different people. The New Nats have not copied other cultures, but they have learned that if they nurture and highlight their own unique cultures, they can recruit to that. Their continued growth will be at the expense of the traditional RIA movement as their offerings will appeal to many advisors who are considering full independence.
- New Nats will have to move to broker owns client model:
Advisors want to own their books. They will move to ensure that this is so. New Nats must make sure Advisors know who owns what before they arrive. They must also make sure their existing advisors are comfortable adding new colleagues to the mix and will have to tweak their existing advisor agreements if in conflict with advisor ownership of accounts.
- New Nats will move to Platform Independence:
Wires had, and still have, every chance to win the platform battle because the perception is that many New Nat platforms are limited. Instead of looking at why an advisor might find a competitor’s platform better, Wires have focused on managing to the lowest common denominator and stifling independent thought, thus creating the perception that their platforms are limited, which really isn’t true. New Nats, on the other hand, offer the entire range of platform choice from their ranks, although the perception is, they have closed platforms and internal product mixes that are compulsory, which isn’t really true. As these firms move to recruit breakaways, expect to see them open up their platforms as wide as possible by adding RIA channels and the widest product mixes in 2019.
- The kids table redux: The year the New Nats grow up:
For all their strengths the New Nats still act like they are at the kids table on Thanksgiving. They are still too insular and inward looking to act collectively on behalf of our industry. They are actually late to the Game of Firms party and not always in tune when presenting their message. The mantle of leadership can be difficult, but it’s the necessary step the New Nats need to make to succeed versus the Wires and RIAs. In 2019 they will speak up.
- No More Prexit firms in 2019:
I think there will be no more Prexits from major firms, for the simple reason that the TRO genie is out of the bottle and even firms like Fidelity are using it when they see fit, whether they are in the Protocol or not. Even the Prexit firms seem to use their Prexit powers only when there is an egregious (read easy to win) case. TROs are here to stay, but the original thought behind the protocol—protecting information and bringing some discipline to the transition process—is largely muted by the fact that in an age of social media, client contact information can no longer be held as a corporate secret.
- Teammates will be weaponized in the Game of Firms:
How will firms thwart breakaways in the future? The poison pill or “Fredo syndrome”. Firms will pick the weakest member of a departing group and make a separate deal with them, even months after they have left the firm, to return and call on their former teams’ clients for extra payouts and cash incentives. Producers take care of your Fredo, or your Fredo will take care of you!
I think that the New Nats will pose the biggest threat to the wires and to continued RIA growth dominance in 2019. They have money, culture, good management, and come in every hue an advisor might want. They are the new disruptors
Funding is the Achilles heel of the traditional RIA/aggregator movement, and the one spot where Wires have the clearest advantage. Wires would be wise to learn lessons from their competitors before it’s too late, although they have proven stubbornly consistent in refusing to recognize any new opportunity to take the initiative.
RIAs need to partner up and keep their offerings fresh or the better funded New Nats will continue to gain ground on battlefields the RIAs have won. Watch out for the vultures!