The Wire

Many RIAs are spending time taking care of their clients and employees while assessing the financial impacts of COVID-19. As the industry gets used to working remotely and adjusting to market volatility, new questions about macro RIA trends have surfaced. 

What will happen to RIA M&A?  

Partially forgivable loans from the Small Business Administration (SBA), made available as part of the federal government’s $2tn stimulus designed to blunt the coronavirus’ economic impact, could soon become a standard recommendation for RIAs’ small business owner clients.

But could they soon become a useful tool for advisory firms themselves?

The coronavirus crisis may provide an important opportunity for RIAs to rethink their business models. 

John Furey (pictured), managing partner of RIA consulting firm Advisor Growth Strategies, said firms facing thinner profit margins should take this opportunity to sort their needs from their ‘nice to haves’ and to reexamine how they operate their businesses and compensate their teams.

Asset-based fee revenue at wealth managers plunged this month alongside the fastest-ever bear market in response to the novel coronavirus. At RIAs with thinner profit margins, that could mean drastically lower compensation and even cost-cutting.

In 2018, the median operating profit margin for RIAs managing between $100 million and $250 million was 28.9%, net compensation costs. RIAs that managed more had relatively similar margins ranging between 26.4% and 30%, according to Schwab Advisor Services’ 2019 RIA benchmarking study, its most recent annual report than surveys more than 1,300 firms, which self-report.

A number of registered investment advisory firms—including some well-know billion-dollar shops—are vowing to hold on to all of their talent as the coronavirus challenge continues despite anticipating a sharp haircut to revenues.

According to advisors Financial Advisor magazine talked to across the country, retaining staffing is a priority to firms as they ramp up customer service and communication. That’s despite what is likely to be a 30% decrease in assets and revenues for advisor firms for the foreseeable future.

“If you fail to plan, you are planning to fail.” So said Benjamin Franklin, and his words ring as true today as they did 250 years ago. Right now, though, far too many owners of RIA firms may find their firms vulnerable in a protracted down market.

With one of the greatest bull markets of our lifetime ended, severe economic damage and a protracted downturn are real possibilities. The most optimistic outlook involves a government-backed “V curve” -type recovery, which would essentially insulate most RIAs from long-term revenue declines. Two weeks into the crisis, however, this type of recovery seems less likely by the day.