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Schwab Study Finds RIAs Addressing Leadership and Talent to Prepare Firms for the Future

SCHW | November 5, 2014

Reflecting a proactive stance to ready their firms for the future, independent registered investment advisors (RIAs) are taking steps in the areas of leadership, talent and business legacy planning, according to the results of the latest Independent Advisor Outlook Study (IAOS) released today by Schwab Advisor Services at its annual IMPACT^® 2014 conference.

The study, which reflects responses from 740 RIAs representing $243 billion in assets under management custodied with Schwab, found that identifying the next generation of firm leadership and cultivating talent are both firmly on the strategic agenda for RIAs. Nearly half of firm principals surveyed (49%) say their firm has already identified the individuals who will take the leadership reins in the years ahead. And, of those who report having identified their firms’ future leaders, 37 percent of principals say that successors are already extremely prepared to lead the firm into the future.

In addition to their future leadership, firms are paying attention to the talent pipeline of younger advisors, with increasing emphasis being placed on greater firm diversity. One in four advisors said their firms are already making efforts to recruit diverse employees, and an additional 15 percent indicated they will be making efforts in the future. When considering the appeal of their firms to candidates under the age of 30, the majority of advisors surveyed (64%) believe that their firm would be seen as ‘striving to be flexible across generations’ and an additional 13 percent think such a candidate would consider the firm a ‘perfect fit with their generation’.

In addition to leadership transition and talent, one in three advisors reported that their firms have been taking action the past five years to grow their business beyond organic firm growth. When asked about what actions they have taken, they report bringing an individual advisor with a transferable book of business into their firms (54%) or acquiring, joining or merging with another RIA firm (51%). The leading two reasons for taking these specific steps are cultural fit (59%) and alignment of business models (49%).

The IAOS results also indicate that the sale of their firm might ultimately play a role in legacy planning for some advisors. Forty-nine percent said they would sell their business in the next five years for the right price (30%) or to the right partner (25%). Of those that would consider selling their firm, 75 percent would sell to another RIA firm and 35 percent would consider a strategic acquiring firm.

“For the past few years we have talked a lot about the opportunities and the challenges ahead for the RIA industry – from the ongoing demand for independent advice and the emerging Generation Now client, which we believe will have a strong preference for the RIA model, to the aging of advisor principals and the approach needed to build legacy firms,” said Bernie Clark, executive vice president and head of Schwab Advisor Services. “It is tremendous to see RIAs not only acknowledging these factors, but also taking the steps necessary to position themselves to maintain their growth momentum and cement the foundation for their firms’ futures.”

As next generation firm leadership steps up to play a larger role in strategy and planning, the IAOS findings indicate differences emerging between the current and future leaders. These differences will likely play a role in shaping how RIA firms evolve over the coming decade. While the two generations share a common perspective on areas such as education, relationship management and investment strategy, more than half of advisors believe that the generations differ in areas including philosophy on technology use, business development and marketing expertise, talent acquisition and the desire for innovation.

“It is not surprising that for some firms, current and future leaders have different perspectives driving their views on the business. Generational change is happening inside RIA firms - just as it is in the investing public - with members of the next generation beginning to move into leadership positions. Often current leaders are the pioneers, having established and built the firm, and future leaders are increasingly tasked with taking the reins and driving continued growth against a changing client and investing landscape,” said Clark. “Regardless of perspective however, founding and next generation leaders must come together to tackle the important areas that will fuel their future growth.”

SECURING GENERATION NOW CLIENTS

Earlier this year, Schwab conducted the Generation Now Study for RIAs, which looked at affluent individuals between the ages of 30 and 45 who are following on the heels of advisors’ current pre-retired or retired clients. Schwab refers to these individuals as Generation Now and, with control of nearly $3.5 trillion in investable assets today¹, Schwab believes they represent one of the most significant opportunities for RIA firm growth in the decade ahead.

The current IAOS asked advisors for their perspectives on different generations of clients and found that they believe individuals in the Generation Now group have a greater lack of trust of financial institutions and advisors than their parents’ and grandparents’ generations, and that they place higher value on fee transparency but less emphasis on personal service.

“Advisors’ perspectives on emerging affluent investors echo some of what we found earlier this year when we conducted our Generation Now study, in particular, that these emerging clients have a level of skepticism when it comes to investing and advice,” said Clark. “There is more to the story though, because our research also clearly showed that these individuals are not so different from RIAs’ current clients. They are seeking advisors with whom they can develop trusted and transparent relationships, and they do want personal service. They have goals and dreams, and hope for a worry-free financial future. Ultimately, they need and want someone to help them feel secure about their future. Generation Now might not know it, but RIAs are well positioned to meet their needs and it is important for RIAs to get in front of these individuals to earn their trust and win their assets.”

When asked what they are doing to build awareness of the RIA industry, advisors said they were:

Getting involved in community organizations (42%)
Providing internships to students and new entrants to the industry (30%)
Writing and publishing editorials and articles (27%)
Leveraging social media (26%)

According to the current IAOS results, winning new clients is likely to occur in an increasingly competitive landscape, with one in three advisors reporting that competition for their clients’ business has increased in the past two years.

AUTOMATED INVESTMENT ADVISORY SERVICES

One in five advisors view automated investment advisory services as a competitive challenge when it comes to acquiring Generation Now assets. At the same time, more than half reported they would implement such an offering to target younger investors (54%), as well as investors with less than $100,000 in investable assets (45%). This aligns with the finding that nearly half (48%) of advisors believe an automated investment advisory solution would help their firm serve small clients more efficiently.

Most advisors (40%) don’t yet know how they would implement an automated investment advisory solution - one third (31%) say they would outsource to a third party, while fewer (19%) report they would buy capabilities to implement internally, and one in ten are planning to build capabilities in-house.

In related news, the Charles Schwab Corporation recently announced the planned launch of Schwab Intelligent Portfolios™, the company’s new automated investment advisory service, which it plans to make available to retail investors in the first quarter of 2015, with a white label version for RIAs available shortly thereafter.

OTHER IAOS FINDINGS

Market Outlook

Sixty-five percent of advisors predict that the S&P 500 will increase over the next six months, a slightly more bullish stance than the previous two waves of the survey.
Despite relative optimism about the S&P, advisors hold a much stronger opinion now (compared to May 2014) that there will be a market correction in the United States in the next six months (74% vs. 30%) while a similar number still predict that interest rates will rise (64% vs. 66%).
Just over half of advisors (54%) report that the current geopolitical environment is negatively affecting clients’ investment confidence.

Technology Use

While the majority of RIAs (76%) are using mobile apps outside the office in their personal lives, only 41 percent are currently deploying this technology within their firms. Although, an additional 34 percent are planning to leverage mobile apps in their business within the next two years.
More than two-thirds of advisors already use technologies within their firms that deliver real-time information and data, and the same number are also currently using or planning to use video chat.

About the Independent Advisor Outlook Study

The Independent Advisor Outlook Study, conducted for Schwab Advisor Services by Koski Research, has a 3.65 percent margin of error. Koski Research is not affiliated with nor employed by Charles Schwab & Co. Inc. All data are self-reported by study participants and are not verified or validated. Advisors participated in the study between September 10and September 23, 2014.

Detailed findings can be found at www.aboutschwab.com/press/research.

About the Charles Schwab Generation Now Study for RIAs

Charles Schwab Generation Now Study for RIAs was conducted for Schwab Advisor Services™ by Egg Strategy, a strategic research firm. The study, which was released in 2014, included 40 participants, men and women ages 30-45 with earned or inherited investable assets of $500K (excluding real estate and business holdings), or a household income of at least $150,000. The term Generation Now reflects the immediate opportunity that this incoming cohort of high-net-worth investors may represent for RIAs. All data was self-reported by participants and not validated or verified. Egg Strategy is not affiliated with nor employed by Charles Schwab & Co., Inc. Investors participated in this study between March 24, 2014 and April 11, 2014.

An executive summary of the Charles Schwab Generation Now Study for RIAs is available at: www.aboutschwab.com/press/research.

About Schwab Intelligent Portfolios™

Schwab Intelligent Portfolios™ will be made available through Schwab Wealth Investment Advisory, Inc. (SWIA), which has filed an application with the SEC to register as an investment adviser. Portfolio management services will be provided by Charles Schwab Investment Advisory, Inc. (CSIA). SWIA, CSIA, and Charles Schwab Bank are affiliates of Charles Schwab & Co., Inc. and subsidiaries of The Charles Schwab Corporation.

Follow IMPACT 2014 news & updates @Schwab4RIAs #SchwabIMPACT

About Charles Schwab

At Charles Schwab we believe in the power of investing to help individuals create a better tomorrow. We have a history of challenging the status quo in our industry, innovating in ways that benefit investors and the advisors and employers who serve them, and championing our clients’ goals with passion and integrity.

More information is available at www.aboutschwab.com. Follow us on Twitter, Facebook, YouTube, and LinkedIn.

Disclosures

Through its operating subsidiaries, The Charles Schwab Corporation (NYSE:SCHW) provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC, www.sipc.org), and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; compliance and trade monitoring solutions; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through Schwab Advisor Services. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides banking and lending services and products. More information is available at www.schwab.com and www.aboutschwab.com.

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Schwab Advisor Services™ serves independent investment advisors and includes the custody, trading, and support of Schwab. Independent investment advisors are not owned by, affiliated with or supervised by Schwab.

¹ Cerulli – Lodestar, 2012E

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