Traditional ideas of wealth management are changing. Instead of a broker calling potential clients to sell a product, investors are looking for professional and holistic guidance on how to manage their financial holdings. To do this, they are turning in droves to Registered Investment Advisors (RIAs).
RIAs manage the assets of high-net-worth individuals and institutional investors such as pensions, trusts, and endowments. They create portfolios for their clients that comprise a range of products such as stocks, bonds, and mutual funds and work to diversify and streamline the allocation of assets to manage risk and cut down on commission costs.
The attraction to RIAs is that they provide more than just investment advice. A good RIA offers clients a one-stop shop including services and advice related to retirement and estate planning, budgeting, debt repayment, and insurance alongside financial planning and asset management.
This blog will take a closer look at RIAs and what trends and challenges they face in 2023.
Overview of the RIA Industry in the US
The number of RIAs in the US has been increasing annually, and there are now over 14,800 registered with the SEC. The growing popularity of RIAs is evident in an overview of the sector’s performance in 2022. With 15,114 fiduciary investment advisers managing $114.1 trillion in assets for 61.9 million clients, the sector grew by 2.1% in 2022. Even as an unstable global economy pushed the value of assets under management down for the first time since 2008, RIAs continued to thrive.
There are a number of factors behind this trend.
- RIAs offer more value for money and avoid the very high commission fees that come with offerings from large broker-dealers and securities houses. They also avoid the mistake of having an inadequate diversification of assets that can result from ‘being sold to’ rather than having your portfolio managed.
- RIAs also offer deep expertise by hiring trained professionals rather than brokers who are primarily salespeople with knowledge about products, but not necessarily about wealth management in general. RIAs employ a range of experts including research analysts, portfolio managers, traders, technical staff, and client service professionals.
- As the range of financial offerings grows more complex and the economy more uncertain, clients are looking for trusted advisors whom they can turn to. They want a reliable resource that knows and understands their full picture, including their overall objectives. RIAs are well-positioned to offer this big-picture expertise.
- With technological advancements making communication less personal, clients increasingly want easier access to their advisors and decision-makers on their accounts. RIAs offer a more personal service – real people are available to explain decisions, provide rationales for strategies, and generally offer clients peace of mind.
What is 2023 Likely To Bring For RIAs?
There are a number of challenges driving trends in 2023. We are still seeing the impact of COVID-19 across all industries. In particular, the number of work-from-home offices increased to 25.6% in 2022, and this transition is looking to be permanent. This is, in turn, driving the digitization of the industry, forcing the use of new technologies and automation in order for firms to manage decentralized operations. Looming recession talk is also making clients nervous, and aside from being reassured, they will also need assistance to prepare themselves. Finally, compliance concerns loom large as regulatory bodies are increasing pressure on financial firms to comply with an ever-growing range of rules.
Given this changing landscape, RIAs are likely to see the following trends emerge in 2023:
- An increased demand from clients for comprehensive wealth management services that include dealing with tougher economic circumstances.
- Adding value to investment advice and services through increased communication and enhanced relationships with clients.
- Offering clients digital platforms that will allow them easy access to their account information in one place.
- Increased use of virtual technologies such as video conferencing in order to increase hybrid in-person/on-line offerings, both for employee and client benefit.
- Improving operational efficiency by adopting new technology not only to benefit clients and advisors but to ensure compliance with industry regulations.
RIA’s and Technology: You Can’t Have One Without the Other
It is clear that if RIAs are going to continue their growth in popularity and meet the challenges of the current economic landscape, they are going to have to make technology their friend.
And there is enthusiasm for increased uptake of new digital and electronic offerings. There is a growing recognition amongst RIAs that technology will help differentiate firms and give the more tech-savvy ones a competitive edge. Add to that the fact that regulatory and reporting requirements now make automation a necessity if firms want to keep using the communication platforms that their clients use (such as WhatsApp) and make work-from-home models viable, and RIAs are eagerly looking for the right platforms to incorporate into their tech stacks.
What Are the Compliance and Regulatory Considerations for RIAs?
- RIAs with more than a certain level of assets under management have to register with the SEC and other applicable state-specific bodies and be subject to all their rules and regulations. If a RIAs business includes broker-dealer services, it would need to register with the Financial Industry Regulatory Authority (FINRA) as well.
- They have to disclose and ensure that clients understand any risks or possible conflicts of interest for any transaction they recommend.
- RIAs have a fiduciary responsibility to act in the best interests of clients and avoid any conflict of interest.
- RIA firms must have a written set of policies and procedures aimed at preventing, detecting, and correcting non-compliance. Advisers have to review these annually and testify to their compliance with them.
- Under the ‘Books and Records’ rule, RIAs must keep complete and true records of, among others, financial and accounting records, all records of investment advice given, transactions conducted, and communications with clients.
These requirements provide real challenges to RIAs, many of whom are small to medium-sized businesses. The volume of information that has to be reported to regulatory authorities can be overwhelming, and cannot be done manually – particularly given the decentralized nature of the new work landscape.
With the proliferation of devices, both personal and business-owned, and the number of different communication platforms used, it is going to become increasingly important for RIAs to ensure they capture all of these records in order to remain compliant.
The consequences of non-compliance are serious. The SEC and FINRA have been known to take a harsh stance against uncaptured communication on off-channel communication platforms, and they have administered heavy fines and even suspensions to those firms and individuals found to be violating the Books and Records rule. For example, the SEC recently hit over a dozen banks with fines totaling $2 billion for the unauthorized use of WhatsApp and other prohibited communication channels. While the SEC’s attention has been focused on the larger brokerage and securities firms, they have made it clear that they will be ‘coming after’ RIAs next.
Meeting the Challenges of 2023: RIA’s Biggest Challenge
Given the rapidly changing environment that RIAs are functioning in, it is clear that building the right tech stack will be a differentiator between those firms that can meet the new challenges and those that can’t. RIAs require the right technology to ensure that they can meet their customer’s needs for enhanced communication and access to information, keep employees happy by supporting hybrid work set-ups, and remain compliant with statutory requirements while doing so.
LeapXpert is an essential component of any RIA’s tech solution. Our fully integrated communication platform maintains a complete record of all electronic communications across all channels and devices, ensuring compliance with all data privacy and governance standards. Our user-friendly dashboard allows for easy auditing and reporting, and displays the real-time status of all messages, conversations, and data sent, as well as flagging when conditions and rules have been breached. Integrated with leading third-party archiving, surveillance, and analytics platforms, all messaging records are securely stored and available alongside all the existing business data.
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