The Harvard Business School’s Michael Porter is the leading authority on industry structure and competitiveness. His Five Competitive Forces Framework states that profitability does not occur in a vacuum with a business and its customers. Rather, competitive forces affect a firm’s ability to attract customers and grow profits – forces that encompass more than just direct competitors. Porter's framework requires managers to think strategically about the current state and future evolution of their industry.
Q3 2022 hedge fund letters, conferences and more
RIA owners would be wise to consider how the shifting dynamics of their industry affect their ability to realize profits now and in the future. Porter’s five-forces framework is a valuable tool for helping advisor owners make successful strategic decisions.
1. Buyer / customer power – In a market as wide and diverse as wealth management, consumers hold a lot of leverage. Retail clients have no shortage of options for obtaining financial advice. While fee compression is a natural result of a long-term competitive market, advisory fees have held steady. One reason is the emergence of financial planning as an extremely valuable service to clients. Firms that had previously only provided investment consulting evolved their services to include holistic financial planning. Advisory fees held because firms added more services.
Clients now expect financial planning to be included as part of their fee. As a result, downward pressure could emerge on advisor fees, possibly through the need to provide more services for the same fee.
Have you considered new service offerings or incorporating operational structures to profitably handle more clients?
2. Competitor power – The competitive landscape has never been more robust. Among fellow RIAs, the market is consolidating, and big firms are getting bigger. Separate from RIAs, there are independent broker dealer, wirehouse, and bank channel advisors that would love to work with your clients.
How are you establishing your personal brand and differentiated messaging to your target customers?
3. Supplier power – RIAs rely on outside products and services to run their practices – among them, compliance, custodial, and technology services. When it comes to compliance, there are a large variety of solutions in the market and RIAs demand competitive pricing and services from their compliance partners.
Wealth management technology vendors hold varying degrees of leverage with RIAs. Switching to a new vendor can cause onboarding, data migration, training and client adoption headaches. Additionally, certain providers require long contract commitments, making it harder to switch if frustrations arise.
Custodians hold the most power when it comes to RIA suppliers. The custodian market is concentrated with only a handful left. With very few choices available, RIAs are forced to be “takers” when it comes to custody service and pricing. Custodians have high “switching” costs, as all advisors dread re-papering and moving their entire book.
Is your firm capable of a multi-custodial structure? Have you digitized your custodial workflows?
Read the full article here by Brendan Falls, Advisor Perspectives.
