RIAs Defend Their Turf Through Service Expansion: Cerulli

“While implementing these additional services may help RIA firms move upmarket and generate greater revenue, RIAs will need to reinvest in the business by hiring more staff, adding technology tools, producing marketing materials or paying a third-party provider for outsourced support,” Marina Shtyrkov, Cerulli’s associate director of wealth management, said in a statement. 

“These expenses typically lower the firm’s profit margins, so by expanding their purview, RIAs find themselves at risk of profit margin compression unless they are able to offset expenses with higher fees, new client acquisition, or additional revenue streams.”

To preserve profitability levels as they add services, advisors can either adjust their fees upward or implement alternative pricing structures, such as monthly subscription fees or fixed financial planning fees — 37% of RIAs charge fixed financial planning fees, separate from investment management fees. 

These nontraditional fees, which are not correlated to portfolio performance, can help RIAs offset the increased costs of delivering added services, thereby reducing profit margin pressure, the report said. For RIAs that offer financial planning, nontraditional fees also ensure that the firm’s pricing is more closely aligned with its value proposition.

Cerulli does not believe all RIAs need to expand their services to remain competitive, though under the right circumstances, added offerings can help firms capture new opportunities and tackle competitive challenges. 

“Like any business decision, the addition of a service should allow advisors to better address their target market and achieve stronger alignment between that segment’s needs and the firm’s offerings,” Shtyrkov said. 

“RIAs will need to consult their strategic partners (e.g., RIA custodians, asset managers, service providers) to help them navigate these choices, weigh the tradeoffs of service expansion, and mitigate the risks of thinning profit margins.”