Viewing RIAs in a new light, Fidelity Institutional shifts from a top-down to a bottom-up emphasis to serve them

A couple of counterintuitive findings in a big study are part of Mike Durbin's more methodical approach to practice management

Wednesday 2.13.13 by Brooke Southall

Brooke’s Note: The findings of surveys are often stunningly familiar and derived from what are pretty unimaginative questions. Not that it’s easy! So when a company like Fidelity Investments spends real money and avails itself of its own powerful connections to its RIA clients to gather survey-based research, we don’t want to waste any nuggets that glitter on the sandy surface. There were a couple of points I found notable when I interviewed Mike Durbin last week. And the points turn out not to be academic. They are part of Fidelity’s in-out strategy.

RIAs that delve into trust, estate and tax planning, and other wealth management issues, don’t do as well as their peer firms that keep it simple, according to a new benchmarking study completed by Fidelity Institutional Wealth Services.

The finding was one of two that seem to conflict with a growing conventional wisdom that says that concentrating on investment management as an RIA is too generic, old school and regressive.

“High-performing firms are more selective in their offering, demonstrating a propensity to provide fewer value-added services than peers in general,” the Fidelity report states. See: Are ultra-high-net-worth clients really worth it?.

Philip Palaveev, chief executive of The Ensemble Practice, is not so sure he’d be willing to put much stock in the finding.

“I think it would be very difficult to say one model is more successful than the other. This has been discussed for many, many years. It’s always a struggle to define a wealth manager versus an investment manager.”

High performers

But Mike Durbin, president of Fidelity Institutional Wealth Services, is confident that his firm’s study, which gathered responses from 308 of its advisory firms, has advanced knowledge surrounding this issue.

For the period 2008 to 2011, high-performing firms reported a median compound annual growth rate in assets of 20%. All other eligible firms reported 12% growth over the same period.

“We feel there’s something there to pay attention to,” Durbin says.

Palaveev agrees that the conviction about wealth management’s superiority as a business model may have gone too far.

“There was a lot of propaganda that you need to outsource asset management. But advisors don’t need to choose that.” See: How the breakaway movement is driving the outsourcing trend.

Philip Palaveev: There was a lot of propaganda that you need to outsource asset management.
Philip Palaveev: There was a lot
of propaganda that you need to
outsource asset management.

Sticking with what you know

The second finding that caught Durbin’s eye speaks to the way in which specialized RIAs — whether serving a gender, profession or geography — operate. Only 3% of the highest- performing firms with that profile deviate from their proclaimed specialty versus 11% of proclaimed specialists.

There is another measureable advantage to keeping it simple. “Another benefit of strict adherence to the target client profile is the ability to close business faster — about 7 out of 10 [72%] of the high-performing firms closed business within two prospect meetings or fewer, as compared with 53% of all other eligible firms,” the study says.

Again, Palaveev cautions against basing practice modeling on these findings. “The majority of firms tend to be generalists. It’s not a bad strategy [to take all comers] in a growing market. It starts to become a problem when demand stops growing. When competition intensifies, that’s when differentiation becomes the name of the game.”

For example, Palaveev says that virtually all the growth in the accounting and legal professions — where overall growth is less than 2% — is coming from specialized firms. He believes that generalists still have room to run in the RIA business, which, he says, is growing at a rate of 10% or more annually.

A quick timeout

These new survey findings form a framework for a shift in philosophy away from Fidelity’s traditional focal points. Fidelity has made a big push to shore up its technology with WealthCentral and its customer service — by creating pods that act as a team in servicing RIA firms. See: Mike Durbin is putting his stamp on Fidelity as an RIA custodian for asset-flush breakaways.

But with those efforts maturing — and with RIAs so low on the efficiency curve in expanding their practices — Durbin is reorienting. This is an approach that Schwab and TD Ameritrade are also taking with RIAs. See: TD Ameritrade takes on Schwab with big consulting push. Pershing, with Mark Tibergien on hand as CEO of its RIA unit, is also making bets on this approach.

“It’s very early,” Durbin says. “These are key points you shouldn’t ignore.”

The one difficulty in focusing on RIAs themselves rather than on the services they avail themselves of at the custodian is that there is some loss of control.

“We can’t take somebody by the scruff of the neck but we can be much more methodical.”

Durbin says, for instance, if an RIA had come to him in prior years asking for help in opening Florida offices, his firm would leap into action. Going forward, it will have a different default response.

“[We’d] call a quick timeout,” he says.

Better to bundle

Here are some of the other findings of Fidelity’s new study:

Attract and engage more of the right clients
High-performers focus more intently on larger relationships: 75% of high-performing firms report an average in excess of $1 million, with nearly 6 in 10 (58%) reporting an average client relationship in the $1 million to $3 million range. Only one-quarter (25%) of high-performers have an average client relationship under $1 million, compared with 42% for all other eligible firms.

Bundling services beats a la carte
High-performing firms are more likely to include the services they do offer in their standard investment management fee. Of high-performers that provide philanthropic planning, 9 in 10 (91%) include it in the asset fee, while nearly 8 in 10 (78%) that offer estate/trust planning include it in the overall investment management fee. See: In big surprise, Fidelity and Schwab rake in charitable assets — early, often and unremittingly in 2012.

Maximize revenue
High-performers maximize revenue through a combination of higher fees and larger clients. High-performing firms boast higher revenue per client than peers. One reason: High-performing firms have larger clients, with an AUM per client that is higher than all other eligible participating firms. High-performers also do a better job of maximizing each relationship’s potential, setting higher- basis-point fees when relationships reach $2 million.

Mike Durbin | Philip Palaveev

Fidelity | The Ensemble Practice