The Five Competitive Forces Affecting RIA Profitability

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.



Originally Published in Advisor Perspectives, written by:
Brendan Falls, CFP®
SVP Strategic Growth, GeoWealth

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?


4. Substitute power – Robo-advisors are an obvious substitute to human advisors. While robos have not significantly penetrated the baby boomer client base, they are still showing enormous growth with younger clients. Similarly, big institutions have offered call-center advisory services at a reduced price. With the biggest wealth transfer in the history of the world on the horizon, advisors should emphasize the human factor in the face of mass scale wealth management winds. Holding personal consultations with clients is the most valuable use of an advisor’s time; robos and call centers will never be able to replace that.

How is your firm prioritizing the personal, human element?


5. New entrants power – Admittedly, it is unlikely that big tech is going to swoop in and drastically alter the financial advisory landscape in the near term. Wealth management is a nuanced industry and very dependent on human interaction.

Far more likely is disruption to the status quo when it comes to the revenue model. For example, new entrants to the advice landscape are charging only for financial planning and giving away investment management, a complete script flip relative to the current RIA model. While financial planning should be the cornerstone of every client engagement, a successful financial plan is contingent on a properly aligned investment plan. RIAs should prioritize the integration of planning and investments to mitigate the effect of new entrants commoditizing the latter.

Are you aligning investment solutions to every unique goal of the client?


The five forces framework is subjective and dynamic. However, it is a valuable tool for RIA owners to think strategically about where they fit in a competitive industry, as well as future developments that may alter that positioning.

Brendan Falls is the SVP, Strategic Growth at GeoWealth, an enterprise technology and TAMP built for the needs of the modern RIA.

This article was originally published by Advisor Perspectives



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