Independent RIAs face a number of risks when operating their business. Some are readily identified, while others may emerge over time and be more difficult to recognize. The challenge becomes managing known risks while identifying emerging risks and preparing for the unknown by developing a plan to manage them. Before we delve into some of the risks associated with being an independent RIA (and how to prepare for dealing with them) let’s discuss how to identify emerging risks.
Identifying Emerging Risks
It is essential to look past current risks and identify potential emerging risks because of their possible detrimental impact on business operations. By their nature, emerging risks are varied, difficult to quantify and often even more challenging to identify. According to the International Risk Governance Council, an emerging risk is “a risk that is new, or a familiar risk in a new or unfamiliar context or under new context conditions (re-emerging).”1 Although there is no one-size-fits-all approach to identify emerging risks, one method is horizon scanning. This process involves examining external information to uncover potential opportunities and threats.
Risks to the Independent RIA
Most independent RIAs face the challenges presented below as they grow their business. Depending upon your situation, you may be facing (and dealing with) the current challenges posed by these risks, or they may arise in the future. Once the risk is identified, RIAs need to assess the risk to both their firm and its clients and then design and implement policies and procedures that address those risks.
Risk #1: Regulatory Compliance
All RIAs must stay abreast of the rules and regulations in the financial services industry, which can be a complex and time-consuming process. Meticulous attention to detail and ongoing education are required to navigate the legal landscape, understand compliance requirements and ensure that every aspect of the practice aligns with industry standards. Staying informed about evolving regulations and investing in compliance technology can simplify the process. Partnering with experienced compliance professionals or firms can help independent advisors navigate the regulatory landscape effectively.
Risk #2: Professional Portfolio Management
Managing portfolios involves significant time and effort. Conducting research, monitoring market trends, analyzing individual securities and executing trades require substantial resources. Even seasoned financial advisors may lack the specialized expertise necessary to make optimal investment decisions consistently. In addition, efficient portfolio management requires robust technology infrastructure, including trading platforms, research tools and risk management systems. Maintaining and upgrading these technologies can be expensive for smaller RIAs. Outsourcing portfolio management to skilled and experienced professionals with dedicated teams and sophisticated strategies can help RIAs provide a more disciplined and unemotional approach to investing to achieve more consistent and diversified returns.
Risk #3: Time and Resource Constraints
Handling day-to-day operations, including administrative tasks like scheduling, client communications, and technology setup, can be overwhelming for independent advisors. A third-party provider can offer a cost-effective way to introduce expertise you may lack into your business and bring a fresh perspective to your efforts. Outsourcing administrative and operational tasks, like back-office support and technology integration, can enhance operational efficiency, enabling advisors to focus on client relationships and investment strategies.
Risk #4: Evolving Technology
Investment in technology is not just financial, it is an investment in time and energy, requiring thorough research and ongoing adaptability as technology evolves. Advisors must balance adopting cutting-edge solutions and ensuring their tech stack aligns with their practice’s unique requirements and long-term goals. Selecting technology solutions that align with the RIA’s business needs can be a complex and ongoing process. The wrong choices can be costly, causing inefficiencies and client dissatisfaction. Leveraging a Turnkey Asset Management Platform (TAMP) like the Wealth Advisor Alliance can simplify this process by providing integrated technology solutions.
Risk #5: Professional Isolation
Operating as an independent RIA can leave the firm’s principals feeling entirely alone. The sense of fellowship and shared knowledge for brainstorming ideas or seeking advice found in larger firms may be missed, and decision-making can become narrowly focused. Overcoming this challenge involves actively seeking out networks and communities where advisors can connect, share experiences and gain valuable insights. Turnkey solutions like the Wealth Advisor Alliance can connect you to a vibrant network of peers and mentors willing to share experiences, challenges and successes.
Risk #6: Succession Planning
Succession is essential for RIAs and connected stakeholders, including owners, employees and clients. The most common mistake RIAs make in developing and implementing the plan is procrastinating. Delaying planning can lead to rushed decisions and inadequate preparation, increasing the risk of a poorly executed transition. Procrastination can (and often does) lead to valuable employees leaving to pursue other opportunities as they lose hope that their current firm will provide their desired career path. Failing to retain qualified legal, financial and human resources experts to advise on the transition can lead to regulatory or legal liabilities in the succession planning process. Experienced professional succession advisors can help RIA owners steer clear of mistakes commonly seen concerning the preparation of a succession plan.
Developing and Implementing Your Risk Response Strategy
How do you manage the risks you are aware of while identifying emerging risks and preparing for the unknown? Once you have identified the risks that could affect your business, examine your firm’s policies, day-to-day business processes, procedures and systems surrounding these risks. Next, ascertain the level of risk and propose solutions to eliminate or decrease the risks. When evaluating proposed solutions, it is important to keep your firm’s core value proposition in mind. As a financial advisor, offering advice and expertise is the greatest value you bring to your clients. Partnering with a turnkey outsourcing solution like the Wealth Advisor Alliance can provide the necessary resources and expertise to grow and thrive.
Source:
1 “Governance of Emerging Risk,” International Risk Governance Council, 2019.
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