The “grow or die” mantra affects every industry, including wealth management. Over the past decade, both organic and inorganic growth has been robust, with market performance at record levels and high levels of mergers-and-acquisitions activity. However, over the past few years, wealth firms have been challenged to deliver organic growth rates above the low single-digit range. The primary growth challenges have been high inflation rates, increased competition, and demographic trends that are driving higher investor redemptions.
With growing external headwinds, it is important for firms to address any internal growth inhibitors. In recent studies by Raymond James and Nitrogen, compliance and regulation are cited as the top growth challenges facing financial advisors.
The Raymond James registered investment advisor (RIA) benchmarking survey of 165 firms ranked compliance as the number-one day-to-day challenge. The Nitrogen survey delivered similar findings, ranking “increasing regulations and compliance” as the biggest challenge facing financial advisors over the next five years.
McKinsey & Co. estimates that up to 60% to 70% of an advisor’s time is spent on non-advisory activities such as compliance. Addressing this internal challenge is becoming increasingly urgent as regulatory bodies across the globe continue to introduce more complex compliance requirements to our industry. Firms and advisors must adapt to these changes in the most productive and cost-effective way.
Historically, firms have relied on manual or semi-automated processes to address compliance. With the increased complexity of new regulations, this strategy simply will not work.
An example of complex compliance is the know-your-product (KYP) compliance requirement for advisors to consider reasonably available alternatives when making investment products or portfolio recommendations. The regulations governing this requirement are client-focused reforms in Canada, Regulation Best Interest in the U.S., and Consumer Duty in the U.K.
Many wealth firms have upwards of 25,000 securities on their product shelves, and KYP analysis across this data set necessitates technology.
In a recent InvestorCOM client case study, advisors realized productivity savings of 2.4 hours per product recommendation when using KYP technology. Considering that advisors make approximately 250 recommendations annually, these savings drive a productivity opportunity of 29%. Reinvesting 29% of an advisor’s time to client activities is clearly an organic growth opportunity for advisors and firms!
Another internal growth challenge is advisor attrition. A recent Advisor360° report highlights that 92% of advisors would move firms for better technology.
Firms that are focused on organic growth must invest in a tech stack that minimizes advisor attrition while maximizing advisor recruitment.
Wealth firms have little control over the external macro factors that influence organic growth rates. However, we do have complete control over the internal challenges that impact growth. Firms that make the right strategic investments to ensure that their advisors are both compliant and productive will win the organic growth race.
David Reeve is CEO of InvestorCOM Inc., a compliance technology provider to the wealth management industry.