In an interview with the president of TD Ameritrade Institutional, Tom Nally, Beacon Pointe president, Matt Cooper, asks about the every changing RIA industry.

MC – Hi Tom, thank you for taking the time with us and exploring questions about our RIA industry space. But before we get to those questions, how has your first year at the helm of one of the leading and fastest growing custodians been?

TN –  A lot has changed for me personally, but the business has been constant.  When I took on the role of president  of TD Ameritrade Institutional, we had a winning strategy and a great team of associates.  The top priority was to maintain that momentum and ensure consistency for advisors as well as our associates.

My predecessor and longtime mentor, Tom Bradley, made sure I was well-positioned to take over. We built the business together from the ground up. While it’s only been a year in my new role, I had been preparing for this my entire career. Over the past twenty years working with RIAs, I’ve run many areas of our organization including sales, client service, operations, technology, and product management.

It’s a testament to our people and culture that we managed such a smooth transition and avoided some of the typical disruption often associated with a leadership change. Instead of restructuring or reassessing, we hit the ground running and were able to deliver some great new services and offerings for advisors over the past 12 months.

MC – How do you feel about the evolution of the RIA business over the past 20 years? Are you optimistic about the future?

TN –  The RIA model has become the aspirational model for financial advice professionals who want to sit on the same side of the table as their clients. We have to thank the trailblazing advisors who made the choice to put their clients’ interests above their own.  Over the past few decades they have helped build the industry and raised awareness about the option and benefits of working with an independent registered investment advisor.

Today, the independent advice model is the fastest growing segment of the financial services industry.  Growth in the RIA channel is up 68%, while wire houses are only up 17% since 2005. We don’t see the momentum slowing down at all.

As a result of the financial crisis in 2008, consumers are asking better questions about financial advice, “How is my advisor getting paid?”, “Is my financial advisor incented to sell me a product?”  Investor awareness about the differences between advice models and advisor compensation have created opportunities for many RIAs who operate under a fiduciary standard and typically charge a fee on assets under management.  Investors are much more savvy and they’re demanding objective advice.

The risk of advisors living for the moment and not planning for the future is a concern.  Firms need to have a well-thought-out succession plan and a strategy for serving next generation investors as advisors and clients get older.

MC – I have heard you speak about advisors needing to run their advisory practice like a business. What did you mean by that statement?

TN –  In order to achieve growth, RIAs need to have a scalable business model.  If an advisor wants to move from a solo practitioner firm to an enterprise firm, a greater focus must be put on the business management function, which includes operations, human capital and technology.

The “X” factor or difference between average and outstanding firms is business management. A lot of advisors are doing great things for their clients, but the firms that stand out are not only taking great care of their clients, they’re also taking great care of their businesses.

MC – I recently read an article about practice management versus business management. Historically the term “practice management” was universal, but as some RIA firms have grown to true enterprises, the need for true business management consulting may be more needed.  Thoughts?

TN –  How we define and refer to RIA businesses and the management of firms is part of the evolution of the industry.  The idea of practice management and business management is something we’re talking with advisors more and more.  If the majority of the work and management of the firm are done by the owner and he or she has the desire to move from “me” to “we”, there is often a need for a more corporate structure and a professional business management team which could include chiefs of operations, marketing, human resources and technology.

At TD Ameritrade Institutional, we are evolving our practice management and consulting services to meet the needs of increasingly complex RIA firms.

We believe one of our key roles in the relationship with our advisor clients is helping them run better businesses, no matter what the size or complexity of the firm.  At TD Ameritrade, we not only have the opportunity to see what the most successful advisors are doing in their businesses, but we have a lot to share with advisors about what we’ve learned about running a large complex business ourselves.

MC – Let’s talk about the trend toward independence. Do you see the trend of advisors leaving the large brokerage house/banks continuing at the current pace? Accelerating or decelerating?

TN –  We don’t see the break away broker trend slowing. Last year, 440 breakaway brokers moved to TD Ameritrade Institutional, up 27% from the previous year.  As more and more advisors in the employee model see the success of their independent peers, they will continue to consider evolving their business to have more control of their destiny.  Also, as these advisors grow and become more successful, they often outgrow their existing broker dealer and have more complex business and client needs that can be better supported in the RIA model, which can be far more flexible.  Breakaway brokers tell us that the tools, technology and access to the products and services they need are better as independent RIAs, thus we fully expect the breakaway trend to continue.

MC – What about the general make up of the advisor leaving the large brokerages/banks? Are the larger teams starting to leave at a greater pace?

TN –  As mentioned above, advisors continue to grow and expand their practices and as a result, often require more support than the traditional broker dealer model can provide.  Because there are more options for advisors to go independent these days ; starting up their own firm, joining an existing firm or integrating into an aggregator firm, these breakaways make up all shapes, styles and sizes of advisor.  It isn’t necessarily just the larger teams or the small startups – it is pretty much consistent across the spectrum of advisors.

MC – Do you think these teams that are leaving the large brokerages and setting up substantial RIA firms on day one are a game changer in the competitive marketplace for clients? Will these more sophisticated teams now positioned as RIAs pose a threat to the “status quo” for RIAs and how they have traditionally marketed for clients?

TN –   We’ve had breakaway startups happening in the industry for several decades now, so I don’t think it is a “game changer” for existing RIAs.  In fact, the majority of client assets are still in the wirehouses and banks, so the real opportunity for RIAs is to look there for new business opportunities.  Our latest RIA survey continues to show RIAs acquiring a majority of new assets and clients from this area, so we don’t see this development as an issue for existing RIAs.

MC – In general, what do think the greatest threat to RIAs will be over the coming years? Specifically, what do you see as the threats to smaller RIAs versus the threats to larger $500 million + RIAs?

TN –  Some of the greatest opportunities for RIAs could also be considered threats. Demographic shifts are happening now and advisors need to adjust their strategies or risk seeing their businesses erode.

For example, 86 percent of younger investors say they will fire their parents’ advisor. Advisors need to avoid being in that category. With Generation Y being 75 million strong and standing to gain more than $20 Trillion in wealth over the next decade, it’s an opportunity RIAs cannot afford to ignore.

Women are also a growing financial force. Today, women control about $8 Trillion in investable assets in the U.S. By 2020, they will control $22 Trillion. RIAs focused on this market opportunity are in a great position. Research shows 80 percent of women feel that having a fiduciary advisor is critical. However, 70 percent would leave their current advisor in the event of a divorce or death of spouse, which is a threat to be taken seriously.

In addition to demographic shifts, an “ethnic shift” is occurring.  The emergence of diverse consumer segments is going to shape the future of financial advice.  The RIA client base will need to reflect the growing diversity of our population.  Eighty-five percent of the U.S. population growth over the next 40 years will come from nonwhite ethnic groups.  Buying power and financial influence will continue to increase as will the need for financial advice.

MC – How about opportunities? Where do you believe the greatest opportunities lie for RIAs, large or small?

TN –  In addition to some of the opportunities stated above, the retirement plan market is also a terrific opportunity for RIAs, due to fiduciary requirements and changing disclosure regulations.

As companies and governments eliminate pensions or cut retirement benefits, even more people will need help planning their future. Today, advisors are only influencing about a quarter of the retirement plan market.  Historically, it’s been dominated by insurance and full commission brokerage firms. But new fee disclosure regulations could tilt the market decidedly towards RIAs.

Changes to the Department of Labor’s fee disclosure regulations have opened up a $4 Trillion opportunity.  For the first time, investors now have a clear picture of what they are paying for their retirement plan. The RIA model has considerable appeal to retirement plans — fee-only pricing, deep expertise and the fiduciary standard. Trusted, fiduciary advisors are in greater demand as plan sponsors seek guidance.  At TD Ameritrade, we’ve seen the number of RIA’s advising plans jump 87% in the past two years and we expect that trend to continue.

MC – Speaking of opportunities, there is a lot of talk about the female demographic and serving female clients. Do you believe this opportunity is real? If so, how would you advise advisors to take advantage of this opportunity? Is TDA addressing this market?

TN –  Absolutely, as identified above, women are an underserved market and there are tremendous opportunities for advisors to re-think how they approach their marketing and client service to women.

For the first time ever, half of all U.S. workers are women.  And 4 in 10 are the primary breadwinners. The opportunity is very real.

For starters, advisors should think about how they are interacting with their current female clients. Historically the man acquired wealth, bought the house, and provided for his wife and children.  While some couples still fit in this category, many more do not. When working with couples, advisors are likely working with a woman who has a lot of influence, if not all the decision-making power, in a relationship. Our latest guidebook, “Essential Skills for Advising Couples” helps advisors learn how to connect, collaborate and more effectively communicate with women in couples.

But advisors may have an uphill battle as two-thirds of women say they don’t trust the financial services industry.  In a recent survey of more than 12,000 women, time and again women spoke about advisors not listening, not being trustworthy and using aggressive sales tactics that turned them off.

It is key to consider her perspective and make sure you understand her individual needs.  Making generalizations about a woman based on gender is a sure way to end up being in that group that gets fired. Not only is becoming more female friendly the right thing to do, it also makes good business sense.

MC – We see a lot of conversation about “mergers & acquisitions” and growing RIA businesses inorganically. What are your thoughts regarding this topic?

TN –  When asked, most advisors will say that they would prefer to have an internal candidate take over their business when they want to retire.  However, the reality for most advisors is that they haven’t planned for their own succession and haven’t developed their people to assume leadership positions.  This gap is creating opportunities for firms to merge, sell or acquire firms to meet this need.  As advisors continue to age, we do expect to see more and more M& A activity.  On the other hand, doing a merger or acquisition is a very time-consuming process and it is hard to identify M& A candidates that are a good fit.

In addition, as the RIA industry’s visibility continues to increase and the independent advice model gains in popularity, we see more growth opportunities for larger more established RIA firms.  The reality is, not everyone is an entrepreneur. Not every advisor wants to have the responsibility of running a business, but they’re interested in the benefits of being an independent RIA.   We continue to see advisors successfully “tuck-in” to existing practices, which has created great growth momentum for larger firms that are well equipped to provide the business management and operations support needed to serve clients.  There are also significant economies of scale and synergies that can be created through M&A such as the consolidation of compliance and operational functions.

MC – I am always fascinated with the conversation about and around inorganic growth strategies in the advisory space. Why do you think it is that everyone seems to be on the “buy side?”

TN –  Generally everyone starts out on the buy side. Then they do their homework are realize there is a lot that goes into preparing a firm for M&A.  Perspectives shift, and maybe they decide they are a seller or a joiner.

As mentioned above, the majority of advisors prefer an internal transition to continue their legacy and have their firm live beyond themselves.  However, because they haven’t planned for succession or developed their human capital, they often have to look externally for that candidate to close that gap.  Ultimately, I believe that most advisors are really “net sellers” in that they want to acquire someone to ultimately sell their firm to.  This makes for a very challenging M&A marketplace and a big reason that while there is a lot of talking about deals, very few relatively are actually being completed.

MC – If someone is truly not prepared or doesn’t have the value proposition to get an M&A transaction done or be successful recruiting and tucking in advisors, do you see this shift in focus away from end clients and attracting more clients as a threat or significant opportunity cost?

TN-  You can’t have one person focused on everything, taking care of clients and taking care of the growth strategy. Firms need to have to have clearly delineated roles, so it doesn’t impact the client experience in a negative way.  It’s about making sure you are running an efficient and effective business, while taking care of your top priority, your clients.

MC – What are your thoughts about the online advisors? Personal Capital, Betterment, etc.?

TN –  I think there’s room for all types of models.  You will have investors who choose to be totally self-directed and those who prefer the personal relationship with an advisor. It will be up to the RIA firms to be confident and clear in the value proposition they bring to their clients.

However, what we do know is that the next generation of investor is more tech savvy and willing to access their advisor or service provider through an online platform or mobile device.  Thus, advisors need to learn from these new online players and work to integrate some of their aspects into their service models and offerings.

Bottom line, people hire advisors because they want to know someone has their back and they have someone they can communicate their financial goals and dreams to. It would be very difficult for an online model to ever satisfy that need.

MC – The common thinking seems to be that the only thing in our business that can’t be commoditized is the human relationship. Do you think that as technology advances and the Gen X, Y, millennial generations and beyond become the investors and holders/creators of wealth, do you see a time when an online/virtual advisor platform/relationship could supplant the human advisory relationship?

TN –  Ultimately, there is a large aspect of psychology that goes into how people manage their money and plan for the future.  Additionally, people’s lives are becoming more and more complex and there are more product offerings available.  Investors will always look to a person to help them sort through this and make the best decisions.  As an example, TurboTax didn’t put accountants out of business.

Technology may be able to expand an advisors reach and allow for greater scale, but nothing can replace personal interaction with an advisor. New technologies and social media are simply opening up new channels to connect and communicate with clients in more efficient ways.  That said, today’s wealth accumulators are underserved by advisors.  A strategy for attracting and retaining younger clients is critical for the sustainability of any RIA firm.

MC – There is a lot written about a shortage of qualified advisors in the future. What are your thoughts here? How can RIA firms help develop future advisors? Is TD Ameritrade involved with or supporting any of the college financial planning programs?

TN –  Research shows the average age of advisors is close to 55 and less than 6 percent of advisors are under the age of 30. Raising awareness about job opportunities within the wealth management industry and creating career paths for the next generation of financial professionals are critical to ward off a potential talent shortage.  According to the U.S. Department of Labor, employment of personal financial advisors is projected to grow 32 percent from 2010 to 2020, nearly double the average for all occupations.

There is a lot of good work being done to attract a new generation of professionals to the business including the new TD Ameritrade Institutional Next Gen Scholarship and Grant program.  Over the next ten years TD Ameritrade has committed to providing $1 million in funding to increase student enrollment in financial planning programs and encourage universities to innovate in the area of financial planning education.  

MC – Is succession planning really as overlooked as stated? We hear that the vast majority of advisors do not have succession plans. Do you believe this to be true?

TN-  It may be a bigger issue than we know.  A report from financial practice consultancy, FP Transitions, shows less than 10% of advisors have a written succession plan.

We do see more aging advisors make the move to create a formal succession plan.  But, nearly half of advisors TD Ameritrade Institutional surveyed report they don’t have a formal succession plan. And with the average age of advisors rapidly approaching 60, this is becoming a critical issue as it can sometimes take 5-10 years to put a plan in place.  Eventually, clients will start forcing this issue. Clients want to know what will happen to them if something happens to their advisor.  Additionally, firms that have a succession plan are more valuable, so we see a lot of activity in this area.  At TD Ameritrade, we are investing in the tools, resources and education to help firms manage this critical issue.

MC – What do you feel are the competitive strengths of TD Ameritrade as a custodian and business partner for RIAs as we stand here today in 2013 and looking forward to 2023?

TN –  At TD Ameritrade, have a winning strategy and a business model that supports and promotes the benefits of working with an RIA.  RIAs are our solution for investors who want ongoing personalized investment advice.  We believe in the RIA model and putting the needs of clients first. We support advisors’ independence by providing a broad range of objective and transparent investment solutions so they can make decisions in the best interest of their clients.

MC – Tom, thank you for taking the time. I know you are very busy and I as well everyone at Beacon Pointe appreciates you taking the time to share your thoughts!

~Interview conducted by: Matt Cooper, President, Beacon Pointe Wealth Advisors

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