Q1 2019 Call Reports

RIAs Respond to the Changing Industry Landscape with Varied Measures

Current Events

During Q1 2019, most classes of RIA stocks underperformed the market despite its relatively sharp increase through the first three months. Investors still seemed concerned about the RIA industry’s prospects in the face of fee compression and continued asset outflows.  RIAs are responding to this pressure in different ways.  Some are actively expanding product offerings to meet clients’ changing demands; others are staying true to the traditional RIA model and responding to revenue pressure by developing cost efficiencies.

As we do every quarter, we take a look at some of the earnings commentary of investment management pacesetters to gain further insight into the challenges and opportunities developing in the industry.

Theme 1: Industry consolidation has been spurred by a challenging revenue environment for RIAs, but firms are going about this in different ways.

Consolidation is driven by a need for succession planning.

  • RIAs are also increasingly seeking options to address succession planning, which is another catalyst of M&A. Industry research indicates that over one-third of all RIAs will transition within the next 10 years, putting $2 trillion of client assets in motion.  In our expertise in continuity planning, Focus is well positioned to lead the industry in this area, which will be another important driver of our growth. – Ruediger Adolf, Founder, Chief Executive Officer, and Chairman, Focus Financial

Consolidation is driven by cost savings.

  • We expect to recognize roughly 50% to 55% of the cost synergies by the end of the third quarter. Additionally, by the end of 2019, we’ll anticipate capturing approximately 85% of the synergies or more than $400 million in the run rate savings. – Loren Starr, Chief Financial Officer, Invesco (on Invesco’s acquisition of Oppenheimer)

Consolidation is driven by the expansion of product offerings to include advanced tech platforms and alternative investments.

  • Last month, we announced the binding offer and exclusive agreement to acquire eFront, the world’s leading end-to-end alternative investment management software and solutions provider. As clients increasingly add to their alternatives allocations, the ability to seamlessly manage portfolios and risk across public and private asset classes on the single platform will be critical. The combination of eFront with Aladdin will set a new standard in investment and risk management technology and reinforce Aladdin’s value proposition as the most comprehensive investment operating system in the world. – Gary S. Shedlin, Chief Financial Officer, Black Rock

Theme 2:  RIAs see flows back to fixed income after a volatile 2018.

  • We saw strong re-risking for those who were in cash that allocated back into fixed income. We saw that predominantly a lot of investors were believing that interest rates are going to go higher, central banks really continue to tighten and, obviously the change in central bank forward forecast and their behaviors many investors were underinvested and put duration to work across the board. – Laurence D. Fink, Chairman and Chief Executive Officer, Black Rock
  • In general, investors continue to pursue more defensive strategies, such as fixed income at the expense of international and higher beta domestic equity strategies. Outflows for our international core equity and science and technology strategies, remain somewhat elevated during the quarter.  While our emerging market equity and high income strategies, also continued to experience outflows, it was at a significantly reduced rate from the previous quarter. – Ben Clouse, Chief Financial Officer, Waddell & Reed
  • On fixed income, generally, I would say that […] I think we’re interested in fixed income. We like the differentiated strategies within fixed income, the kind of core kind of bond U.S. and global. [….].  We’ve seen substantial appetite from institutions for fixed income relative value. – Jay C. Horgen, President and Chief Financial Officer, AMG

Theme 3: RIAs continue to respond to the demand for responsible investing.

  • Clients are increasingly attracted to our Responsible and Impact investing portfolio offerings. Assets in a diverse array of responsible equity and fixed income services totaled $1.9 billion at quarter-end, a 23% increase since year-end. – Seth Perry Bernstein, Alliance Bernstein
  • Last week, we launched a Liquid Environmentally Aware Fund or LEAF, as a prime money market fund with an environmentally focused investment strategy. The fund will use 5% of its net revenues to purchase and retire carbon offsets and direct a portion of the proceeds to OUR conservation efforts. Increasingly, clients want sustainable strategies that provide financial returns and target a measurable social or economic impact.  BlackRock’s goal is to make those strategies more accessible to more people.  Beyond dedicated sustainable investment funds, we’re also integrating environmental, social, and government risk factors across all our investment processes. – Laurence D. Fink, Chairman and Chief Executive Officer, BlackRock

Asset managers saw some improvement in performance in Q1 2019, but performance fees remained depressed as products worked back up to their previous watermark.  RIAs are still experiencing headwinds and are responding in various ways.  Under the assumption that fee pressure is the new norm, we are still seeing increased spending on technology in order to lower costs. Others are expending into higher margin products such as illiquid alternative investments.  Overall, RIAs are well positioned to have a stronger second quarter.

We will continue to follow the key drivers of consolidation in the industry, as well as changes in fees and asset mixes during the rest of 2019.