The Small RIA Firm Poverty Trap (and How to Escape)

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No doubt that being a financial advisor with $150MM or less in AUM in an unenviable position to be in. While many have the potential to scale their businesses, most will never make it there without significant investment in marketing. Here are some marketing ideas – with a special focus on how financial advisors can get leads using LinkedIn messages – for how small RIA firms can get new clients and grow. Time to get out of the small RIA firm poverty trap

I’m here to tell you how to escape the small RIA firm poverty trap, y’all!

By the way, thanks for joining me.

For those of you who are new to my blog/podcast, my name is Sara. I am a CFA® charterholder and I used to be a financial advisor. My weekly newsletter is about financial advisor lead generation topics, and it is best described as “fun and irreverent.” So please subscribe!

Sara Grillo, CFA is a highly fun and slightly crazy marketing consultant based in NYC.
I am an irreverent and fun marketing consultant for financial advisors.

So if you’re looking for some straight up talk then you’ve come to the right place!

A Small RIA Firm Profitability Sketch

The economics of being a Registered Investment Advisor (RIA) firm simply aren’t made to work for small operations. The overhead, the cost of being in business, and the cost of complying with regulations take a huge bite out of profit margins. This adds to the small ria firm poverty trap.

The results?


Most small RIA firms struggle, are forever penny pinching, and can’t hire the quality of staff that they’d need to have in order to impress people with serious money. There is hope! Hint: it has to do with your ability to use the internet to get new clients for your financial advisor practice. I’ve got all kinds of ideas on my blog and in my podcast about how financial advisors can find new leads using the internet, and I’ll get to this later.

But first let’s take a closer look at what life looks like financially for a small RIA firm or for a small financial advisor practice.

A Small RIA Firm Income Sketch

For example, let’s look at an RIA firm with $100MM in assets under management. Let’s say there’s three investment advisors with $33MM each in their book of business who decide to pool their assets into one RIA firm. And let’s assume – and this is a big break – that they’re lucky enough to earn 1% off that $100MM.  So, conservatively estimating, it looks like this:

Revenue                      $100,000,000 x .01 =  $1,000,000

Cost of Goods Sold                                           ($450,000)

Gross Profit                                                         $550,000

What’s next?

  •  If they’re taking home the full 1% fee that means they have inhouse research staff because they’re not fee splitting with a subadvisor. So pay a Chief Investment Officer/Director of Research about $100k (again, this is conservative) and a Research Associate about $70K. Now, as far as research staff goes these people are way underpaid if they are performing all the diligence and research that goes into managing $100MM of assets.
  • You’ve got to keep the clients happy, and let’s say there are about 100 accounts with $1MM average. There’s got to be at least one operations person, and if you want to really do it right you should have two because the trades have to go through even when sick days and vacations happen. So say you pay them each $60k.
  • Then you’ve got to have somebody to manage the office, keep your calendar and answer the phone, so let’s say we pay him/her $35k.
  • And then you need to either outsource marketing or get someone to help you with the website, newsletters, and social media. Either way that comes to about another $35k.
  • You need accounting and compliance support as well, to make sure everyone gets paid and the clients get billed, and that you keep up with all the regulations, so let’s conservatively say that costs $1k per month for you to outsource.
  • Oh yes and then there’s IT support in case the server goes down, disaster recovery policy are followed, etc., another $1k per month for you to outsource.
  • By the way, you haven’t paid rent yet and in a place like New York you’re looking at a minimum of $2k per month for a facility to house all these people.

Is that it?

So, trust me, this is by no means all it takes; there’s way more I’m not including like office supplies. Before this headache turns into a migraine and you all hate my blog post more than you do already, let’s pick back up on the income statement where we left off.

Gross Profit                                                       $550,000

Operational Expenses                                    ($460,000)

Net Profit (9%)                                                   $90,000

So according to this sketch, and my expense estimates were conservative, this small RIA firm isn’t at a healthy margin. When all is said and done, to end up with this little profit when things go right isn’t looking good for when things go wrong.

And what about for those small small RIA firms with less than $100MM in AUM?

The Small RIA Firm Poverty Trap

The model above illustrates that most small RIA firms are just getting by financially. In the above example, with partners at the firm being responsible for running the firm in addition to all their client duties, they aren’t doing much active prospecting. Marketing comes last, and in the scenario described you can see that the budget doesn’t create the resources to reach the highly lucrative clients they want.

There’s probably zero active lead generation. As a result, they “take what they can get”, accepting smaller clients that demand as much service as larger ones but barely cover the cost of sales and service when all is said and done.

This is why most small RIA firms don’t scale, or don’t scale the right way. The bigger the firm gets, the more financial strain they face. Mathematically that is what happens to a low/shrinking margin business that adds incremental clients. And this is what I call the Small RIA Firm Poverty Trap.

The Unforeseen

And then, when you least expect, the unforeseen happens. You didn’t see it coming and now you’ve got a mess to deal with.

  • You get hit with an audit and some exceptions come up. Now you’ve got attorney bills and the risk of going out of business, can’t focus on your clients and you’re running behind schedule every day.
  • The market dips and you lose 40% of AUM overnight. Now you can’t even pay your bills.
  • WannaCry virus hits and you didn’t update your firewall because your tech person is a novice 25 year old. You’ve got some explaining to do to clients.
  • Your top portfolio manager leaves and takes your three largest clients and because you didn’t sign a non compete agreement you can’t do anything about it. Now you’ve got to reassign accounts and cut back on the bonus pool this year.

So all this begs the question, how can a small RIA firm take care of its clients when so often it can’t even take care of itself financially? Ask most analysts at small RIA firms and they’ll say they’re happy with their level of responsibility but the pay is way lower than what they can — and will — get elsewhere after they pass their CFA® exams or get their MBA or get a few more years of portfolio track record. I knew one guy who was President of an RIA firm and he had to take two years with no salary just to avoid closing down his firm after the recession hit.

What I Learned

I’ve worked on the buy side for a company with over $2BB in AUM and I’ve also worked as a consultant to clients with as little as $40MM. Overall my experience working at/with small RIA firms is that while they put on a cheery face and have an optimistic attitude towards their clients, at the heart of it, the staff is overworked and underpaid, and the firm constantly operates in a state of vulnerability. There are no small risks; even a minor issue becomes a major one.

It does not have to be this way!

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Is There Integrity in the Small RIA Firm Marketing Pitch?

So now that we’ve established that most small RIA firms operate in a poverty trap, what does this mean for clients?

Well first of all, why do clients work with small RIA firms rather than big ones? Most of the time it is a personality match. Most RIA firms haven’t built their brand and don’t actively pursue the cold market. In addition, referrals and personal networking are where business comes from, and the reason people say “yes” to a small RIA firm is likely the promise of better service or the comfort of knowing the person that they’ll be working with.

In this video below, the way that a small RIA firm markets itself can be quite differ from a larger one

While small RIA firms tout customized, responsive service, are they really delivering on this promise? Do they really have the resources to deliver what a mid or large firm could in all possible circumstances? Stepping back and seeing it objectively, I doubt it. Is a firm with all these vulnerabilities and resource constraints really going to be able to outservice even a mid-sized competitor? I’ve come to realize that this marketing pitch is a false hope that lacks true integrity most of the time.

Small firms stay small for a reason and usually it’s because they can only get small clients. The larger accounts ($10MM and above) are the ones you have to compete for. And I mean, compete with a capital C. It takes a tremendous amount of time, attention, focus, polish, branding, and customization to get through to these folks. Just one wrong word in a marketing pitch can blow the whole deal. Appearances matter and most small RIA firms look small and unsophisticated in the eyes of someone with serious money.

Scaling Your Practice

So, sorry if I’m being too direct here. For all you small RIA firms, please hear me. This is the elephant in the room preventing you from scaling your practice.

So how do I know all this?  For many years I myself was a financial advisor (until I had two children in under two years which put quite a damper on having to meet my quota to my boss. By the way, I now have four children so it’s even worse.). Now that I’m not a practicing financial advisor anymore, I can see the industry as an insider and outsider at the same time.

If I won the lottery and was awarded $20MM, or even $10MM, would I go to my college buddy who lives down the street and has two people working for him, both twenty somethings? Or, would I go for the name brand  at Morgan Stanley with a credentialed staff to choke a horse? I don’t know that I’d choose the small RIA firm. It would just be too much of a risk. I would just see too many things that could go wrong.

What Would Happen?

The reality is, sitting here in the position of the consumer (and at the same time, having a deep knowledge of how the investment industry works), I would be more inclined to work with a financial advisor that had $500MM or more if my account size were $20MM or above. Or $10MM, or $5MM. I’d want to see 20 years in the business and seasoned, deep staff resources. I wouldn’t be that happy seeing a cast of twenty somethings. It would also be important to see top security to protect me from risk of theft and misappropriation. That means everything, from encrypted email to making sure someone locks the file cabinets every night.

While this wouldn’t necessarily lead me to Morgan Stanley, it would rule out most small RIA firms in favor of any mid or large sized RIA firm. This is just based upon these simple needs. And that’s why life stinks financially, many times, for small RIA firms.

Sound familiar? There is one thing a small RIA firm or small financial advisor practice can do – create a tight LinkedIn marketing strategy and a big  online brand.

Small RIA firms can create a big brand through LinkedIn and LinkedIn Messages

There is way out of the Small RIA Firm Poverty Trap. Create a big concept that people associate you with. I’m not saying “fake it until you make it.” Exaggerating is going down the wrong path entirely. Lack of sincerity is exactly what created distrust of our industry in the first place.

Even small financial advisor firms can create a big brand on the Internet. It requires creativity and a laser like focus on what your unique strengths are. And then you apply it a million different ways in every presentation of your company. You’ve got to do it in a way that makes people attach to you emotionally.

Financial advisor marketing doesn’t have to cost a fortune. With the Internet as accessible as it is, marketing can be done relatively inexpensively using tools like LinkedIn. The financial advisor must create these messages with thought, sincerity, and purpose and that requires a commitment of attention. To learn more, read this blog about financial advisor LinkedIn messages and sequences.

Gone are the days of expensive paper mailers and marketing brochures. The currency of social credibility is how big you look on LinkedIn (which you can set up for free, by the way). Even if you’re the smallest RIA firm out there, if you have a big following online it signals value to people, rightfully or wrongfully. In their minds, people will figure out that there must be some good reason you’re getting all this attention. It will at least make them curious.

Now let’s say you follow that up with a really powerful brand that expresses your value as a financial advisor. How do you do that, by the way? Let’s talk about that next.

Small RIA Firm Poverty Trap and Branding Tips

But just getting on the Internet isn’t enough. You’ve got to get a nice, big brand online. Now, many RIA firms think brand doesn’t matter. They don’t even know what branding is and haven’t paid much attention to it. But this is the elephant in the room keeping you from where you want to be. Here’s why.

Forgive me for sounding so brash, but I can’t convey this point without doing so bluntly.

99% of RIA Firms say the same thing in their marketing.

Or said differently:

99% of financial advisor marketing sounds the same.

It’s easy enough to prove my point. Just go to Google right now and type the search term “RIA firm” in your local area. You’ll see the first 5 firms that come up are saying the same things on their websites. I mean, it’s that obvious. They even use the same exact wording: “customized asset allocation”, “20 years in the business”, “fee only, independent advice”, “objective.” Blah blah blah.

So how do you set yourself apart?

For some concrete examples of good and bad RIA firm branding, read this blog.

To bring back the example of me winning the lottery (which I must admit, is quite pleasant to think about!), let’s suppose that I came across an RIA firm on LinkedIn that had $50MM in AUM, but was specifically targeting New York City mothers.

  • Let’s say that they had several blogs on New York 529 plans and seemed to know everything about them.
  • Let’s say that they had a conference call on working mothers and how to make sure your kids can access your investment accounts if you were to pass away (how DO they get the passwords, anyways, especially if you were a single mom?).
  • Now let’s suppose that they have 10k followers on LinkedIn, were featured at a seminar as one of the top firms in the country in women’s finance, and their logo and tagline were female-oriented. Well, in that case I might just overlook the drawbacks of their small size.

Since they’ve branded themselves as a financial advisor targeting  female entrepreneurs who have children, there’s something about them that calls out to me.  See how brand matters? Certainly, it enlarges something of value to me. It stirs up my emotions, it makes me take a second look and focus on what they want me to see rather than what I want to see.

Blowing Up Your Small RIA Firm Marketing Funnel

Thanks for reading!

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Or, if you’re ready to get out there and start getting new clients through social media, I wrote an e-book. It’s called, “47 Financial Advisor LinkedIn Messages and Sequences that will NOT make you look Stupid. “ If you are a financial advisor trying to meet new clients over LinkedIn and need some scripts, download it here.

Thanks for reading about the small firm ria poverty trap and I’ll see you in the next one!