Ed, thank you for the excellent article and though it is fairly exhaustive, I want to add a few points.

First, based on my experience with RIA’s ( I am not one) I have found with some exceptions that most are glorified order takers. They do not perform their own research, do not have their own well defined analytical process for buying, selling and managing positions and tend to follow the crowd. As a consequence, many such advisors and their companies will face a great reckoning during the next bear market. As advisors know, most clients tend to be forgiving if they don’t make them money, but are not particularly charitable when funds are lost.

The current bull market is masking a multitude of sins and during the next downdraft when clients lose profits/capital, AUM will take a massive hit. This will lead to further industry consolidation, a move which is already taking place. Another major problem facing the industry as well as service providers in other fields is that marketing has become incredibly difficult due to the inability to cost effectively reach prospects. If RIA’s are unable to aggregate new assets during good times, it will become nearly impossible during a downturn.

To help inoculate a firm against the loss of assets in the next bear market, my suggestion would be to hire great risk managers now when times are good. Seek out market people to hire, those out of the box thinkers who eat, breathe and sleep markets. Hire salespeople to sell, and accountants to keep books, but neither should be managing money.

If a firm develops a unique set of selling propositions based upon the specialized skills of its personnel, salespeople will have a easier job selling advisor services and higher client retention should be the result.