What Do Advisors And Beer Have In Common?
What comes to mind when you hear the following: “made locally with the finest ingredients by passionate people committed to the process and the product?” My first thought is, “a new craft brewery must be opening down the street,” but it also describes a major trend in the seemingly unrelated world of wealth management – the rise of Registered Investment Advisors (RIAs). If RIAs sounds like Wall Street jargon to you, think of them as “craft advisors.”
Colorado is a great place for both craft advisors and craft beer. The CFP® designation got its start here, as did the College for Financial Planning and the Financial Planning Association. Presented by the Brewers Association (headquartered down the road from us in Boulder), the Great American Beer Festival (GABF) attracts 60,000 enthusiasts to Denver every fall in the biggest celebration for beer outside of Munich. Colorado ranks 3rd highest in breweries per person, as well as number of craft breweries, and receives the biggest economic boost from beer per person in the United States.
Similarities of Craft Beer and Craft Financial Advisors
Craft breweries and RIAs are close to their local communities. You can talk to the brewers and smell the hops or sit down with the members of the investment committee. 1 Surveys show consumers prefer their beer to be local over other types of drinks. Anecdotally, I believe this is true when people choose advisors as well.
Growth for both initially comes via word of mouth from satisfied clients, friends, and family. Many of the most popular craft breweries started out as a work of passion in a garage (or might still be in one), and our firm had a similar path from humble origins in Mike Sargent’s garage. It doesn’t get any more local than that.
A major reason people choose craft beer is the wide variety of flavors for all tastes. As an example, the 2014 GABF had 90 categories of beer covering 138 different beer styles. Similarly, most RIAs use an open architecture approach to investment choices, which means client accounts are not limited to proprietary products or the “store brand”. Portfolio managers and advisors can choose the best investment option for clients to meet their goals. Compare the wide range of options on tap at a small craft brewery to the limited choices from major domestic brands. This aligns with research that shows consumers generally like to have a variety of choices in what they buy. 2
3. Better ingredients
Tying in with variety, better ingredients are a key component to the success of craft beers. A barrel-aged cherry sour is on a completely different playing field than an American light lager.
On the RIA side, the fiduciary standard they follow means they must act in the best interests of their clients at all times. Compare that to the suitability standard of non-fiduciary advisors – provide advice that is suitable, but not always the best. Whose investment portfolio would you guess has lower fees and no commissions?
Growing Market Share
Under the common rallying cry of more variety and better ingredients served locally, it’s no surprise the industry dynamics for craft brewing and RIAs are similar. Consumers are voting with their wallets.
In a flat market for beer, the craft segment experienced almost 18% growth by volume in 2014 with 11% US market share.
In parallel, according to Cerulli, independent RIAs grew by 17% and represented 20% market share in the US as of the end of 2013, with an estimated market share of over 28% by 2018.
RIA market share - 2013
RIA market share - 2018
The number of breweries and RIAs also have positive growth trends. The number of RIAs has grown at 3% per year since 2007. Notice the negative impact of increased competition from better distribution networks and Prohibition on brewery numbers in the early part of the 20th century, as well as the rapid growth since 2008 in the charts below.
Consumers are increasingly looking for high-quality, unique, local products and services. These traits represent a shift in preferences among consumers from the conformity of keeping up with the Joneses of 1950s and 1960s suburbia. Cost is also less of a factor than it might have been in the past. While many parts of the global economy continue to ruthlessly compete towards cheaper, commoditized products driven by low margin and high volume industrial titans, there has been an upswing in the “craft” economy to fill in the niches, as noted in The New York Times. (It also reminds me of one of my favorite lines in Star Wars).
To stem the tide (and shore up their decreasing market share), brokerages and banks are buying up RIAs, just like Anheuser-Busch InBev recently purchasing respected craft brewers Goose Island in Chicago, Elysian Brewing in Seattle, and Breckenridge Brewery here in Colorado. Will these subsidiary firms stay independent or will quality suffer in order to increase profit margins and satisfy investors? Time will tell, but it serves to confirm the strength of the RIA and craft brewing models. If you can’t beat ‘em, join ‘em.
One Notable Difference
Speaking of cost, it is a notable difference in this extended comparison between craft breweries and RIAs. Most craft beers cost more than national brands, but RIAs generally charge less than the fee-laden brokerages.
Craft advisors providing better service for investors at a better price than brokerages? Now that’s something we can all toast. Prost!