RIA assets of $2.4 trillion will be up for the taking in the next five to ten years, says research from Cerulli Associates — and nearly 67%, or $1.6 trillion, of that sum will be the result of impending advisor retirements.
Lack of succession planning is an opportunity
“One of the primary drivers of RIA consolidation is an impending succession crisis among advisors,” says the Cerulli report.
In a previous report, Cerulli pointed out that close to 31.1% of RIAs would retire over the next 10 years but many of them lack a succession plan. That’s where consolidators come into the picture. More than 80% of advisors currently affiliated with an RIA consolidator see it as a succession strategy, says Cerulli.
Scroll down to see an interactive chart of top challenges in operating an independent RIA in 2019
“Succession planning resources are decentralized in the independent channel, meaning the largest, well-capitalized RIAs are best positioned to match advisors to a like-minded successor, help navigate the process, and provide capital to fund the transition,” says Marina Shtyrkov, a research analyst at Cerulli.
As the RIA channel continues grow, analysts at Cerulli expect a concentration of assets with the largest players, “as these remain best positioned to capitalize on M&A activity, particularly as aging founders of other RIAs seek external exit strategies.”
Challenges for RIA consolidators
Mergers and acquisitions in the RIA space have been moving at a record pace, though booming stock markets have led to high valuations and the creation of a seller’s market.
“The math is pretty clear in the extreme levels that we’ve been at for a long time, primarily driven by low interest rates and private equity money coming into the space has really created a challenge for folks that want to acquire a book of business,” says S. Jay Coulter, a consultant at Resilient Advisor, adding, “I see some real challenges for advisors that are buying books of business at these values should there be a correction in the equity markets that lasts for a protracted period of time."
But a downturn, experts at Cerulli think, may accelerate RIA M&A activity and present an opportunity for aggregators to pounce.
“If the market turns and valuations begin declining, more advisors may choose to sell before it’s too late for them, given their proximity to retirement. Flipping from a seller’s market to a buyer’s market will change the balance of power between acquirers and their acquisition targets. A sustained market correction may also stress test consolidators’ business models, proving (or disproving) their financial viability and long-term sustainability,” says the Cerulli report.
Another challenge for consolidators is how to differentiate themselves from their competitors in an already-crowded space. The answer to that, according to Cerulli, is slightly more complicated.
“As the space has become more competitive, firms are testing out new concepts and emulating each other’s business models in an effort to find the perfect fit. As a result, some major consolidators are adopting an omni-channel approach, and risk further blurring the distinctions among competitors,” observes Cerulli.
Breakaways and growth concerns could tip the balance
Among other drivers of consolidation are breakaway advisors offering an opportunity worth $469 billion and RIAs struggling to meet growth challenges that could potentially put $348 billion of assets in motion, according to Cerulli.
While there’s an influx of advisor breakaways from broker-dealers to the independent channel, fewer advisors are looking to set up on their own.
According to Cerulli, “independent RIAs are still attracting advisors at a record-setting pace, but the number of new firms has relatively flattened. More breakaway teams and rookies are tucking into established independent firms versus forming new RIAs.”
RIA aggregators are already gaining ground in the market. According to Cerulli data the 10 largest RIA consolidators saw their assets under management's five-year CAGR grow by 22% between 2013 and 2018, more than double the growth for all RIA assets over the same time frame.
Shtyrkov says RIA consolidators “provide the safety net of operational support, strategic guidance, and economies of scale, while also allowing advisors to retain flexibility and gain more control over their practice than they have in the broker-dealer channels,” as opposed to setting up their own shop where advisors could face higher risks and operational costs, among other concerns.
In a prior interview, Jeff Nash, a former LPL recruiter who is now CEO of consulting firm Bridgemark Strategies, agreed that sometimes advisors underestimate the work outside of advising that becoming an RIA requires.
“What happens is with a lot of people who go to the RIA, they’re sold on how simple it is to become an RIA,” says Nash. “Once you become an RIA you realize it’s not quite that true. There’s more risk, there’s more time, there’s more stuff that you do, that becomes a distraction.”
Per Cerulli, the top three challenges reported by advisors regarding running an RIA in 2019 included time required to run a business, selection and integration of technology, and compliance duties.
Lately there has been a discernable trend where advisors are looking to move on from their own RIA and tuck in under a larger RIA to get support on their non-advisory duties.
“I continue to hear from advisors myself, and I hear from other recruiters that they continue to talk to advisors that have set up their own RIA, that have decided that they want to dissolve that and tuck back in under for a variety of reasons, whether it’s they don’t want the compliance responsibility and liability, financially they realized that maybe keeping the RIA intact is more expensive than they thought. There’s a variety of things that could be a reason as to why someone would do that. But that also tends to be a trend that we’re seeing,” says Jodie Papike, president of recruiting firm Cross-Search. Papike adds, however, that there continue to be advisors seeking to go independent by setting up their own RIA shops.
A lot of those issues could get solved by RIA consolidators, as Cerulli admits many more of those firms have started resembling national or regional broker-dealers in terms of both scale and function.
“RIA consolidators couple the fiduciary appeal, advisor-first culture, and flexibility of the RIA model with the horsepower of a national firm — the scale that affords cutting-edge technology, sleek marketing, robust back-office support, and preferred pricing,” says the Cerulli report.