RIA market consolidation is nothing to fear, according to global research and consulting firm Cerulli Associates.
Acquisition opportunities have been strong for registered investment advisors for a decade now and look to remain so in the next decade, said Stephen Caruso, a research analyst on Cerulli’s wealth management team, during the Boston-based firm’s recent State of the U.S. RIA Channel webinar.
“I think, overall, we’re going to see continued consolidation, but I don’t think we’re going to reach a point where there are just 10 players in the market,” Caruso said.
By 2026, RIAs are projected to manage 33% of advisor assets, according to Cerulli. But hiring top talent, rising costs and the need for differentiation still challenge RIA firms.
The total number of RIA firms in the marketplace fell 1% a year for the past five years, said Marina Shtyrkov, Cerulli’s associate director of wealth management. She is the lead author of the 2023 RIA report that Cerulli recently published.
“But I don’t think that tells the whole story,”she said. “It’s not happening equally across all firm types.”
A closer look
The smaller RIA firms — those with about $100 million in assets and less — are losing market share while the larger RIA firms are growing in size and total number, said Shtyrkov.
First, older advisors running lifestyle practices who are winding down their businesses and retiring might not have a successor, she said. Others are merging with existing firms. Meanwhile, more advisors who are moving from employee channels to independent channels are choosing to join existing RIA firms rather than start their own firms, she said. So, advisors who merge with existing firms add assets and clients served even as they may tick down the number of firms in the marketplace.
The number of large firms has grown with consolidations, she said. Now, the average RIA firm manages $500 million in assets and together employ about 60% of advisors, Shtyrkov said.
Caruso said the RIA industry grew 12-fold in the past decade, from cottage industry to capital investment enterprise. He attributed much of that to major consolidators, including Focus, Mariner and Mercer.
“Consolidators have really stepped in to get second-generation advisors in,” Caruso said.
In the past decade, the consolidators’ [aggregate] asset value has grown from $53 billion in 2011 to $645 billion, even with a 2021 “pandemic pause,” he said.
Additional growth opportunities
“There’s still a ton of opportunity for the market to keep growing over the next decade,” Caruso said.
Independent RIAs often don’t plan well for succession due to challenges in adequate capital and support services for growth, he said.
Private-equity investors are attracted to the stability of the asset-based fee model and the loyal foundation of the close advisor-client relationships.
“In the RIA space, the biggest value comes from the clients and their trusted relationship with their advisor. The private equities’ investment in the RIA space hasn’t dampened that one bit,” Caruso said.
“RIAs are still growing, still active, still acquiring clients, and the value-add has come from that support angle,” he said.
The guiding hand of private equity and other investors can help an RIA’s growth stride by providing the operational expertise and infrastructure efficiencies that most advisors don’t focus on, he said. Private equity looks for opportunities to grow revenue even as it focuses on job- and cost-cutting.
Shtyrkov said smaller firms may be more concerned about the future of regulations and perceptions of clients than are private-equity owners.
Managing regulatory filings doesn’t change, but the overhead to sustain a firm’s operating infrastructure and other complexities of the infrastructure do, she said.
“As RIAs grow and bump up against these challenges, they might decide to merge,” Shtyrkov said. “We see about two-thirds of RIAs either want to be acquired or actively pursue acquisition,” especially on the higher end, to grow organically.
Paying top talent is one of those challenges, she said.
Cerulli surveys show RIAs are generally satisfied with their compensation plans, Shtyrkov said. Compensation is a new area of research that Cerulli took up this past year, she said.
Only about 9% of all broker-dealer advisors say they are unhappy with their current compensation structure, compared with about 24% of wirehouse advisors.
Among wirehouse advisors, 62% cite the complexity of their firm’s compensation plan as a reason for dissatisfaction. Half also complain that the firm’s pay structure is based on factors outside their control.
“If you keep digging into this a little more, you can see why the wirehouse channel sees this differently,” Shtyrkov said. Wirehouses change their compensation structure frequently to align with complex managerial objectives to keep the firm moving in one direction.
Those objectives have little or nothing to do with client performance and may be insufficiently communicated or relevant to the financial advisors.
“Research shows they [advisors] are becoming increasing frustrated,” Shtyrkov said.
“For advisors, it’s hard to navigate all those changes,” she said. “Not only is it complex to begin with, but what exacerbates that complexity a lot of that time is that those pieces are always in flux,” Shtyrkov said. “They’re becoming increasingly frustrated with their firms moving the goal posts on them so frequently.”
Cerulli surveys show many RIAs leave to start their own independent RIA firms, counteracting the attrition that consolidators seem to cause the RIA market numbers.
About 45% of broker-dealers who switched jobs in past few years said compensation structure was the reason they decided to transition RIA channels. Among all types of advisors, 71% identify a preference for independent affiliation.
“it’s a delicate balance,” she said of compensation as a leading motivator for recruitment.
The larger RIA firms also take more decision-making control over the investment process out of advisor’s hands, as a matter of efficiencies.
Still, some RIAs – especially those with more affluent clients – weigh it all in the balance and decide it’s worth giving up some autonomy to have access to a consolidator’s efficiency, despite less decision-making power.
“Centralization of resources can really be a value-add,” Caruso said.
Linda Hildebrand is a longtime newspaper editor and consumer reporter.