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Is the RIA profession entering a golden era? Sounds gushy, but it might be true.
Increasingly, investor mindshare and wallet share are moving into the space as people turn away from the commission-based model in favor of a fee-based one that, in theory, represents unconflicted financial advice. Meanwhile, greater numbers of breakaway brokers want a piece of the RIA action.
Cerulli Associates projects the combined RIA and dually registered market share to make up 24.7% of the advisory industry in 2014, up from 18.6% in 2010. For sure, the wirehouse broker model will remain a force. But RIAs seem to have momentum on their side.
“The RIA market is the winning market of the current and next decade,” says Chip Roame, managing partner at Tiburon Strategic Advisors. “The market benefits from so many trends, including the move to independence, the move to fees and consumers’ focus on fiduciary responsibility.”
Those good vibes were reflected in Financial Advisor’s 2013 RIA survey that details last year’s growth picture in the space. In toto, 479 RIA firms reported growth in assets in 2012. Nine firms registered asset growth of at least 100%, and 336 firms had double-digit growth. There are 143 RIAs that reported more than $1 billion in assets, more than in FA’s past annual surveys of RIA firms. In each asset range, the firms as a group showed double-digit growth. The average and median number of client relationships for participating firms also increased.
RIAs across the country are holding exploratory merger talks in growing numbers. More than 34% say they have held M&A conversations in the last three years, while more than 18% report they have rejected a firm merger proposal over the same time period.
M&A dealmakers estimate that only one in six or seven merger discussions results in an actual transaction. But among the largest firms, deals actually are getting consummated. First Republic Investment Management expanded its asset base with the acquisition of Luminous Capital (which managed $5.5 billion) last year, while firms such as Mariner Holdings, Beacon Pointe Advisors and United Capital Financial Advisors continued their acquisition sprees.
Experts expect consolidation in the highly fragmented RIA space to accelerate in the next five years as advisors age and competition intensifies.
Meanwhile, the RIA model is diverse and there are different ways to make a living in the space. What follows is a small sampling of advisors from around the U.S. who are growing in their own distinct ways.
Steve Osterink sees a big opportunity in a bifurcated RIA industry where, he says, there’s increasing separation between firms focused on asset management and those focused on financial planning. “A lot of firms who want to focus on client relationships and don’t want to manage assets are looking for outlets to shore up their asset management needs,” he says.
“Our firm is structured differently from most traditional advisory firms in that a lot of our growth comes from partnering with other RIA firms to be their asset management outlet,” says Osterink, chief investment officer at Advisory Alpha LLC in Grand Rapids, Mich. “We built in-house the infrastructure for an integrated asset management program. We private-label it and turn it over to the financial advisor’s own brand, and it serves as an entire back-office solution for them.”
Advisory Alpha is on to something: The firm’s asset growth rate of 117% last year made it the seventh fastest-growing RIA in our survey. It had $132 million in assets by year-end 2012, and its boffo 204% growth rate in assets per client was far and away tops on our RIA survey list.
Much of that growth, Osterink notes, comes from its asset management subadvisory relationships covering roughly 65 independent advisors. He also sees big potential from breakaway brokers who want to open their own RIA firms. “People coming from the broker-dealer channel are used to somebody else doing a lot of the performance reporting, billing services and other back-office chores,” he says. “A number of firms want to get out of that environment and have asked us to help them pull the trigger.”
Advisory Alpha is seeing decreasing growth from its own advisory practice focused on individual clients. “We came out of that space, but a lot of our passion lies in helping our advisor clients better serve their clients through our infrastructure,” Osterink says. “We’ve taken our foot off the gas in our marketing efforts to attract new [individual] clients.”
The firm currently has three advisors focused primarily on client-facing financial planning and six people working on the investment research and trading side (including Osterink). “We just brought on a person at the beginning of the year and another in June, he says. “We’re definitely going to expand our staff as our business continues to grow.”
Raking In On Retirement Plans
LeafHouse Financial Advisors LLC co-founders Todd Kading and Neal Weaver had previously worked at American Express Financial Advisors (now Ameriprise) where they served mainly individual clients, along with a smattering of institutional clients. But they sold their practice in 2008 and went in a whole new direction. “We made the decision to focus exclusively on providing fiduciary services and investment management to retirement plans.”
The move has paid off for the duo, who formed Austin, Texas-based LeafHouse in 2009 and last year saw its assets grow by 122%, to $151 million. They placed fifth among the fastest-growing firms in our RIA survey. Some of that growth came from an uptick in asset values from the rebounding financial markets, but most of it came from its concerted efforts to drum up new business in the retirement plan space. “We’ve done several things to make it known we’re focused on this business,” Kading says.
Specifically, the LeafHouse partners do a lot of meetings and events where they talk about retirement plan issues. They made roughly 30 presentations last year throughout Texas, and now are taking their show on the road around the country. Some of these events are sponsored by professional organizations at which LeafHouse is invited to speak about retirement plan topics, and the organizations’ members can get professional credits for attending. In other cases, the firm puts on its own events aimed at plan sponsors.
In late June, for example, LeafHouse scheduled two separate events at two different New York City steakhouses to educate retirement plan decision makers about new, more stringent Department of Labor regulations (the DOL regulates the retirement plan industry). Other talking points dealt with reducing plan costs, increasing transparency and improving outcomes.
And LeafHouse has created partnerships with other financial advisors to help them manage their own retirement plan business through its Retirement Advisor Management Partnership program. This service has two components. First, LeafHouse can help advisors put on their own education events for plan sponsors to help them generate additional retirement plan business. Second, LeafHouse can manage the investment selection and monitoring––along with overseeing the fiduciary duties––of a retirement plan.
In the latter case, LeafHouse actually contracts with the plan sponsor to handle those chores. The financial advisor who brings LeafHouse into the mix is still employed by the plan sponsor, but LeafHouse’s role lets the advisory firm that hired it focus on the client service aspect of a retirement plan. LeafHouse can also analyze the underlying costs of a retirement plan and help reduce plan expenses, which Kading believes represents a tremendous growth opportunity because he says the vast majority of plans are overpriced.
“Maybe one-third to one-half of our asset growth has come from partnering with advisors,” he says, adding that he believes his firm’s recent growth is sustainable. “Absolutely, that’s the goal. We intend to help as many people as possible save large sums of money in their retirement plan.”
In Kennewick, Wash., the RIA firm Petersen Hastings Investment Management Inc. also attributes much of its growth last year to its expanding retirement plan business. The firm, which started out as a property and casualty company in 1962, has evolved into an operation with fortes in retirement plan administration, investment management and personal financial planning. The firm grew its asset base last year by more than 16%, to $442 million. That ranked them number 250 in our RIA survey.
The firm’s president, Scott Sarber, says client assets are “above fully recovered” from the market crash of ’08-’09. Business remained steady during the crash and its aftermath, and in recent years the company has hired two new advisors on the financial planning side and another advisor in the retirement planning area.
Petersen Hastings bills itself as a personal chief financial officer for successful physicians, dentists and business owners in Eastern Washington. But it has another, perhaps unique, client niche from the Hanford Site, a 586-square-mile parcel along the Columbia River that’s administered by the U.S. Department of Energy and is one of the world’s largest environmental cleanup projects.
The Hanford Site played a major role in the building of the world’s first atomic bomb and produced roughly two-thirds of the plutonium used in the nation’s nuclear weapons program before it closed in the 1980s. In its wake are abandoned atomic reactors and tons of radioactive waste that the government and private contractors are trying to clean up.
The site attracts a lot of engineers on short-term assignments, and it’s an economic driver for the Tri-Cities area that includes Kennewick, Richland and Pasco. Some of these folks have stayed in the area after their assignments were done and started their own businesses, and a good number of Hanford-related personnel have become Petersen Hastings clients.
Hanford workers account for roughly 15% of the firm’s clientele, Sarber says. He notes this isn’t a niche the firm actively cultivated. “We’re not doing any seminars at the site,” he explains, which brings to mind comical images of making 401(k) presentations in hazmat suits. Instead, the Hanford slice of the firm’s business has grown through referrals.
Sarber says Petersen Hastings is taking a measured approach to growth by hiring new staff and growing from within, but he expects it to make acquisitions in the near future. He notes the RIA space is filled with founding partners who’ve grown their businesses and are now pondering what to do next. “I think there will be a lot of opportunities for ensemble firms like us to find acquisition opportunities,” he says.
“Ensemble” firms, Sarber explains, are those with multiple owners and integrated operations that take a team approach to client service. Such firms, he says, can offer growth opportunities for smaller RIAs. “We don’t have a strategy saying we’re going to buy X number of firms in five years,” he says. “But we’re contacting other RIAs in our area who we think would be a good fit in terms of having strong client relationships and the potential for more wallet share from those clients.”
Red Door Wealth Management LLC in Memphis is a small firm with big aspirations and an unusual name. The name alludes to the positive symbolism that red doors have meant in cultures ranging from Scotland, China and early America. The firm’s aspirations speak to an outfit that’s confident about its future.
Red Door set up shop in 2010 after its two founding partners, Fred Hiatt and John Phillips, created the firm in partnership with two members of a local accounting firm, Cannon Wright Blount. That relationship has helped funnel a lot of assets to Red Door.
“Probably half of our business comes from the CPA firm,” says Phillips, Red Door’s chief investment officer. He adds that referrals from clients in the other half of the business account for the rest of the firm’s growth. “We don’t have to do any outside marketing.”
Red Door came in at number 40 on our RIA survey of fastest-growing companies, with a growth rate of 42%. They finished last year with more than $74 million in assets, and they plan to leave that figure in the dust soon enough. “Our goal is to be at $200 million in two to three years,” Phillips says.
He notes the firm initially built a large, scalable infrastructure to handle 200 clients. “At the time, we had only two clients,” Phillips says. “Now we have about 120, so we still have a lot of space left before we start feeling the strain, which is why we’re just now looking at potentially hiring another person.”
Red Door currently has four employees, which includes a client relations director and chief financial officer. The firm provides a host of financial, estate and tax planning services for individuals and families, along with various business services for companies. Phillips says Red Door doesn’t have a specific client niche, but that its clients typically are business owners or service professionals such as doctors. It has no client minimums.
Phillips is bullish on the long-term prospects of both Red Door and the RIA space in general. “It’s taken a while, but the investing public is getting more educated about different compensation structures between commissions and fees, and it [the RIA model] makes more sense to them,” he says. “I think the RIA industry is just at the beginning stages of really making a big splash.”