With advisors aging, record low interest rates and clients demanding more for less, the industry is ripe for consolidation and merger and acquisition activity has been fierce, leaving smaller firms feeling pressured to join bigger name firms with more resources, according to one advisor.

Duncan Rolph, managing partner at Miracle Mile Advisors (MMA), said the buying frenzy that has played out over the past five-plus years is creating a significant division that will have serious long-term consequences for the industry.

“Private equity firms finally figured out that our industry is a very attractive industry to invest in from a cashflow perspective, and so you have seen over the last several years the deals have increased dramatically,” said Rolph of the Los Angeles, Calif.-based firm with $2 billion in assets under management.

Rolph said that over the past several years, there have been 60 RIAs with more than $10 billion, compared to a handful 10 years ago, and there are more than 750 firms with more than $1 billion, compared to half that amount five years ago. Private equity firms over the past four years have acquired, not including minority investments, more than $125 billion worth of advisory firms, he noted.
The M&A activity is taking place in the middle to upper end of the market, which leaves smaller firms in a precarious position because bigger firms will be their competitors, Rolph explained. “You are going to have $100 billion RIAs with localized footprints across the board, dedicated marketing departments and billions of dollars on the balance sheet, and that’s going to be a complete gamechanger for the smaller shops that are going to have a hard time competing,” he said.

Rolph pointed out that historically, advisors have been smaller, owner-operator shops where people knew their clients. “When you have these massive roll-up shops coming in and gobbling up a lot of these firms, it’s creating real pressure on a lot of these independent RIAs who don’t necessarily want to go work for a financial investor.”

That has left a lot of firms trying to figure out what to do, Rolph said. The other part of this is that the evolution and innovation in terms of technology and the horizontal expansion of service offerings is forcing a lot of advisors to add significant costs and additional resources to compete with the larger firms and with the overall industry, he said.

“You have to add a lot more technology, specialized industry services, advanced planning, and sometimes trust and state tax (services) that you did not have before,” Rolph said. He also noted that online advisors have added to the competition by dramatically reduced their fees.

For independent RIAs who thought they would simply grow to a reasonable rate, run their business until they retire, and have a bench of advisors they could use for succession planning, most of that is not available in the current market environment, Rolph said. “Corporatization of RIAs is really driving massive consolidation,” he said.

For MMA and a lot of other RIAs that want to grow and continue to remain independent, there are few options when it comes to competing because they do not want to sell to a private equity shop or a financial investor, Rolph said.

To compete against the corporatization of the RIA space, MMA, which has consistently grown by double digits since the firm started in 2007, averaging 30% growth year-over-year since 2016, has taken a unique approach in restructuring so that each advisory team has an equity stake in the success of the overall business, Rolph said.

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