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.
“It’s basically the anti-rollup business model where we get all the same benefits of the operational scale on the backend, all the technology costs and other stuff that each individual firm has to spend on their own,” he said, explaining that they are able to aggregate that and do that at the larger level with each advisory team having the flexibility and the ownership in their business to continue to grow and serve the client the way they want to.
MMA is one of a few firms that has created a culture where advisors can join and directly own a piece of the firm and still get the benefits of being an entrepreneur and serve the clients the right way, Rolph said. “I think for a lot of our RIAs, that’s an appealing option because $5 billion is the new $1 billion mark for our industry and so as you need to scale like a lot of these firms that are sub $1 billion, there is not great options if you don’t want to work for a corporation,” he said.
He said MMA has been fortunate with this model and a lot of it comes from being able to attract and train up high-quality talent. A lot of the advisors have joined the firm over the last couple of years and that, he said, is one of the primary considerations in being able to create this broader bench of younger talent that can integrate into their longer-term teams.
Rolph noted that there are large corporate RIAs that will provide an office and custodial platform, but the advisors still have to do the rest, such as their own marketing, compliance, client service and operations. “It’s a real challenge to have to wear those hats and grow a business while at the same time providing advice to clients,” he said.
And you do not get equity, Rolph added. “You are working for them and the bottom line is really all they care about,” he said.
Getting a big check up front makes sense for many aging advisors who do not have an internal succession plan and are looking to retire, but that is not most of the marketplace right now, Rolph said. It is smaller firms that are having challenges with operational aspects of the business and could be much more successful if some of those tasks were centralized. “Those are the growing firms where those synergies make sense, where they don’t want a check. They are looking to grow their business. They need help,” Rolph said.
The other group that would benefit from those synergies, and Rolph said MMA has been getting calls from them, is the advisors at brokerage firms who have been bleeding assets for years and being overrun by compliance and corporate oversight that affects their ability to deliver advice to their clients, Rolph said.
“A lot of them realize now that going independent is a lot easier but doing it in the framework of a reasonably sized firm where you have established infrastructure, brand name and a lot of other things that you are going to need to build because building all of that backup stuff does not create any enterprise value. Those are just the table stakes,” he said.
To be sure, Rolph said the number of M&A will continue to accelerate over the next five years and there probably will be 100 $10 billion-plus firms and a bunch of firms above the $50 billion mark. These firms, he said, will deliver an array of service offerings at an even more competitive price point, which will place a huge amount of pressure on the smaller firms.
Rolph said more collaborative business models like MMA’s are going to become a lot more attractive to many of these fragmented RIAs that do not want to work for a corporation.
“Having the ability to have equity and upside in the business and still have the ability to service the clients in a way that makes them feel good preserves that whole reason why they want to be RIAs in the first place,” Rolph said. “Those are the advisors we end up with and from where we are sitting, that is a win-win for both of us.”