A decade ago when BlackRock was looking at building a new service or product solution, the first place it looked to deliver that vehicle were the large wirehouses. Today, it’s the RIA channel, Michael Lane, head of enterprise at U.S. Wealth Advisory at BlackRock, told attendees at FSI’s One Voice conference in Rolando this morning.

“The scaling up of the RIA space is unlocking innovation,” said Lane, who moderated a panel on the diversity of different RIA models. “We’re focused on building out entire divisions at BlackRock to serve this space.”

In the last few years, the independent RIA universe has enjoyed a surge in the number of new firms created, according to Steve Caruso, a senior analyst at Cerulli who has studied the space. Given the youth of these start-ups, the vast majority are still quite small firms.

Except for the hybrid RIA business serving dually licensed advisors, the other channels including wirehouses and independent broker-dealers (IBDs), have suffered declines in their advisor counts. Presumably, some of the new RIAs have come from wirehouses and IBDs. Some of the newly independent firms probably thought they could thrive on their own after spending a few years in a pandemic world; others were likely dazzled by the huge premiums private equity firms paid for RIAs in 2020 and 2021.

The business formats favored by small advisors are of critical importance to independent broker-dealers and custodian-clearing firms because they account for about 75% of the advisor universe and many will respond to direction. One brokerage executive commented that it's only about 10% are aggressively growth-driven and will find tactics and business models that can propel them to superior growth rates completely on their own.

Significantly, the RIA space is bifurcating into two primary groups, observed Ben Harrison, managing director and head of the wealth solutions group at BNY Mellon's Pershing. He identified two major trends sweeping the advisory space.

The first is convergence, or how investors want to be served, with more holistic planning and one-stop services. The second trend, Harrison said, is the clear delineation between the largest 1,200 firms with 70% of the assets and what he called “practices,” or smaller firms.

Much of the session centered on the fate of small RIAs, many of whom are growth-challenged. “Those RIAs are looking for a partner to help them scale,” said Chris Radford, president of AE Wealth.

Lots of firms, the panelists agreed, appear stuck at some level of assets and are struggling to get from $100 million to $200 million or $200 million to $300 million. Most are dependent on market appreciation rather than organic growth to reach their goals.

Caruso suspects there will be lots of growth in the hybrid RIA space, partly since many of these advisors need support because lots of advisors with about $100 million are growth-challenged. “Advisors who go independent [often] find there are costs they don’t think about,” he said.

Another reason for leaving the brokerage industry and becoming an independent RIA is saying farewell to Finra supervision. However, Radford noted that, as a broker, saying hello to the SEC as an RIA was not a “big escape.”

Harrison also urged service providers to understand this and portray the transition to RIA status as a business opportunity, not as regulatory arbitrage between agencies. If a service provider describes her services as risk management, it becomes a solution advisors “are willing to pay for.” For small RIAs, “supervision is something they don’t have,” he added.

Many “are looking for partners to help them scale,” Radford said.

Although numerous private-equity firms have backed aggregators to help small advisors grow and become more productive the jury is still out on how many of consolidation entites will be successful. One of the earliest consolidators to focus on small RIAs, United Capital, was sold to Goldman Sachs in 2019 for $750 million, but the Wall Street giant failed to integrate that firm into its business and sold it for a major loss to Creative Planning last year.

Competition and higher interest rates are forcing many to re-examine their strategies and several PE firms have shaken up top management at RIA consolidators in the last year.