With returns like that, one might assume public markets would be more receptive to RIAs. What’s the disconnect? After all, it seems difficult to fathom that Wall Street couldn’t figure out an adjacent market like the RIA business.
But as Steve Sanduski writes on page 35 of this month’s issue of Financial Advisor, most RIAs are experiencing anemic organic growth. That’s a critical metric for public investors. RIAs’ slow growth comes as they continue to gain market share from Wall Street brokers, many of which are shrinking.
Organic growth has been a challenge for the entire financial services business, including mutual funds and other asset managers. As baby boomers enter the phase of unwinding their investments, the problem is likely to become more acute across many financial sectors.
Former Pershing Advisor Solutions CEO Mark Tibergien has long been a skeptic about all the IPO chatter in the advisory world. He believes the RIA business remains relatively immature.
“It is important to remember where we are in the consolidation cycle,” he maintains, noting the industry is still in the fragmentation phase. Firms “have not invested much in people and infrastructure, so their actual profitability is somewhat camouflaged.”
In other words, firms are making real money, but questions remain about what happens after the founding owners wind down or die. The M&A boom of the last five years has also prompted many RIAs to focus on deals instead of upgrades to their operations and infrastructure.
The Next Phase
The next phase, in Tibergien’s view, entails building platforms that include “systems, processes, consistent branding and other elements that provide for greater efficiency,” ultimately making the firms more sustainable. “Not all the RIA consolidators will remain standing,” he predicts. “Some will merge with each other.”
Tibergien concedes it’s hard to tell whether there will be only two giant firms remaining—the same kind of duopoly controlling the beer industry—or if the industry would look more like banking, where 19 firms control 60% of the nation’s deposits. Eventually, he believes Wall Street will get a chance to invest in the big RIA model.
Ask any head of a billion-dollar RIA what the biggest constraint to their growth is and they are likely to say that it’s finding talented young advisors. Since they run service-oriented businesses, they depend on human capital, and skilled personnel is in short supply here as it is elsewhere in American business.
If a giant wealth manager went public, however, and turned into the kind of growth business Wall Street loves, that would be a game changer. Such a firm would have to enjoy consistent organic growth while posting predictable financial gains year after year. Think Microsoft, AIG, Coca-Cola or GE in the 1990s. Of course, Microsoft and Coke stagnated, while GE and AIG ran into accounting and leverage issues.
But there is a chance advisors may get a sneak peek in 2023. CI Financial has spent a fortune acquiring several dozen of the best RIAs around. The Canadian firm paid premium prices to do this and leveraged itself in the process, causing its stock to drop 50% in the last year. But if it follows through and attempts an IPO next year, it will have on its side many subsidiary organizations that boast deep management structures and impressive organic growth.
For the time being, however, Wall Street investors are still wary of RIA firms’ revenues being too dependent on buoyant equity markets. Seivert notes that RIAs don’t need IPOs to be successful. Right now, the combination of rising rates and falling multiples may cause some firms to refocus on internal business dynamics instead of exit strategies in the next 12 months. That's likely to be a positive development.