The registered investment advisor channel continues to lead the financial advisory industry in growth as measured by headcount and assets under management, according to Cerulli Associates’ annual RIA survey.
However, the number of firms has declined as consolidation continues unabated, the survey found.
Headcount among hybrid RIAs was up 5.5% over the last 10 years, and 3.3% for independent RIAs, according to Marina Shtyrkov, an associate director at the Boston-based research firm who specializes in retail advisor trends across affiliation models, and Stephen Caruso, research analyst.
Independent RIAs are defined as registered with the SEC or state, with no broker-dealer affiliation. Hybrid RIAs are also registered with the SEC or state, but while the RIA is owned and operated by the advisor, there is an affiliation with a broker-dealer.
Advisor-managed assets at hybrid and independent RIAs in 2022 grew 13.6% and 12.9%, respectively, the survey found. Meanwhile, wirehouses lost 1.6% of headcount and gained only 7.4% in assets in the same timeframe.
“But I think this doesn’t tell the whole story,” Shtyrkov said, speaking at a webinar to discuss the annual survey’s findings, with collects data from more than 1,500 financial advisors. “The total number of RIA firms has actually been declining.”
The RIA channel lost 6% of its firm count from 2020 to 2021, and 1% annually over the prior five years, she said. And the most affected segment are smaller RIAs, with $100 million or less in assets under management.
“On the flip side, the larger RIAs are growing, both in size and in total number, and there are a few key reasons why this is happening,” Shtyrkov said.
First, older advisors running lifestyle practices are winding down their businesses, retiring and may not have a successor, she said. Second, more advisors who move from the employee channel to the independent channel are choosing to join an existing RIA firm rather than start their own practice. “So they’re adding to headcount and asset count, but not to firm count,” she said.
And third, ongoing consolidation decreases the number of firms but bolsters the growth of the buyer. “Now the average RIA firm manages almost half a billion dollars in assets, and that was only $228 million in 2016,” Shtyrkov said. “The RIA space isn’t just growing in size, but it’s also growing up and getting more mature and more sophisticated in terms of the types of firms that are in the RIA channel.”
The largest firms now control 75% of assets and employ more than 60% of the RIA channel advisors, she said. As they’ve gained scale, they’ve experienced a shift in the challenges they face, the survey found.
Across all levels of AUM, compliance responsibilities and filings are the number one challenge for more than 80% of firms. After that, however, smaller firms without big brand recognition are more concerned about their clients’ confidence in working with them and have uncertainty about future regulation, while larger firms are more concerned about the cost to maintain staff, offices and infrastructure, and also maintaining and integrating technology, the report said.
As the RIA channel has shifted from a cottage industry of small firms to bigger enterprise players, it’s left some observers wondering if, eventually, it will end up in the same position as the independent broker-dealer industry, where there are just eight to 10 players, Caruso said.
In 2021, about $645 billion in assets were consolidated, he said, but that’s barely making a dent in the opportunity.
“In looking at this market opportunity, there’s $3.7 trillion [in assets] that we recognize as an addressable market for RIA acquisitions,” Caruso said. “About $2.6 trillion are advisor retirements, about $600 billion in growth-challenged RIAs, and a further half a trillion in breakaway advisors.”
Cerulli found that over one-third of advisors in the RIA channel intend to retire in the next decade. Of them, 25% are unsure of their succession plan. In that vacuum, consolidators have stepped in, offering capital to second-generation advisors to turn them into leaders or to move the book of business to a larger RIA firm that can nurture those clients “as the advisor sunsets out,” he said.
For existing RIAs with growth challenges, those roadblocks can be overcome with the capital, support and services that can be provided through consolidation. And in the breakaway category, Cerulli found that advisors are continuing to move from broker-dealers to being independent.
“Where they go depends on the level of service and affiliation they’re looking for, but in the last few days a $13 billion team left First Republic to join Crescent Partners, a major RIA consolidator,” Caruso said.
Private equity continues to support transitions in the RIA channel, the survey found. In addition to capital, these strategic relationships can provide additional support to RIAs that can accelerate growth, through M&A support, business model support and marketplace development.
And while private equity managers are often perceived as cost-cutters and job-cutters, their function is different in the RIA space, Caruso said.
“In the RIA space, the biggest value comes from clients and their relationship with a trusted advisor. Private equity investment in the RIA space has not dampened that one bit,” he said. “RIAs are still growing and attracting new clients, and the private equity value-add really is that support angle.”