A lot of financial advisor practices could be up for sale in coming years, creating a huge potential market for consolidation within the registered investment advisor marketplace, according to a recent report from Cerulli Associates.

In its “U.S. RIA Marketplace 2019: Consolidators Gain Momentum” report, Cerulli posits that the total addressable market for RIA acquisitions during the next five to 10 years is $2.4 trillion in assets under management. That amount incorporates imminent advisor retirements ($1.6 trillion), breakaway advisors ($469 billion) and so-called growth-challenged RIAs ($348 billion).

Regarding the potential surge in advisor retirements, Cerulli says roughly 32% of advisors across various RIA channels expect to retire within the next 10 years. Many of these advisors don’t have a succession plan, which makes selling out to a RIA consolidator a quick-hit solution to succession planning.

Cerulli states that consolidators comprised just 3% of RIA firms and 8% of asset marketshare as of year-end 2019. But the 10 major RIA consolidators—the two largest being Focus Financial and HighTower—grew their assets by a combined 22% five-year compound annual growth rate from 2013 to 2018 versus a 10% rise in all RIAs during that time period.

The potential appeal of RIA consolidators goes beyond succession planning. According to Cerulli, these consolidators combine a fiduciary approach, an advisor-first culture and the flexibility of the RIA model with the scale of a larger firm that can offer the technology, marketing, back-office support and preferred pricing needed to facilitate growth.

In short, these attributes can make consolidators a desirable landing place for breakaway advisors leaving the broker-dealer world, as well as for advisors facing growth-related challenges.

“Consolidators provide the safety net of operational support, strategic guidance, and economies of scale, while also allowing advisors to retain flexibility and gain more control over their practice than they have in the B/D channels,” Marina Shtyrkov, research analyst at Cerulli, wrote in the report. “By delivering turnkey resources, strategic guidance, and expertise, consolidators allow advisors to focus on what they really care about, such as growth and working with clients.”

Consolidator Models

Cerulli puts RIA consolidators into three categories: RIA-branded platforms, financial acquirers and strategic acquirers. What differentiates them are the degree of integration, characteristics of target firms, financing and services offered.

So for an advisor who’s interested in hitching their wagon to that of a consolidator, they need to gauge several factors such as how much integration and/or autonomy will be part of the package and, consequently, how that could impact the entire experience.

As described in the Cerulli report, some RIA consolidators “stitch together a large number of autonomous firms, making it more difficult to create true synergies and realize efficiencies. Conversely, strategic acquirers are best able to achieve economies of scale due to their high degree of centralization, but affiliates must be willing to relinquish a certain level of autonomy.”

Cerulli notes that RIA consolidators have become attractive to private equity and venture capital firms. While that can provide much needed external funding, it also imposes rate-of-return targets and exit-strategy expectations that can hinder long-term perspectives.

“Although additional capital can change the growth trajectory of an RIA, it comes with serious considerations,” Cerulli cautioned.