CAPTRUST had finished three acquisitions this year as of June. Hoyle adds that the firms best able to withstand painful periods like 2020 are the ones reinvesting in their business, especially technology. “I can assure you that other firms that aren’t as durable are not looking to grow, they’re looking to just sustain.”

Growth is key. “Most RIAs are not growing,” Mallouk agrees. “I think that’s the dirty secret of the industry. Most RIAs are just growing a couple of percent a year and that’s it. And so they have very big margins, because [they] don’t have to invest in growth. When you’re growing, you have to hire out in front of it. You have [to get] real estate out in front of it. Invest in technology out in front of it.”

More profit-taking often signals stagnation, he says.

Margin Compression Vs. Fee Compression
The ranks of the nation’s largest RIAs increasingly are dominated by firms like CAPTRUST and Edelman Financial Engines with huge 401(k) businesses. This gives them two major advantages—they receive continual flows of new assets and they must learn to manage their margins

Hoyle says that CAPTRUST hasn’t seen fee compression yet in the RIA space. “One thing I think we’ve all experienced over the years is maybe some margin compression,” he says. “Because you have to do more services for maybe the same fee than you did 10 years ago or five years ago.” CAPTRUST, which has deep penetration in the DC plan consulting business in a bunch of cities, started pairing its wealth management business in those cities to exploit those existing relationships and enjoy wealth management’s higher margins.

“We have felt forever that it was harder to build a firm that could support three business lines—wealth; the retirement plan consulting business; and endowments and foundations,” Hoyle says. “It was a steeper climb, and it was a more difficult climb, but it would create a more diverse revenue stream, which would insulate us from crisis. … We’re benefiting from that now.”

One of the things the coronavirus market crash did to the advisor industry is threaten the value of firms in a time when their valuations were at peaks. Many advisors approaching retirement were likely thinking of cashing out at those huge multiples.

Michael Tiedemann, CEO of Tiedemann Advisors, says his firm is not in acquisition mode, but he adds that until recently there were too many interested buyers in the market, and this was pushing multiples for advisory firms too high. The coronavirus likely poked a hole in that bubble, he argues.

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