I attend dozens of industry conferences in a year. It’s common for an audience member to ask if smaller RIAs will be extinct in five, 10 or 20 years from now. This is a realistic question given the pace of M&A that has taken place over the last decade. A large and sophisticated buyer pool exists and will continue to support the wave of consolidation. However, today’s buyers may not absorb a large percentage of small firms, simply because those smaller firms don’t bring the economic value to warrant the sometimes high costs of integration. Just like most RIA firms have minimums for clients, so too, do today’s professional buyers. As a result, smaller firms may need to compete for the attention of the top buyers.
With nearly 10,000 firms with $150MM or less in client assets and annual deal volume being in the 2-3% range of the total population for the last three years, the “RIA next door” is not at risk of disappearing anytime soon. However, as the industry continues to age, many owners are quickly realizing that they are not running viable and sustainable businesses for today’s much more competitive and challenging industry.
We are living in an era of service expansion, and financial planning is table stakes and no longer a competitive differentiator. Firms that are growing are those that offer a panoply of professional services under one roof, a one stop shop for financial planning, tax return preparation, estate planning, corporate trustee services, and more. Ultra-high-net-worth clients DEMAND these services. Smaller RIAs that cannot meet their growing demands could have a harder time competing for these clients. Similarly, high-net-worth clients also want these services delivered to them as part of an expanded value proposition. Again, financial planning alone does not make you stand out in a crowded market. Investment management-only firms that saw their secret sauce as investment alpha died off, so too those RIAs that only provide financial planning will find, as investment managers learned, the only way to compete and attract or retain clients is to cut their fees. Lowering fees is a race to the bottom which is why larger RIAs often more value add services in addition to financial planning.
As an RIA owner, reviewing your strategic options is now more important than ever. For many, selling is a choice that can be attractive, particularly if there is no internal succession plan in place.
Market gains and the resulting complacency has created a false perception of the RIA marketplace as one of collegial competition, steady growth, and an over-supply of clients. However, market dominators are beginning to emerge, along with moves upmarket by digital challengers, creating an entirely different environment, resulting for many firms, in an immediate wake-up call for the future of their businesses.
Our experience as one of the leading acquirers over the past decade, suggests that owners should take a hard look at their current situation and future prospects. For example, if you are an owner of an RIA with $500 million or less in client assets, consider the following questions:
Do you have a business continuity and succession plan to ensure your clients are protected should something happen to you? As a fiduciary, you must plan for the continued and uninterrupted care of clients This isn’t just a concept or theory. It’s a requirement of the Investment Advisers Act of 1940. To fulfill the requirement, you must have a formal and written succession plan, which according to many studies shows that more than 25% of the industry does not.
Are you actively marketing your business and adding new clients? Today’s digital world has made marketing a true discipline. Without hiring an external marketing agency or having a dedicated professional, it is nearly impossible to compete. The result is that most RIAs are growing only 3% ex-market and do not have the resources or background to accelerate growth. In fact, with only 6% of RIA firms controlling more than 76% of the industry flows the challenge of organic growth will conceivably increase (Source: Tiburon Research).
Do you play a significant role in your clients’ lives? As the financial landscape has evolved, so have the expectations of high-net-worth families seeking comprehensive wealth management. The ability to connect the intricate dots of their financial lives has become a crucial aspect of retaining and attracting clients. If you’re not meeting their expectations, your clients may be at risk of migrating to another advisor or solution.
What is the average age of your clients? Are most in decumulation mode? As your clients age, the reality of decumulation becomes increasingly apparent, with potential repercussions for your business. It's not uncommon for 50% of a financial advisor's clientele to be aged 60 or older, and a substantial portion, around 20-25%, to be at least 70 years old.
Are you struggling with the increased requirements of today’s competitive market—operational and technology demands, regulatory requirements and increasing expectations from clients? If your firm is grappling with one or all of these challenges, you may be at a crossroads and a strategic review of your future business is critical.
From all of these questions, one central question arises. Can you build your practice into a business or is it time to join a firm that has the scope and scale to solve all of these critical challenges?
In my opinion, the majority of smaller firms will not be able to thrive on their own. Small RIA owners will not be able to compete by building. All they will have built is a job, not a business. An RIA becomes a business when it has professional management, established client service levels and capabilities that are profitable, a technology infrastructure that will allow it to efficiently serve current clients and attract new ones, and a strategic plan that provides the framework to grow five to 10 years into the future.
An RIA business has an enterprise value. Does your firm have enterprise value? Chances are the decade-long bull market that ended in 2021 created the illusion of success for you and your firm. Today’s environment is a wake-up call that should be addressed sooner than later.
David Barton is vice chairman of Mercer Advisors and leads the organization’s M&A efforts. He has held many senior leadership positions at Mercer Advisors including CEO for nine years (2008-2017), president, chief operating officer and general counsel. Mercer Advisors has $56 billion in client assets and has completed 86 acquisitions.