New research from Cerulli Associates estimates that the total addressable market for registered investment advisor (RIA) acquisitions over the next five to 10 years is $2.4 trillion in assets under management (AUM). The figure—comprised of impending advisor retirements ($1.6 trillion), breakaway advisors ($469 billion), and growth-challenged RIAs ($348 billion)—paints a picture of a vastly different playing field for RIAs in the next 10 years. Given that the major RIA consolidators currently manage a total of $308 billion today, $2.4 trillion represents a massive growth opportunity.
One of the primary drivers of RIA consolidation is an impending succession crisis among advisors. According to Cerulli’s projections, slightly more than 32% of advisors in the RIA channels plan to retire in the next 10 years, many of whom lack a succession plan. “Succession planning resources are decentralized in the independent channel, meaning the largest, well-capitalized RIAs are best positioned to match advisors to a like-minded successor, help navigate the process, and provide capital to fund the transition,” explains Marina Shtyrkov, research analyst at Cerulli. More than 80% of advisors who are currently affiliated with an RIA consolidator see it as a succession exit strategy.
As the RIA channel continues to steal marketshare away from broker/dealers (B/Ds), attracting advisors with the allure financial value and an enduring legacy, it presents another growth opportunity. “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,” Shtyrkov explains. Aside from losing clients during a transition to independence, breakaway advisors’ top concerns focus on the cost and additional responsibilities of operating an RIA. As a result, roughly half would prefer to join an existing independent firm instead of starting their own.
Persistent growth challenges facing existing RIAs will also create continued acquisition opportunities. RIAs of all sizes face myriad growth-related challenges, including time constraints, increasing costs, technology integration, compliance hurdles, accommodations for increased staff headcount, and reallocations of management responsibilities. Shtyrkov adds, “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.”
A large part of the RIA market is available to consolidate, presenting a positive outlook for the future state of consolidation and RIA consolidator firms are best positioned to capitalize on this opportunity. “RIA consolidators couple the fiduciary appeal, advisor-first culture, and flexibility of the RIA model with the horsepower of a national firm—the scale that affords cutting-edge technology, sleek marketing, robust back-office support, and preferred pricing.” Cerulli places these RIA consolidators into three categories: RIA-branded platforms, financial acquirers, and strategic acquirers. Each of these business models face unique opportunities and risks, contending with new challenges as they grow. Overall, as a fast-growing segment seeking to aggregate an otherwise highly fragmented market, RIA consolidators are an attractive opportunity for private equity investors and asset managers.
These findings and more are from The Cerulli Report?U.S. RIA Marketplace 2019: Consolidators Gain Momentum.
