The RIA industry has boomed over the past decade with assets under management rising, even as the number of firms has started to contract.
A new report by Advisor Growth Strategies, a management consulting group focused on RIAs, takes a look at the trends of the past decade and what that means for future growth.
Between 2016 and 2021 the RIA channel grew 12 percent annually in assets, according to McKinsey. Comparatively, all other channels, excluding direct brokerages and remote-advisory offerings, grew about 7 percent. Today, RIAs collectively manage more than $100 trillion dollars and control about 27 percent of all industry assets.
However, growth within the industry hasn’t been equal.
According to the Investment Adviser Association, 88.1 percent of investment advisors have 50 or fewer employees with only one or two offices. Despite that, the largest firms control most of the wealth, and the concentration at the top has only gotten worse, according to Advisor Growth Strategies.
In 2011, there were only 10 RIAs with at least $10 billion in AUM. Today, that number has ballooned to 258 firms. These firms represent only 1.5 percent of all RIAs, yet manage 47.4 percent of all assets. Firms with at least $1 billion in AUM have a market share of 74.6 percent.
According to the Advisor Growth Strategies report, the largest RIAs had organic growth of 10 percent. Comparatively most RIAs’ organic growth rate was 3 percent or less.
“Broadly, the industry became bifurcated into ‘haves’ and ‘have-nots,’” author John Furey, founder and managing partner of Advisor Growth Strategies, wrote in the report.
Inorganic growth has played a large part in the concentration of assets at the largest RIAs. In 2022 M&A deal volume hit a new high within wealth management, marking the 10th consecutive record year. In 2021 the number of independent and hybrid RIA firms across the U.S. decreased by 5.5 percent due to consolidation, according to Cerulli Associates, a Boston-based research and consulting firm.
According to Furey, larger RIAs have a revenue model and scale that allows them to invest in their business and technology and employ experts like estate or tax planners. That makes it harder for smaller firms to compete with the larger firms’ offerings.
Furey said he undertook research for the report not just to understand what has happened over the past ten years but to develop a guide for firms to use going forward given the historical trends in the industry.
However, to get to a place where RIAs can even compete with largest firms takes dedication and skill. According to Furey, the type of specialization and additional capabilities offered at larger firms doesn’t really happen until an RIA reaches around $2 billion in assets with revenue of around $15 million.
“That point is where firms really flip the switch on that and say, ‘You know what, we’re going to build more consistency across our firm and how we’re going to do that is by centralizing utilities for all our advisors to use,’” Furey said.
Furey believes that there are practical actions smaller growth-oriented firms need to take in order to compete and continue to grow.
These include partnering with another RIA or provider with scale to gain leverage — or developing a niche client strategy if a firm can’t scale, broadening firm ownership to involve the next generation of advisors, creating firms based on goals and metrics, and focusing on human capital and developing diverse teams. According to Furey, human capital is the most important because “it’s really hard to grow a firm without the right team.”
He also suggests some practical actions firms can take like developing a clear human capital strategy, creating an environment of accountability, and mastering remote work.
Ultimately, Furey believes that the concentration of assets at the top is positive because it provides advisors with a lot of options.
Larger RIAs can also provide advisors with benefits like those available through wirehouses while still operating under the fiduciary standard.
But the smaller RIA is not going away. Not every RIA is striving to be the next $10 billion firm.
“That’s not for everyone, right? Not all advisors want to sign up for that. They want their individuality, they want customization in those things. But it doesn’t scale as well and it’s harder to compete,” said Furey. “There’s still room for the smaller registered investment advisor who kind of wants to do it their way.”