The Private Equity Race for RIAs

The RIA channel represents more than $3.7 trillion in acquirable assets, according to a new report.


Illustration by RIA Intel

Private equity interest in RIAs is at an all-time high, according to a new report by Cerulli Associates, a consulting and research firm.

Fueled by high growth rates, market fragmentation, and recurring revenue streams within the RIA space, private equity firms now see RIAs as a compelling business opportunity, but one that is becoming increasingly competitive.

“This is a high-growing space where a lot of assets are flowing in and firms keep growing, yet at the bottom of the market there are a lot of small firms that are operating independently, and with that comes opportunity to really consolidate, pull assets together, pull firms together, and create larger platforms that increase the service opportunity for clients,” Stephen Caruso, research analyst at Cerulli and author of the report, told RIA Intel.

According to Cerulli, the RIA channel represents nearly $3.7 trillion of potentially acquirable assets over the next decade. The vast majority, $2.7 trillion, will come from veteran advisors, who are retiring at a faster rate than new professionals are entering the industry. Another $600 billion comes from growth-challenged RIAs, and $500 billion is from breakaway advisors who are looking to join the independent advisory space.

Private equity’s interest in RIAs has grown over the past few years. According to Echelon Partners, a boutique investment bank that tracks wealth management M&A, about 77 percent of all transactions in the first quarter of 2023 involved private equity either directly or indirectly. Additionally, direct acquisitions by private equity made up 12 percent of all RIA acquirers in 2022 — an increase of 2 percent compared to 2022.

The RIA industry’s fragmented nature is especially appealing to private equity firms. Despite a decade-long consolidation trend within the RIA space, most RIAs are still relatively small businesses. According to Cerulli, 84 percent of RIAs had less than $500 million in AUM as of year-end 2021. Many firms operate locally with limited resources and are often owner-run or solo RIAs. According to the Investment Adviser Association, 88.1 percent of investment advisors have 50 or fewer employees and only one or two offices.

However, despite the relatively small size of the majority of the firms, the RIA space has grown substantially over the last decade. RIAs now control 27 percent of the total asset advisory market share, up from 20 percent in 2011, according to Cerulli. Total assets in the RIA space jumped from $2.3 trillion to $8.2 trillion over the last decade, a 13.2 percent, 10-year compound annual growth rate. As a comparison, advisor-managed assets at wirehouses grew just 7.4 percent over the same period, Caruso said. He added that all other advisory channels were between 3 to 5 percentage points below the RIA channel growth rate.

The fee-based model used by RIAs, which provides them with a stable recurring revenue stream and a sticky client base, is also driving PE interest. According to the report, RIAs derive about 81 percent of their revenue from asset-based fees.

“As these firms continue to grow, that revenue base only grows, creating long-term value for private equity firms,” Caruso said. “RIAs don’t have a lumpy income statement compared to some other industries, where revenue is far less consistent.”

On the opposite side, Caruso said, the value-add that PE investment brings to RIAs is immense. Not only does it help fuel growth at firms that would otherwise struggle to grow, but many PE owners also continue to provide operational support to the firms going forward.

“Value add from an investor can include M&A strategy, business model support, and marketplace development. By injecting their expertise into a portfolio RIA, PE firms can better assist management teams in achieving their growth goals,” Caruso wrote in the report.

However, the space is becoming increasingly competitive, as more PE firms enter the arena. “There aren’t a ton of multibillion-dollar RIA firms just waiting in the wings,” Caruso said. “Private equity firms are competing against each other to make those investments.”

However, Cerulli has seen a shift in recent years into the emerging consolidator space, as RIAs tap consolidators earlier in their growth stages. “There’s [an] opportunity to really supercharge the inorganic growth of that next layer of RIAs.”

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