Diverse Buyers Capitalize on ‘Fragmented, Dispersed’ RIA Market

Cerulli categorizes consolidator firms into three segments, and “The merits and drawbacks of each segment’s business model will often depend on the adviser’s motivations for affiliating with a larger partner.”

The latest research shared by Cerulli Associates suggests the registered investment adviser (RIA) channel is “ripe for consolidation and enjoying fast growth.”

“From 2011 to 2016, three major consolidators grew affiliated assets under management by a five-year compound annual growth rate of more than 45%,” reports Marina Shtyrkov, research analyst for Cerulli. “During this timeframe, all independent RIAs grew assets by only 11.7%, and hybrid RIAs by 10.7%.”

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According to the Cerulli analysis, based on data from the first quarter 2018 issue of The Cerulli Edge – U.S. Adviser Edition, “succession solutions, infrastructure support, acquisition capital, and aggregated buying power are all common motivators that can be attributed to advisers’ increased interest in affiliating with consolidators.”

Naturally, the reasons why advisers choose to partner with a given consolidator will vary depending on the practice’s size and growth stage, Shtyrkov says. And given the recent momentum behind aggregators and platforms, and the demand for operational and financing support, it is crucial for advisers to remain aware that not all consolidators are created equal, she says.

“Cerulli categorizes consolidator firms into three segments, including platforms, financial acquirers, and strategic acquirers,” Shtyrkov explains. “The merits and drawbacks of each segment’s business model will often depend on the adviser’s motivations for affiliating with a larger partner.”

The Cerulli analysis suggests that the traditional channel lines in the advisory and investment distribution business are blurring. Yet, as channel lines are blurring, certain segments, such as national and regional broker/dealers (B/Ds), are still growing faster than others, “indicating fingers on the pulse of advisers’ needs.”

“The national and regional B/D channel grew assets at a 9.1% rate in 2016, eclipsing the industry’s overall expansion of 7.2% and outpacing the registered investment advisor (RIA) channel,” Cerulli finds.

Despite strong momentum, Cerulli finds that advisers have “limited knowledge about the differences between consolidators’ business models and value propositions.”

“This is an advantage for broker/dealers, who can capitalize on advisers’ tendencies to generalize all major consolidators by clearly articulating their own services,” Cerulli reports.

“Platforms allow RIAs to ‘rent’ an end-to-end operating and support platform and do not take an equity stake in affiliates,” Cerulli explains. “Financial acquirers systematically acquire RIAs to aggregate individual firms in a fragmented market and realize financial gains through a liquidity event or cash flow distributions. We define strategic acquirers as large RIAs that systematically acquire advisory firms to grow market share, enter new geographic regions, and achieve other growth-oriented strategic objectives.”

Working with platform consolidators, advisers gain access to branded platforms that offer rented services, such as technology, finance, investment support, marketing, and compliance. This could be an advantage for advisers who are wary of giving up equity.

“For platform providers, the risk of attrition becomes more acute as advisers gain autonomy and choose to forgo paying the platform fee,” Cerulli explains. “As they achieve greater scale, practices can replicate the infrastructure that platforms provide and their proposition of enterprise pricing becomes less alluring.”

Turning to financial acquirers, Cerulli says this group offers cash and stock deals with long-term upside potential. “After multiple infusions of private equity funding, advisers who sold into the aggregator model early may be impatient to receive the financial upside that a public offering promises,” Cerulli warns. “Aggregators appeal to advisers nearing retirement and searching for succession options … but this threatens to overweight the firm with older advisers and poses a risk of future demographic challenges.”

Concerning strategic acquirers, Cerulli says the aim “to build a cohesive national brand by implementing standardized processes and leveraging efficiencies via centralization.” These firms “offer the best key-account distribution opportunities for asset managers because of their highly centralized nature and advisers’ greater reliance on those home-office resources.”

Cerulli warns that full integration into the strategic acquirer’s model “not only requires operational adherence, but cultural fit and philosophical buy-in. These firms cultivate a like-minded community above all else.”

Pre-Retirees and Retirees Express Concerns Over Retirement Readiness

Most are not currently consulting with a financial professional, but retirees report a moderate amount of interest and pre-retirees a high amount of interest in receiving support and education on a variety of finance-related topics.

The Society of Actuaries (SOA) ninth biennial Risks and Process of Retirement Survey identified an overall increase in consumers’ level of concern for their finances both prior to and during retirement in 2017.

The survey revealed that inflation, health care and retirement costs rank as Americans’ top retirement concerns. Among pre-retirees, 78% selected inflation as a top concern, 74% chose health care, and 73% selected long-term care. Among retirees, the percentages were 57%, 54% and 59%, respectively.

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Many pre-retirees state they plan to take a number of steps to protect themselves financially as they age. Seven in ten (70%) state they intend to completely pay off their mortgage, including the 26% who have already done that. Fifty-eight percent have or plan to take less risky investments and 42% have or plan to postpone taking Social Security.

“I am encouraged to see pre-retirees and retirees alike taking steps to mitigate these risks, such as eliminating debt, saving money and cutting back on spending. But I am still concerned that there is not a greater focus on long-term planning, risk management, or dealing with the major uncertainties of life,”  says Anna Rappaport, fellow of the SOA and chair of the SOA’s Committee on Post-Retirement Needs and Risks.

A significant number of retirees and pre-retirees report that they feel unprepared to navigate financial shocks and unexpected expenses—61% of pre-retirees and 47% of retirees feel unprepared for expenses in retirement that could deplete their assets. For instance, according to the survey report, only one in three say they could financially handle a 25% drop in their home value, running out of assets or a family member needing financial support. While a majority feel they are prepared to handle small financial shocks, there are still a significant number who would have trouble dealing with car repairs or home repairs.

About half of pre-retirees (51%) say their savings are behind schedule, and one in three (33%) say they are on track.

Most are not currently consulting with a financial professional, but retirees report a moderate amount of interest and pre-retirees a high amount of interest in receiving support and education on a variety of finance-related topics.

The online survey of Americans ages 45 to 80 was conducted in July 2017 by Greenwald & Associates on behalf of the SOA.

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