The Path Ahead for Small Firms and Independent RIAs

Just 5% of RIA firms advise on $1 billion or more in assets, but they service more than 60% of the industry’s total.

Art by Malina Omut

Scott Slater, vice president, practice management and consulting, Fidelity Clearing and Custody Solutions, recently spoke with PLANADVISER about the firm’s newest analysis of merger and acquisition (M&A) activity in the financial services space.

Slater says the pace of M&A activity has remained quite strong in 2019, and this is particularly true for deals among registered investment advisers (RIAs). In fact, for the first time since Fidelity started tracking this data more than four years ago, each of the first two quarters of the year delivered more than 30 RIA-focused deals.

“I would also point out that we saw 50% of total financial services industry M&A activity coming just from RIAs during the time period, in terms of transactions and assets,” Slater says. “In the conversations I have with many of the RIA leaders doing the acquiring, they say they have pretty active pipelines for the rest of the year. They are planning to introduce new deals and continue to grow that way.”

Like Slater, Greg Peterson, financial services leader for PwC Deals, and Gregory McGahan, asset and wealth management leader, say there is little sign that the pace of M&A activity will slow down any time soon.

The pair note that wealth management-focused deals rose 58% during the first half of 2019 compared with the same period last year. Looking across the whole financial services landscape, the wealth management segment remained the strongest sub-sector for M&A activity, they say. The second quarter saw repeat acquirers growing their scale through such transactions, usually focusing on smaller, family office firms. According to PwC data, among the deals announced by wealth management firms from January through June, 46% involved an acquiring firm that had bought at least one other wealth manager since the start of 2019.

“The volume of deals continues to be quite strong, and there is a consistent theme in terms of what is driving this trend,” Peterson says. “The pressure for M&A is coming from a serious crunch with respect to fee pressures and performance pressures. Firms are trying to figure out how to right-size their businesses for the emerging lower-margin environment.”

Strategic Acquirers Make Headway

Slater says 2019 has seemingly been a successful year for “serial” acquirers. 

“The serial acquirers are clearly well capitalized and have put strong teams in place to work on the due diligence and to source and structure new deals,” Slater explains. “They have built out the capacity to do repeated M&A activity, and so it is no surprise they are driving a lot of the deals. Based on our data, it is something like seven in 10 transactions that are being completed by serial acquirer firms.”

Reflecting on what this picture means for smaller RIA firms with little interest in M&A activity, Slater says, firms should take a hard look at the emerging competitors they may face. Perhaps the main factor to consider is whether a small firm’s service model can match, profitably, the client experience that larger, better-resourced firms provide. Also, the deal volume should also be kept in proportion.

“On the one hand, yes, it is a lot of activity, particularly in the RIA wealth management space, and this may cause some concerns for firms about the emerging, well-resourced competition,” Slater says. “But we should also think about the raw numbers. If you look at the total number of SEC-registered and state-registered advisory firms out there, it’s something in the ballpark of 17,000 or 18,000, depending on how you count them. Relatively speaking, 30 transactions per quarter is not a lot of the whole landscape.”

Citing Cerulli Associates data, Slater says the RIA industry is facing its own “Tale of Two Cities.”

“RIA industry data from Cerulli shows only 5% of RIA firms have more than $1 billion in assets under advisement, but this small group represents over 60% of the total assets in the industry,” Slater says. “In that sense, the overall RIA marketplace is very concentrated and is becoming more concentrated through M&A.”

The Cerulli data shows firms with less than $100 million represent more than 75% of the firms out there.

“Already, this large number of firms controls only 10% of the assets in the industry,” Slater says. “It is a skewed pattern and what we are seeing today is that the larger firms with stronger operating platforms and stronger client service delivery models, they are making their play for scale. It’s a sign of the maturing of the industry generally.”

Defending the Small Practice  

While some feel small independent RIA firms face a very tough future, Slater is more optimistic that independent shops will survive. He says there are many ways they can move forward, but to survive without making any changes, that never really happens in a competitive business.

“Another interesting fact is that there are still new players, new firms, being formed all the time, so that’s some additional food for thought,” Slater says. “I personally think there is plenty of room for them to operate, so long they can build enterprises with real value.”  

Slater warns such firms that it is easy to overlook what it means to be “a small niche player.”

“I have been a business consultant for years working with RIA firms,” he explains. “ I can say most advisory firms remain somewhat loosely organized. They have a mix of client types and they are basically still trying to be all things to all people. In the emerging landscape, if you are going to be a niche player, you better have a well-defined niche and your services have to be meaningfully aligned.”

Slater gives the example of a small practice that, in reviewing its book of business, finds it has a majority of assets coming from medical professionals.

“Small firms can leverage this,” he says. “This firm, for example, could build a really special skillset where they can help medical practice owners with their own wealth and succession planning efforts. Looking at the existing book, the firm could double down on these services and make it really clear that this is what they do. That’s how a niche player survives in any industry that goes through this type of maturation and consolidation.”

What Advisers Think

Earlier this year, Nationwide Advisory Solutions worked with the Harris Poll to test the RIA community’s sentiments around M&A activity. The 51% of RIAs and fee-based advisers who believe that M&A activity will benefit their businesses is up slightly from the 47% measured in 2016. The reasons why they believe M&A activity will positively impact their business are being able to offer more resources to clients (31%), having more resources to expand and scale their businesses (also 31%), being able to create a succession plan (28%), having more opportunities to sell their business (27%) and having opportunities to buy another practice (26%).

Notably, among the larger advisers earning more than $500,000 and managing $250 million or more in assets, 71% expect RIA M&A to increase. This group of advisers is also more likely to say that M&A will directly impact their business (64%).

According to the survey, 12% of RIAs and fee-based advisers feel negatively about the impact of M&A activity. Thirty-three percent of these advisers say they prefer to manage their business independently without oversight. Thirty-two percent say that M&A makes it more challenging for small, independent firms to compete with the giants, and 32% say M&A might increase pressure on them to sell products that might not be right for clients.