Competitive Dynamics of the RIA Channels

Hue Partners is proud to share the fourth M&A Confidential article authored by Stephen Caruso, Associate Director, Wealth Management at Cerulli Associates.

How are RIAs adapting to a changing environment?

Both the independent and hybrid RIA channels have undergone a significant transformation over the past decade, growing from a localized industry to one of the dominant players in wealth management. This growth has seen the emergence of a class of firms that have achieved unprecedented scale and sophistication, primarily driven by inorganic growth. These consolidators are reshaping the dynamics of the RIA channels, intensifying competition, and accelerating the introduction of new offerings. The divide between local firms and national enterprises has never been more pronounced. In response to these changes, some of the largest firms across the channels have adapted in various ways, signaling a promising future for growth in the RIA channels. As Cerulli looks toward 2025, we have high expectations for key areas of the RIA market.

A Fruitful Acquisition Opportunity

The maturation of the RIA channels has created a wealth of consolidation opportunities. With more than 18,000 RIAs active across the market, the potential for acquisitions is abundant. For firms seeking to grow inorganically, seizing these opportunities is crucial. According to Cerulli's research, 57% of RIAs are interested in acquiring other firms. Of this group, 16% are actively seeking deals and 41% are passively exploring acquisitions. Both the independent and hybrid RIA channels are home to sub-scale RIAs that have less than $500 million in assets under management, making them attractive acquisition targets.

With a variety of acquisition strategies in play, including tuck-ins, team liftouts, and full-firm acquisitions, the market is ripe for those looking to get involved. In addition to homegrown inorganic growth, Cerulli has observed interest from private equity (PE) and minority investors, highlighting the potential for fruitful acquisitions in the RIA market. While both PE and minority investors offer differentiated approaches, the expertise of an outside partner can be a fantastic resource as firms navigate all stages of growth. In addition to much-needed dealmaking capital, these partners can supercharge different aspects of the RIA. In this market especially, a minority investor with strong operating experience and support can find success helping RIAs navigate their challenges across technology, operations, and inorganic growth.

Push Toward Centralization

As RIAs have grown inorganically, the need to build enterprise value has become increasingly important. In the early stages of consolidation, firms had well-defined acquisition and integration approaches, ranging from independent operation to the well-integrated strategies of strategic acquirers. With each new generation of acquirers, the overall strategy has shifted toward an acquisition approach with centralization in mind. This shift has led to more uniform firm offerings, challenging firms to differentiate their value proposition as competitors catch up. For RIAs considering transactions in this market, understanding life after the deal closes is crucial. While the structure, processes, and service level will vary from firm to firm, RIA leaders need to be comfortable with their new firm's overall approach and design.

Demand for Services

Building on consistent bases of financial advice, larger RIAs are readily looking to expand their value proposition by making acquisitions that go beyond strictly investment advice. Over the last few years, a developing trend has been acquiring businesses that not only connect RIAs with a broader potential client base but also deliver additional services to existing clients. Firms such as Creative Planning, Hightower Advisors, and Mariner Wealth have all made acquisitions supporting extended service offerings. Varying from accounting firms, in the case of Creative and Hightower, to M&A consultancies with Mariner's acquisition of Woodbridge, the collective impact has been to drive engagement with existing or potential clients. These enterprises are building a suite around the advisor that gives them access to this host of tools, and it positions the advisor to be the quarterback of a client’s financial picture.

Organic Growth

A hot-button issue for firms across the RIA channels, organic growth has taken center stage in firms' newest push for growth. Although well-known in the industry, RIAs are growing modestly year-over-year when accounting for market growth and acquisition activity. Too many inefficiencies in existing advisory practices prevent sub-scale advisors from maximizing time during the week with a dedicated tilt toward business development. Across Cerulli's Advisor Research Collaborative, RIAs report spending just 7% of their time prospecting for new clients. During a 40-hour week, that accounts for roughly three hours. This doesn't create enough opportunity for advisors to impact their asset gathering each year significantly.

As the channel has evolved, we've seen a directed shift in how large RIAs drive their organic growth forward. Many of the largest firms are developing centralized business development teams to propel new business from the center. For firms not yet at that stage, centralized marketing resources have become a primary resource for supporting advisors' organic growth efforts. Leveraging significant scale to support lead generator tools, both internally created and those coming from industry partners such as custodians, the largest RIAs are looking to improve organic outcomes just as they have with inorganic opportunities. Interestingly, at-scale RIAs are still seeking to formalize referral processes. With 60% of RIAs citing referrals as their primary source of new client growth, building referral networks around advisors is paramount. At the enterprise level, firms have the capabilities to create marketing plans and guide the content and communications to cultivate these relationships.