Acceleration! That’s the byword in today’s RIA marketplace, where the trend for large ‘consolidator’ firms to ‘roll up’ smaller RIA firms is rapidly picking up speed. That’s in contrast to a few years ago, when the financial downturn forced roll-up firms to slow down their activities and make fewer deals.
Why the change? First off, many RIA holding companies (rollups) are now flush with funds from large private equity firms, so the market is once again in acquisition mode. Secondly, with the rise of Gen X and Gen Y investors, who expect heightened levels of client service, many smaller RIA firms are seeking ways to upgrade their service offerings by rolling up into larger entities. And thirdly, regulatory changes such as Dodd-Frank are forcing these smaller RIA firms to reassess their abilities to meet compliance regulations on their own, and seek strategic partnerships or roll-up opportunities that mitigate the cost and risk.
The Consolidators’ Dilemmas
When an aggressive RIA holding company brings smaller firms into the fold—and gains mass as a consolidator of multiple firms—it is forced to contend with several key questions:
Does it try to impose some level of uniformity on the disparate firms it now possesses? How does it maximize efficiencies and economies across these entities? How does it ensure that the clients of its rolled-up firms continue to be satisfied in the face of change, and that client retention remains high? And of course, how does it leverage these client relationships to increase revenue and profits?
The success of the holding company depends on how well it answers these questions. For example, if a holding company consists of 20 acquired RIA firms, and they’re each still using their own internal systems (including 10 different portfolio management systems, for example), it isn’t possible to simply flip a switch and suddenly consolidate them all into a single streamlined operation. Rather, the holding company needs to find and implement solutions that will work over time—whether this involves making adjustments to the respective corporate cultures, adopting new technologies, or launching concerted “silo busting” initiatives. Right now, let’s focus on new technology, with a specific look at how it relates to the lifeblood of any firm’s business: its data.
Dealing With the ‘Data Disconnect’