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RIA Industry Is 'Under-consolidated': Focus Financial's Adolf

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What You Need to Know

  • RIA M&A transactions and consolidation are expected to continue in 2022.
  • The sector continues to have a major problem: Not enough advisory firm owners have succession plans.
  • More enhanced tech is expected to be introduced next year.

RIA merger and acquisition activity achieved another milestone in 2021, surpassing 200 transactions in a calendar year for the first time, according to David DeVoe, CEO and founder of the research firm DeVoe & Co.

2021 marks the eighth successive record year for RIA M&A activity, and the same is expected for 2022. But DeVoe told ThinkAdvisor we shouldn’t necessarily expect the 30%-50% growth in the number of M&A transactions we’ve seen in recent years.

He and three other industry executives ThinkAdvisor recently interviewed all predicted continued RIA sector consolidation.

Below are their projections for the sector in 2022, along with their thoughts on other trends.

Rudy Adolf, CEO, chairman and founder of Focus Financial

“It was a very good year” for RIAs in 2021, according to Rudy Adolf, CEO, chairman and founder of Focus Financial, noting it was another record year with increased M&A activity.

What “gets lost,” however, is that “this industry is still under-consolidated,” he argued. Noting there were over 200 deals in 2021, he said: “From my perspective, this industry should be doing 300, if not 400, transactions.”

This is about a $6 trillion industry and is expected to grow to $9 trillion, growing about 10% a year, Adolf said. There will probably be $3 trillion “in motion in the next five to seven years,” not the 10 years some expect, he added.

He predicts M&A activity in the U.S. and beyond will continue growing, probably at an accelerated pace.

Peter Mallouk, CEO and president of Creative Planning

From August through October this year, “we saw a huge number” of new RIA firms come to market for reasons that included a fear the tax rate was going to rise, according to Peter Mallouk, CEO and president of Creative Planning.

A growing number of RIA firms are also coming to market because “valuations have expanded, sellers are getting older, [and] pricing has gotten too high to do internal successions,” he said.

Advisory firm owners are also “a little concerned about big competitors in their backyard that are starting to show up,” Mallouk added.

Those factors are “going to drive a five-year consolidation in the space” in which the number of M&A transactions will grow, he predicted.

“Whether or not there are tax changes, I think there’s just this awareness that the tax rates are probably never going to be better, so they can only move against a seller,” he said.

One significant issue that is changing going into 2022: ”Before, you can be in a city in America and it’s you and like a hundred other firms, but now you’re starting to see the five big names … showing up in every town,” according to the executive. “And they’re all going to get bigger” in those markets, he predicted.

Advisory firm owners are asking themselves how they can compete with the major players, Mallouk said. His prediction: “There will be people that are going to successfully compete, but you’re going to have to make decisions to be able to do so in the future. …. Some people won’t be able to make those investments, and some will.”

Meanwhile, “most of the big firms have a huge amount of leverage tied to them, and it will work out wonderfully if the market continues to go up,” he said.

But Mallouk warned: “If we have a prolonged bear market, with an emphasis on the word prolonged, not like the pandemic” that lasted only “a couple of months,” things won’t go so well for those large players, because “the space is much more fragile than it appears.”

Things will “go really well if bear markets are short-lived, but if we have an ’08-’09-type scenario or anything like that, we would see, for the first time, the collapse of a major player,” he predicted.

On the tech front, the Creative Planning executive said: “I think somebody is eventually going to have to create technology that really goes across trading and reporting and CRM and that’s really functional.”

That is because, “for all I hear about how amazing technology in the space is, I find it to be clunky and difficult,” he said. “I think there’s an incredible opportunity for somebody to come in and really be transformative in this space. But I think we’re a long ways away from it.”

Mallouk predicts that the company will be a current player in the space through acquisition, internal investment, “cobbling together the pieces and then getting the market penetration to become the industry leader.”

David DeVoe, CEO and founder of DeVoe & Co.

The “trajectory” for M&A transactions “will probably flatten” in 2022, according to DeVoe. “We won’t see 50% year-over-year growth” in the number of RIA transactions next year, but we might see more transactions than we saw this year, he said.

“We also have valuations that are at extremely high levels and some strong, sophisticated acquiring groups … so the table is set for strong M&A activity” next year, he said.

Although the “underpinnings of mergers and acquisitions in the space remain the same,” DeVoe pointed out that “certain short-term drivers” that led to a surge in M&A activity in 2021, “like the threat of increased taxes … were short-lived and will not sustain themselves through 2022.”

But “there might be other drivers that come into play,” he conceded.

If interest rates go up, private equity investments in the RIA space will likely “slow down and I think there might even be an impact on valuations,” he said, noting they “might compress if interest rates go up.”

Last year, there were just under 200 transactions and there are expected to be 240 this year, he told ThinkAdvisor, projecting 240 to 270 in 2022.

“I think we might see some consolidation amongst the consolidators” in which “some of the firms that are in the marketplace sell to some of the consolidators out there [and] some of the consolidators sell to one another,” he said.

The major reason for this continued consolidation is “we have an industry where scale matters and many firms are joining with larger organizations to get the benefits of scale,” he explained.

Meanwhile, we continue to “have a succession problem in the industry,” he said. “We don’t have the number of succession plans we need in place, and we have an aging demographic of founders and owners.”

He also predicted that organic RIA sector growth is “likely to slow down a bit next year from this year.” One reason: Finding talent stands to be “more challenging,” he said. Factors include the newly mobile workforce in which top talent is no longer constrained by job options in their geographic area, he explained.

On the tech front, he predicted, “over time, technology will continue to evolve and enable small, medium- and even large-sized firms to improve the way they not only manage their business but … help them grow more effectively as well.”

Timothy Welsh, president, CEO and founder of Nexus Strategy

In 2022, “I think it’s going to be more of the same but higher volume in terms of M&A, in terms of new technology coming to market [and] new methodologies” including “advisors being able to spin up their own technology ecosystem” so they don’t have to rely on outside companies, according to Timothy Welsh, president, CEO and founder of Nexus Strategy.

New technology will include microservices and a “whole new slew of technology software development,” he said. We will also see people who created big, legacy platforms several years ago come back with new tech platforms, he told ThinkAdvisor.

For example, Oleg Tishkevich, who sold his financial planning software firm Finance Logix to Envestnet in 2015, is back with a new software development consulting firm, Welsh said he also knows of a couple of others in the incubation stages with new platforms.

He noted that Schwab has not fully integrated TD Ameritrade into its operations since closing on its acquisition of its former rival in October 2020. He predicted the integration won’t be completed next year and “they probably won’t even” finish it in 2023. TD Ameritrade advisors will be frustrated due to the 18 months in which they have been left “hanging,” he said. Overall, it won’t be a smooth transition, he predicted.

Despite the continued growth of RIAs, he predicted the “same flow” of breakaways from wirehouses because large firms are doing well and “it’s a bull market, so nobody wants to move.” The only thing that “would speed up” breakaways is if there is a “market break,” he predicted.

(Pictured: Rudy Adolf, CEO, chairman and founder of Focus Financial)


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