Small RIAs vs. ‘Meta-Acquirers’: Who Has the Advantage?

Two RIA dealmaking specialists duked it out Sunday at the inaugural Future Proof conference in Huntington Beach, California, before several hundred advisors and other attendees ​— revealing some critical insights about the state of the wealth management industry and where it is heading.

The debate featured David DeVoe, CEO and founder of the RIA consulting firm DeVoe & Co., and Brian Hamburger, CEO and president of MarketCounsel and chief counsel of the Hamburger Law Firm.  Citywire RIA’s Ian Wenik served as moderator of the discussion. 

When asked when the 12 to 15 largest RIA acquirers may come to dominate the overall business ​— which includes nearly 15,000 investment advisory firms ​— Hamburger said: “They’re never going to get there because of the creative streak in the wealth management business and because of the low barriers to entry.” 

Filing the required registration form with the Securities and Exchange Commission, for instance, is not very demanding, he explained.

In DeVoe’s view, there are about two dozen firms that he’s labeled “meta-acquirers.” They may be “reshaping RIA [industry] records, but they are not reshaping the industry — yet they are consolidating rapidly and are happy acquiring like crazy,” said. 

These meta-acquirers, DeVoe says, are better than the average small RIA at managing client relationships. 

He points to Edelman Financial Engines as a large firm that has spent roughly $10 million on technology to help produce client leads. It generated about 100,000 leads last year and has produced some 150,000 this year.  

This large RIA “is doing things differently,” DeVoe explained, “and thus is able to grow as you can’t imagine.” (He referred to these growth strategies as “meta-techniques.”) 

“I don’t buy it,” Hamburger responded. The large firms “may be doing more things right than the other firms, but the other firms are still nimble.”

In other words, the biggest RIAs are “enterprises and that means they take longer to develop innovation,” which should serve to limit further industry concentration, he said. Plus, the number of large acquirers likely will remain at 12 to 15, Hamburger stressed. 

Private Equity Issues

What about private equity and the negative impact it could have on the RIA space?

Private equity firms’ focus on cash flow could have a corrosive impact on client service, Hamburger said.

The negative effects of private equity increase “the further the founders [of an RIA] get from the heart of the company, its sense of allegiance [to clients] and decision making,” the attorney said. “All of this can be increasingly adverse for clients.” 

While he doesn’t want to turn private equity “into a scapegoat” — and believes its push into wealth management has done a lot of good — its role in the RIA business “can’t go unchecked,” said Hamburger. Otherwise there’s a risk that money invested by PE firms in efforts that generally benefit both clients and the business itself might decline.

“Private equity has been positive for the RIA space,” argued DeVoe, adding that PE firms have a reputation in some other industries for “gutting companies” via debt and leverage, freeing up cash flow and then selling the acquired firms as “a shell of their former self.” 

While PE firms “are no angels, I don’t see this [pattern] in our industry,” he said. “They are practicing good behavior because this is a growth industry ​— and human capital is central to it. Private equity will not gut RIA firms of their human capital.” 

Referring to recent news and academic research that shows the mortality rates at nursing homes owned by PE firms are higher than at other nursing homes, DeVoe stated: “You don’t see [such] bad behavior in the RIA/wealth management space. And that should be the case for years to come.”

Other Acquirers

When it comes to why asset managers and insurers are active acquirers of RIAs, Hamburger said it’s “because “they’ve lost significant distribution, and this is a way to reacquire distribution to wealthy clients.”

DeVoe explained that he’s “been impressed with [insurers’] approach to building [out their role] in the RIA business, especially by sharing some cultural elements. They see where the puck of the wealth industry is going and want to be part of it.” 

“They’re saying all the right things …,” Hamburger said, “but wait until their shareholders say, ‘What! The RIA margins are less than the insurance margins!” 

Pictured: Brian Hamburger, left, and David DeVoe. (Photo: Janet Levaux)