9 Trends That Sum Up the State of RIAs: Cerulli

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1. RIAs lead in adding advisors and assets ...

Independent and hybrid RIA firms continue to lead the financial services industry when it comes to headcount and asset growth, according to Marina Shtyrkov, associate director, wealth management at Cerulli.

Advisor headcount in the hybrid RIA channel grew 5.5% on a 10-year compound annual growth rate from 2011-2021, while growing 3.3% in the independent channel, Cerulli says. Meanwhile, advisor-managed assets have grown 13.6% among hybrid RIAs and 12.9% among independent RIAs.

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2. ... Even as the number of RIA firms shrinks.

“One piece” of the story “I think often gets overlooked … is that the total number of RIA firms has actually been declining,” according to Shtyrkov. The total RIA firm count fell by 6% from 2020 to 2021 and 1% annually over the past five years, she noted.

Smaller RIA firms with $100 million in AUM or less are losing market share, while the larger RIA firms are growing due to ongoing consolidation, older advisors retiring and their firms closing without successors, and more advisors moving to the independent channel choosing to join existing RIA firms rather than starting their own firms, she said.

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3. Operational challenges are shifting as RIAs gain scale.

“The RIA space isn't just growing in size,” noted Shtyrkov. “It’s growing up and getting more mature and more sophisticated in terms of the types of firms that are in the RIA channel [and] the largest RIA firms control the vast majority of assets,” while employing over 60% of advisors in the RIA sector, she said.

As a result, she said, challenges of those larger RIA firms are “just a lot different than their smaller peers,” she said. Some main challenges reported by RIA firms are the same regardless of their size, such as compliance and regulatory filings, she noted.

“But in some of the other aspects, there are some crucial differences depending on the size of the firm,” she said. For example, smaller RIAs are “much more concerned about the impact of future regulation,” she explained.

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4. Custodian use is tied to RIA firm size, with $250 million the tipping point.

There has been a great deal of change in the custodial space, Shtyrkov also noted. And “RIA firm size definitely plays a role” in what custodian is selected by an RIA firm and how many custodians are selected, she said.

Most RIAs are small and have “relatively limited resources [and] less operational complexity than larger firms, and so having just one custodian is typically simpler” for those smaller firms, she explained. Custodians also “typically give more favorable pricing [and] better support to RIAs that have more assets on their platform,” she said.

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5. Inertia and the inconvenience of repapering benefit incumbent players.

Very few firms add a custodian or switch to a different one, Shtyrkov said. Only 24% of RIA firms polled said they were exploring adding a new custodian in the next 12 months and just 4% said they switched custodians in the past 12 months, she noted.

It is “far more likely that an RIA is going to add a custodian to try to fill in any gaps in the services, the capabilities that they're currently getting at their existing custodial providers,” she said.

Larger RIAs are more likely to be looking for a new custodian and nearly 50% of RIAs with $500 million or more in assets say they're exploring adding a new custodian over the next year, she added. Larger RIAs are also “more willing to take on new custodial relationships to accommodate practices that they're acquiring,” she added.

“Unwinding a custodial relationship is still operationally really difficult [and] there's just a lot of inertia that keeps advisors with their current” custodians. That and a desire to not “disrupt the client experience unless they really have to,” she said.

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6. A decade of rapid consolidation is expected, buoyed by private capital investment.

There has been a return to consolidation after a short pause created by the pandemic, according to Stephen Caruso, research analyst, wealth management at Cerulli.

He expects to see more consolidation but doesn't think “we'll reach a point where there's just 10 players in the market.”

Meanwhile, there remains a “steady undercurrent of private capital that's woven through the RIA channels,” he said, noting private capital “really stepped in” to support the recent growth in the RIA industry.

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6. The addressable market for RIA acquisitions will reach $3.7 trillion over the next 5-10 years.

That includes $2.6 trillion from advisor retirement, about $600 billion from growth-challenged RIAs, and $506 billion from breakaway advisors, according to Caruso. He called the $2.6 trillion an “amazing amount” of available capital, adding the lack of succession planning is a major issue across the industry.

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7. RIAs need more than money to grow.

Cerulli has “identified three key value-add support areas” in its research, Caruso said. He pointed to the importance of having an M&A strategy, business model support, and marketplace development. Consolidators can often be very helpful, he added.

“RIAs are very happy with getting … business model support,” he said, noting: “Building a scale business in the wealth management space requires a significant level of operational expertise from connecting the disparate technology pieces that you're using on a daily basis to centralizing marketing.”

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8. Private equity is setting its sights on the next generation of RIAs.

The growth opportunities for RIA acquirers continue, and private equity firms want to be involved as the “opportunity becomes more accessible,” Caruso said. “Growing rapidly, emerging consolidators access growth capital much earlier in their lifecycles” than other firms, according to Cerulli.

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9. Frequent changes and increasing complexity are leaving wirehouse advisors dissatisfied with their compensation plans.

“The wirehouse channel has significantly more advisors who are saying that they're dissatisfied with their compensation overall” than the other channels, according to Cerulli research, Shtyrkov pointed out.

She pointed to advisor response data in which 24% of respondents from the wirehouse channel said they disagreed or strongly disagreed that they're happy, compared with just 5% in the national regional broker-dealer channel and 7% in the independent BD channel.

As a result, she said, we’re seeing “a lot of modification, a lot of changes to compensation plans among the wirehouses.”

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1. RIAs lead in adding advisors and assets ...

2. ... Even as the number of RIA firms shrinks.

3. Operational challenges are shifting as RIAs gain scale.

4. Custodian use is tied to RIA firm size, with $250 million the tipping point.

5. Inertia and the inconvenience of repapering benefit incumbent players.

6. A decade of rapid consolidation is expected, buoyed by private capital investment.

6. The addressable market for RIA acquisitions will reach $3.7 trillion over the next 5-10 years.

7. RIAs need more than money to grow.

8. Private equity is setting its sights on the next generation of RIAs.

9. Frequent changes and increasing complexity are leaving wirehouse advisors dissatisfied with their compensation plans.

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9 Trends That Sum Up the State of RIAs: Cerulli

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More on this topic

1. RIAs lead in adding advisors and assets ...

2. ... Even as the number of RIA firms shrinks.

3. Operational challenges are shifting as RIAs gain scale.

4. Custodian use is tied to RIA firm size, with $250 million the tipping point.

5. Inertia and the inconvenience of repapering benefit incumbent players.

6. A decade of rapid consolidation is expected, buoyed by private capital investment.

6. The addressable market for RIA acquisitions will reach $3.7 trillion over the next 5-10 years.

7. RIAs need more than money to grow.

8. Private equity is setting its sights on the next generation of RIAs.

9. Frequent changes and increasing complexity are leaving wirehouse advisors dissatisfied with their compensation plans.

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