RIA firms ride consolidation wave

Fueled in part by succession planning among older advisers, the registered investment advisory space saw a record 44 mergers and acquisitions during the first quarter of 2017.

Jun 3, 2017 @ 6:00 am

By Jeff Benjamin

Against the backdrop of the relatively short history of modern financial planning, it appears there has never been a better time than now to be participating in this industry.

Many of the things often identified as challenges, including regulatory changes and fast-evolving technology, are becoming the industry's main drivers toward the future, which can be summed up in a single word: consolidation.

The registered investment advisory space saw a record 44 mergers and acquisitions during the first quarter of 2017, according to consulting firm DeVoe & Co.

That compares to 36 deals in the fourth quarter of 2016. The most recent quarter eclipsed the previous high of 39 deals in the first quarter of 2015.

Listen up, veteran financial advisers, because this trend is about you and your businesses.

Whether you have a well-structured succession plan or not, and many of you don't, the advice industry is moving toward you, oftentimes rolling out red carpets.

"The consolidation movement is just getting started," said Ron Carson, founder and CEO of Carson Wealth Management, which oversees $7.4 billion in client assets.

Mr. Carson draws an analogy to the farming industry, pointing out that unless a firm is hyperspecialized in some way, it is becoming more difficult to thrive without a certain amount of scale.

(Watch: Ron Carson: How Carson Institutional can be the John Bogle of wealth management)

"If you have a specialized niche and there's no question about the value propositions to your clients, there will be room for small firms. But you better be very clear and make sure the end client understands how you're staying relevant, because big is critical," he added.


While that might sound like a horror story to some advisers still running smaller firms, it represents a potential resolution to one of the other major challenges facing the advice industry, the aging population of financial advisers.

"We always hear about the average age of an adviser being 51, but the average age of advisory firm owner is estimated to be 61 or older," said David DeVoe, managing partner at DeVoe & Co.

"I'm less concerned about the age of advisers than I am about the age of the owners, because they are the ones who are moving toward retirement," he added.

Mr. DeVoe attributes the increased deal activity to a marketplace that is flush with capital, including a growing list of private equity investors looking to put money to work. And then there is the full spectrum of consolidator and roll-up operations that provide advisers with a variety of different avenues to capture some liquidity on the way to retirement.

In real estate parlance, this would be known as a seller's market, and many of the older advisers have good reason to be motivated to sell.

"I think the big consolidation move is just getting started because the older advisers don't want to have to sit through another major market event, or another DOL kind of wave of regulations, which we think is probably coming," Mr. Carson said. "If we get a market downturn of 20% or more for 12 months, you'll see the deals pick up even more."

"we're looking for people who still have some gas in the tank."j. fielding miller, ceo, captrust financial

But ahead of any such market or regulatory situation, the financial advice industry overall has been enjoying a pretty good ride, thanks in large part to a stock market that has soared more than 250% from its 2009 bottom during the financial crisis.

According to InvestmentNews' analysis of Form ADV filings by independent financial advisers, there are now 1,906 SEC-registered advisory firms, up 37% from five years ago, when there were 1,393.

Total advisory firm assets crested the $1 trillion mark this year, reflecting a 131% increase over the $470 billion in advisory assets counted in 2012.


In perhaps another example of the benefits of an historic bull market, large firms continue to get larger, according to the data.

The 2017 analysis of ADV filings found firms with more than $1 billion in assets represented 15% of all advisory firms, up from 10% five years ago.

Meanwhile, firms with between $100 million and $250 million under management declined to 48% of all firms from 59% five years ago.

Slicing the data another way, the total assets under management of the 50 largest firms is more than $643 billion, which represents a 93% increase over the $334 billion total five years ago.

"I don't think there's ever been a better time to sell," said Elliot Weissbluth, founder and CEO of the RIA consolidator HighTower.

He cites the aging of advisers as a driving force behind many of the deals, suggesting that succession plans are not always what they should be.

"A large number of advisers are looking for succession plans," Mr. Weissbluth said. "But a succession plan takes years to implement, and sometimes it needs to be set up and financed."

And if you're an adviser who is not close to retirement, you better be big or get big in a hurry, said Mr. Weissbluth. "Smaller advisers will be significantly disadvantaged by a competitor with more resources," he said. "If you're a $100 million RIA, the first thing you should do is find a partner and become a $200 million RIA."

That kind of logic is not lost on advisers like Matt Archer, founder and managing partner of Archer Investment Management.

The $50 million advisory firm is in the process of bringing on another $50 million book of business, and Mr. Archer said the RIA space feels like a feeding frenzy of deep-pocketed buyers.

"It's a pure asset grab, and the big boys are putting out a lot of money to consolidate the industry," he said. "A lot of veteran advisers don't want to go through another 20% market pullback. And if they don't have a succession plan in place, they are willing to take the money and run."

Some might describe Captrust Financial Advisors as one of those firms chasing advisory firm assets.

(More: RIA consolidation hits new high in first quarter)

"We've done five acquisitions already this year, compared to none last year," said J. Fielding Miller, CEO of the firm, which has 120 advisers managing $215 billion in client assets. "We'll probably do a total of seven or eight deals this year," he added.

While Mr. Miller is aware of the trend of selling as a succession plan, he is more interested in advisers who want to stick around for a while.

"Our mantra is, 'Don't sell out, buy in,'" he said. "We're looking for people who still have some gas in the tank and are still looking to grow."

Rick Suarez, partner and managing director at $6 billion Clarfeld Financial Advisors, recognizes the consolidation trend but warns sellers to look before they leap, especially if they're selling as a succession plan.

"Even though the world has evolved over the past several years, I still see the most common topic at every conference is succession planning and exit strategies," he said. "The problem that exists within the consolidation world is what the consolidators are doing with the assets."


Citing consolidators' lack of success in going public, which would offer RIA sellers a clean liquidity event, Mr. Suarez said it might be better for some firms to just sell the whole firm, as opposed to a piece of the revenue stream.

"Selling to a consolidator is an option for someone who doesn't have any other choices," he said. "But if firms can consolidate amongst themselves, no question that's a better choice. Then you have a bigger entity that could be offered to an even bigger company."


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