The aging financial adviser demographic is expected to put $1.6 trillion worth of client assets in play over the next five to 10 years, according to research from Cerulli Associates.
The Boston-based consulting firm counts $2.4 trillion in client assets as the total addressable market for potential registered investment adviser acquisitions over the next 10 years and cites the lack of succession planning as driving the bulk of the activity.
"Succession planning resources are decentralized in the independent channel, meaning the largest, well-capitalized RIAs are best positioned to match advisers to a like-minded successor, help navigate the process and provide capital to fund the transition," said Marina Shtyrkov, a research analyst at Cerulli.
Cerulli's research shows that more than 80% of advisers currently affiliated with an RIA consolidator view it as a succession strategy.
Cerulli gets to the total of $2.4 trillion worth of client assets in motion by including an anticipated $469 billion worth of breakaway broker accounts and $348 billion worth of assets from "growth-challenged" RIAs.
"The economics for internal succession are improving, but the industry desperately needs [first-generation advisers] to start putting succession plans in place," said David DeVoe, managing director of DeVoe & Co., a firm that tracks data showing M&A activity in the RIA space hitting new records every quarter.
"Cerulli is spot-on with their thesis, and their data seems directionally accurate," Mr. DeVoe added.
But even in an industry where the average practitioner is 58 years old and only about 30% have established formal business succession plans, not everyone sees a succession plan emergency on the horizon.
"Most advisers are self-employed solo practices, which pays pretty darn well, particularly if you've been doing it for 20 or 30 years," said Michael Kitces, partner and director of wealth management at Pinnacle Advisory Group and co-founder of XY Planning Network.
Mr. Kitces said the life of a veteran solo practitioner with a small RIA usually doesn't require a lot of effort related to organic growth, and "client servicing usually involves a lot of nice lunches and some golf."
"They're probably making a couple hundred thousand a year," he added. "Why on earth would you sell that? Why would you want to sell that?"
Mr. Kitces is not alone in pushing back on the popular argument that the aging adviser demographic will produce a tsunami of RIA consolidation.
"I don't think anyone really wants to sell their firm, but sales are driven by things like the regulation, valuations, the stock market and the health of the owner," said Jason Van Duyn, president of AQuest Wealth Strategies, a $300 million firm that has acquired seven small advisory practices over the past three years.
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Like Mr. Kitces, Mr. Van Duyn cites the basic math demonstrating that a sole practitioner with $30 million in client assets can be netting about $160,000 per year.
"The valuation to sell is probably two times revenue, but for someone who is 67 and in decent shape, the job isn't killing them," he said. "They're basically working part-time for $160,000."
Mr. Van Duyn said he met recently with a 90-year-old adviser to discuss buying the advisory practice that his wife now must drive him to because he can no longer drive.
"He said he doesn't know when he wants to retire, but probably within the next few years," Mr. Van Duyn said. "He's 90 and he can't commit to a retirement date."
Mr. Kitces said the advisory business is like the legal profession, in that professionals can keep working as long as their mind is clear. "A lot of people essentially die with their boots on," he said.
"Someone will pay you maybe two times your revenue, but if you can make as much money by keeping it for three more years as you would for selling it, and then you can still sell it three years later, you tend to just stick around for three more years," Mr. Kitces said. "Then three years later you do the math and it's the same math."