Consolidators fuel RIA recruiting boom

The RIA industry has been trending upward for years as the fastest-growing channel for advisor headcount, with last fall’s OpenArc breakaway from Merrill Lynch feeling like a gut punch delivered to the legacy wirehouse model. 

OpenArc managed roughly $130 billion in assets as they exited Merrill to launch an independent RIA backed by minority investor Dynasty Financial Partners and Charles Schwab as its custodian.

Cerulli Associates has projected an 11.8% headcount increase in the independent registered investment advisor (RIA) channel by 2028, which is more than double the projected growth of the next-fastest-growing channel of independent broker-dealers at 4.7%. 

“The departure of Open Arc from Merrill Lynch’s global corporate and institutional advisory services team – I think that showed there’s a significant pool of assets out there that’s servicing adjacent businesses to wealth but are also looking to break away from larger businesses,” says Stephen Caruso, associate director at Cerulli Associates.  

Schwab has projected that RIAs will need to hire more than 70,000 new staff over the next five years to keep up with current growth rates. However, most of the industry’s hiring has been dominated by private equity-backed aggregator firms. Cerulli says since 2014 RIA consolidators have increased advisor headcount nearly sevenfold – from under 200 advisors to nearly 1,300 – while the rest of the RIA market has remained largely flat over the past decade. 

RIAs have a deal-structure edge over wirehouses or broker-dealers in recruiting advisors looking to sell their business, according to Diamond Consultants CEO Louis Diamond, whose mother, Mindy, founded the advisor recruiting firm. Large RIAs can structure transitions so that most of the compensation is taxed at favorable long-term capital gains rates instead of ordinary income or forgivable loans, which is highly attractive to advisors. 

“We’re seeing advisors really say, ‘I have a great team and I’m just looking to cash out,’ or ‘I want to merge my business with an existing RIA,’” says Louis Diamond. “So, they’ll legally sell their business to one of these large, typically private equity-owned RIAs and unlock capital gains tax treatment. Get a bunch of cash, equity, and reap the rewards of independence without having to take the hard step of running their own business. I think that’s going to keep accelerating.” 

According to an RIA industry survey conducted last year by consultancy DeVoe & Company, 68% of respondents said a well-defined career path is the top request from next-gen professionals. These career-path prospects are often muddied for non-partnered advisors whose firm is sold to an acquirer, often prompting those advisors to seek other options. 

“They get sold to a big RIA acquirer, and all of a sudden their shot at taking over the business and working with the firm of 10 people completely changes,” says Diamond. “So we’re seeing a lot of RIA breakaways, who built their own book or might just be more of a support advisor that’s looking to go out on their own, start their own RIA or go to a smaller firm, or go to a firm where they’re going to have equity and have more of a voice.” 

A path to advisor equity was the second-most desired request for advisors according to DeVoe’s survey. RIAs that have developed their own models for advisor equity include Ritholtz Wealth Management, Bogart Wealth, Steward Partners, and Mercer, among others.   

“Some firms offer actual equity – other firms it’s structured more as profits interest, so [advisors] get distributions and they can monetize in an acquisition, but it’s non-voting and there’s different tax treatment,” says Diamond. “What advisors care about, the voting doesn’t matter because they’re going to have such a small stake. It’s more, can I get distributions and how am I monetized in a transaction? Am I going to be diluted? What’s the value of the equity?” 

Much of the RIA industry still operates 1099 independent contract models for advisors, but a growing number of firms are shifting toward W-2 employee models that cater toward equity participation. Private equity-backed acquirers to roll-out W-2 programs include Mariner, OnePoint BFG Wealth Partners, Hightower Advisors, and Signature Estate & Investment Advisors (SEIA). 

Sam Huszczo, founder of Michigan-based SGH Wealth Management, is an example of a smaller-scale RIA that has opted for a W-2 model for its 15 employees that manage $570 million in assets. His firm’s average employee is 27 years old, and he’s leveraged campus visits to colleges such as Michigan State to meet potential recruits. 

“Our industry is literally no different than lawyers or accountants or audit people. We do a professional service, you need designations, and then you need to get clients. But why has the business model of wealth management always been this independent contractor pool thing?” asks Huszczo.  

Michigan State offers a minor in financial planning and wealth management for students interested in that career path. Schwab has also been active on college campuses, awarding $15,000 to winners of its RIA Talent Advantage Student Scholarship. 

“With wealth management firms, I think we’re going to be occupying skyscrapers across the country at some point in the next 15 years, but not on a business model that can’t scale. And I’m sorry, but the independent contractor route is unscalable,” adds Huszczo.