As RIAs chase scale, smaller practices will scramble to stay relevant: Report

Research from Advisor Growth Strategies sees smaller firms facing increased pressure to grow or specialize to meeting rising client expectations.

The financial advice industry is still a long way from consolidating into a handful of mega firms dominating the landscape, but the trend lines over the past decade suggests bigger will continue to be better, and that’s a message that shouldn’t be lost on sole proprietors and lifestyle advisory firms.

In a new research report on the RIA space, John Furey, founder and managing partner of Advisor Growth Strategies, warns of the “unforeseen risks of doing nothing” when it comes to business development and general growth strategies.

While RIAs don’t necessarily have to follow the herd toward mergers and acquisitions, Furey said advisors that aren’t aggressively thinking about the various forms of business development could be quickly left behind in an increasingly competitive financial advisory landscape.

As some of the largest RIAs in the country build nationwide footprints and push assets under management well into the tens of billions of dollars “in pursuit of this illusive thing we call scale,” Furey said RIAs with less than $400 million may have a difficult time standing out unless they develop a unique niche or some other special abilities.

“To compete with the larger firms, you need to really own your niche, or do a deal to scale up,” he said. “Or choose to do nothing and be like most other RIAs that don’t really grow.”

For context, even with all the headlines about mega mergers, the report shows the RIA space is still dominated by smaller practices.

There are about 9,500 RIAs with less than $100 million in client assets, according to the report, making that the largest category by far. That compares to the 2,700 firms managing between $100 million and $250 million.

At the other end of the spectrum, there are about 1,200 RIAs managing between $1 billion and $5 billion, and 258 firms managing more than $5 billion.

A key element of the data, however, involves market share by segment.

The 9,500 RIAs at the small end hold just 3.3% of the total assets under management, while the 258 mega RIAs have 47.4% of the total assets under management.

Furey’s report, ‘The Future of RIAs: Scale, Durability and Human Capital,’ touches on many of the themes and cases for consolidation that have been permeating the wealth management space for decades, but that now are seeing an increased sense of urgency.

Beyond some of the more obvious benefits of scale, including better access to technology, succession planning and the rigors of regulations, the report reminds advisors that client expectations are rising.

“Given advances in technology and sophistication of capabilities within larger firms, client expectations can only go one way — up,” the report states. “Larger firms will be better equipped to invest in their firms to manage these expectations. RIAs will need to develop their professionals to provide greater client education, develop their solution set to deliver deeper wealth management solutions, and anticipate client needs.”

While the report provides a comprehensive perspective on where the RIA space is coming from and where it’s likely headed, not everyone sees the eventual demise of smaller practices.

“John Furey brings up a number of good points in this white paper — especially with regards to the importance of scale in the RIA space,” said Chuck Failla, founder and chief executive of Sovereign Financial Group

“However, I do believe there is still room and frankly, demand, for smaller, even one-person shops,” Failla said. “I believe the rise of techstodians like Altruist and others will provide custody and tech solutions for advisors that want full independence. The good news is that choice and options still rule the RIA space, which is a great thing for advisors and their clients.”