The ongoing consolidation of RIAs through mergers and acquisitions (M&A) is shaping the landscape of the industry in ways that might not be fully understood for years to come. Statistics from recent months indicate industry M&A activity has picked up, especially when compared to the same months in previous years. In particular, M&A transactions in the summer months spiked to heights not seen since Fidelity Investments started tracking the data more than half a decade ago.
Industry analysts insist the frequency of RIA consolidation through M&A will continue to increase in the months and quarters ahead. In this article we’ll take a look at the impact of RIA consolidation in the context of the record-setting M&A rate, and the future of this competitive industry.
Breaking Down the Impact of RIA Consolidation
The rampant consolidation of RIAs through M&A will shape the industry moving forward. A recent survey shows nearly 55% of financial industry professionals and advisors anticipate the uptick in M&As will have a positive impact on company practices. Industry consolidation is leading to rising valuations as markets soar to new heights. Add in the fact that additional private equity is moving into the space and that many more financial professionals and advisors will consider making a move to monetize their business.
The increase in industry consolidations is partially the result of RIAs scooping up smaller RIAs and those of a similar size in the quest to make their practice that much more robust. Swallowing up another RIA facilitates scaling the enterprise, reduces the financial hit of fee compression, cuts overhead costs, and also reduces aggregate tech investment.
The perfect storm has brewed for continued RIA consolidation. Interest rates were hiked earlier this week yet they are still hovering around record low levels. The pressure from RIA clients who expect more service for less money, along with an increase in aging advisors, sets the stage for consolidation through unseen levels of mergers and acquisitions.
Small RIAs are Struggling to Adapt to Industry Consolidation
The bulk of RIA industry M&A activity is occurring within the market’s upper end, meaning comparably small firms are put in new and challenging position. Smaller firms are finding it difficult to compete with medium and larger sized RIAs after consolidation. As a result, that many more small RIAs are willing to consider the merits of a merger or acquisition, leading to even more industry consolidation.
It is becoming increasingly difficult for new RIAs, and those without significant capital or sizable client bases, to compete with the big boys. RIAs that joined through a merger or acquisition with an aggregate size in excess of $5 billion, have more dedicated support departments including marketing, HR, and portfolio management, and a cash-flush balance sheet which can easily outperform a smaller RIA.
It appears as though the days of owner-operator RIAs, in which financial specialists establish a meaningful relationship and rapport with each individual client, will become challenged in the future. The industry’s corporate consolidation is forcing more independent RIAs to consider corporate mergers and acquisitions, or these RIAs risk much slower growth. Though some smaller RIAs are able to take on additional costs, technology, and personnel to hang with the industry’s largest competitors, doing so is becoming more of a struggle with each passing day. It is possible some such RIAs will soon be forced to expand their services at a loss to remain competitive. Others will warm to the idea of entering into an M&A deal to stay afloat.
Is the M&A Trend a Net Negative or Positive for the RIA Industry?
RIA industry consolidation has made it difficult to maintain a level playing field, especially when an RIA is undersized or underfunded. An objective assessment of this industry trend shows there is a growing division that will spur significant long-term ramifications for individual RIAs as well as the sector as a whole.
Private equity firms are seizing the opportunity to invest in the RIA industry, partially because it makes sense to do so in the context of cash flow. As an example, in the past couple years, 60 RIAs with more than $10 billion have emerged as compared to merely a couple one decade ago. It is even more shocking to learn nearly 800 such firms are now valued in excess of a billion dollars when about 350 firms were at this valuation half a decade ago. All in all, private equity firms have scooped up in excess of $125 billion of advisory firms in the previous four years alone.
From the perspective of newer RIAs and those with comparably minimal funding or personnel, the industry’s consolidation trend is clearly a net negative. However, RIA owners who have cashed out as a result of M&A deals, or those whose businesses were saved as a result of such deals might perceive the consolidation trend as a net positive.
Regardless of how your RIA views industry consolidation, the trend probably won’t let up any time soon. What matters most is how your firm reacts to this trend and the overarching dynamics of the industry moving forward. Bridgemark Strategies is here to help you navigate the maze.
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Bridgemark Strategies is a recruiting, consulting, and M&A firm. We help advisors assess, evaluate and negotiate their search for a broker dealer, RIA, or strategic partner. Our experience and success is unparalleled in the industry in helping advisors find their next firm. Reach out to us today at (866)266-8823 or on the web through our contact form for a confidential discussion and more information about our services.