RIAs are Growing Rapidly but not Equally. Here’s Why
February 22, 2024 | Tobias Salinger
The growth of registered investment advisory firms is accelerating, but their fragmentation is giving the largest ones an edge in confronting the challenges of launching and expanding.
Financial advisor headcounts at RIAs surged 9% and the number of retail client-focused firms in the channel jumped 11% in 2022 — compared to their assets declining by 13% amid slumping stocks and bonds that year and an annualized headcount increase rate of just 4% over the previous decade, research consultancy Cerulli Associates found in a study earlier this month.
Advisor breakaway moves from wirehouses, regional firms and independent brokerages will keep driving the channel's market share as the volume of RIAs reaches record levels each year.
Within the continuing momentum of RIAs, though, experts say advisors may be taking risks in trying to compete with giant consolidators that are vacuuming up smaller firms by the billions of dollars in client assets and in taking on the added burden of completing a variety of tasks that used to be handled by a corporate office.
"Reflecting on the last 12 months, what I've noticed is what the report shares: an increase in new independent RIAs seeking autonomy," RIA business coach and operations consultant Cameo Roberson of Atlas Park Consulting and Finance said in an email. "I'm currently working with three new firms launching this spring. From an operations and practice management perspective, particularly those who previously worked at employee models were told how to run their businesses, when to jump and how high. It's new territory as an independent where you must figure things out on your own."
Compliance questions such as creating written supervisory procedures and registration requirements often lose out on the list of priorities to issues like the advisors' choices of custodian, marketing tools, planning software or other technology vendors, according to Scott Gill, the CEO of Synergy RIA Compliance Solutions.
"A lot of advisors dont have the compliance knowledge and expertise to design their firm's compliance program," Gill said in an interview. "Advisors get overwhelmed with the pieces of the puzzle that are right in front of them that are, quite honestly, more exciting."
The numbers
The vast majority of RIAs remain relatively small firms. Just 7% manage more than $1 billion in client assets, and only 8% have a staff with more than 10 employees, according to Cerulli. Yet the channel keeps grabbing market share from the competition: the current count of 78,282 advisors at independent and hybrid RIAs represents 27% of the total across the industry. That portion will climb to 30% by the end of 2027.
In terms of assets, the RIA channel's piece of the market will rise by 5 percentage points to 32% between 2022 and 2027.Those gains aren't going to flow to all RIAs equally. The private equity investors and consolidators often deploying their capital will tap into "acquisition opportunities among growth-challenged firms with complementary processes, talent, and clients," the report said.
"2022 continued to highlight the obstacles that many smaller firms face due to not having the resources or capacity to differentiate and foster inorganic growth in a challenging market," Cerulli Senior Analyst Stephen Caruso said in a statement. "The largest RIAs will continue to dominate as breakaway teams leave employee-based models to join large established RIAs that offer more autonomy, without advisors needing to sacrifice resources that they are accustomed to.
"RIAs with more than $1 billion in client assets manage 71% of the channel's total holdings and employ 47% of its advisors, and the consolidators are flying with a tailwind amounting to an addressable market of firms looking for a buyer while managing $3.3 trillion in assets. That includes about $2.3 trillion from expected advisor retirements, with the rest divided roughly evenly between breakaway teams and "growth-challenged" RIAs. Their advisors manage, on average, about $35 million more client assets than those at other RIAs.
And they have another potential advantage over independent brokerages that work with hybrid RIAs. More than a third, or 37%, of hybrid advisors told Cerulli they plan to drop their brokerage affiliation at some point, with the vast majority saying their broker-dealer isn't adding enough value for the cost.
"Over half of hybrid RIAs report back-office and operational support and a technology platform from their BD are very important services," the report said. "As RIA consolidators mature, their best-of-breed platforms present an attrition risk for BDs that do not improve their offerings."
Threats large and small
In other words, independent broker-dealers face a competitive threat from RIA consolidators that often charge clients and advisors lower fees, according to recruiter Simon Hoyle of RIA Choice."
A confluence of wirehouse advisors finally finding the independent model worth jumping to, combined with IBD advisors craving more flexibility, better technology and a different service model (to enjoy the major benefits of using direct institutional custodians like [Charles] Schwab, Fidelity [Investments] and many other appealing providers," Hoyle said in an email. "Wirehouse advisors have gained some independence but have enjoyed tuck-in RIAs. No longer beholden to production requirements and receiving a bevy of practice-related improvements, they have supported independence. Quality of life and eschewing the pressures of selling high-profit margin products is a breath of fresh air."
In particular, technology is playing a major role in helping advisors launch RIAs, Gill said.
"The catalyst for the growth in that segment of that business is heavily predicated on technology," he said. "There are now so many tools that are available for advisors to launch and run their own practice that it makes the process seem a lot more feasible than it used to seem a decade or two decades ago.
"Still, the newly independent advisors must figure out how to handle needs like compliance, day-to-day operations and the client experience outside of systems "where things were all spelled out" for them, Roberson said. Many advisors "don't know what they don't know" and aren't sure what to ask, she said.
"New RIAs will eventually figure it out, but often by trial and error," Roberson said. "The race to build a firm is torrid, with operations often taking a backseat, until things are too chaotic to continue 'business as usual.' As they grow, prudent advisors who build operational systems sooner versus later will be happy when it's time to add staff or seek to automate processes within their firms."
IBDs will Continue to get Closer to the Advisor in 2024
December 22, 2023
The independent broker/dealers that tighten connections with their advisors and demonstrate flexibility in their affiliation models will be competitive in the year ahead.
When you think about innovation and creativity in the wealth management industry, the independent broker/dealer channel does not typically stand out. Industry observers expect more of the same from IBDs next year—continued consolidation among the larger players, more private equity flowing into the space, a fierce battle for advisor talent and the continued evolution toward the advisory model.
Matt Lynch, managing partner of Strategy & Resources, a financial services consulting firm, argues, however, that there are pockets of innovation in the channel. Firms that are connecting themselves more closely or more permanently to the advisor’s business are setting themselves apart. That may take the form of acquiring their own offices of supervisory jurisdiction or providing capital for succession.
“A lot of the challenges, particularly for the larger firms, are to try to continue to have some sort of definition around what the affiliation with that particular firm means to a given advisor—the character, culture of the firm or how they’re really helping them with their growth of their business and remaining relevant to them,” Lynch said.
IBDs have been addressing that by taking ownership stakes in advisor practices. In 2022, Osaic (formerly Advisor Group) entered the M&A market for the first time, making a minority investment in Signature Estate & Investment Advisors, a Los Angeles-based hybrid RIA. This year, LPL expanded its liquidity and succession offering to unaffiliated advisors.
Under that program, the IBD acquires practices with principals nearing—but not yet at—retirement and commits to spending 10 to 13 years supporting a next generation that will eventually have the option to take control without the steep price tag—or any cost at all. In February and April, respectively, Cetera announced minority investments in Prosperity Advisors and NetVEST Financial. And in June, the broker/dealer network announced the purchase of The Retirement Planning Group, its first acquisition of a pure RIA.
Industry observers expect to see more of those deals in 2024 as the large IBDs aim to stop advisors from leaving to get big checks to sell to someone else. That’s a big fear for the large firms, given the average age of advisors in the industry, with many near retirement, said Jodie Papike, CEO and managing partner of Cross-Search.
“To stop any kind of bleeding, firms have got creative to say, ‘We have all this capital, what should we do with it?’ And if they invest it into purchasing a percentage of an advisor's practice or large OSJs’ practices, I think it's all about keeping people with them so that they don't lose assets,” Papike said. “And it also gives the advisors in the situation some capital to do whatever they want with it without having to make a move.”
In recent years, some firms have launched affiliation options to provide their advisors with more choices in structuring their businesses. That's been a way for IBDs to keep those advisors under their umbrellas. Take LPL, for instance, with its W2 model, its RIA option, and, most recently, its W2 offering for high-net-worth advisors. There are other examples too, such as Commonwealth’s RIA-only offering, and Kestra Financial’s Bluespring Wealth Partners.
“The IBDs that are demonstrating flexibility and have maybe multiple affiliation options, where the advisor can tap into the services that they need for the structure they want to have are probably the ones that are going to continue to grow,” Lynch said. “The ones that are coming out with some flexibility are going to hang onto the advisors longer and be more attractive to the advisors whose businesses are evolving and growing.”
The trend will continue toward advisory, fee-based business, and a lot of advisors want to serve that business via their own RIA.
That said, IBDs will have to act more like independent RIAs, not just try to look like them, said Simon Hoyle, owner of RIA Choice, a recruiting firm in the IBD and RIA channels. There are wholesale differences between the two models, and those that have repositioned themselves carry the real advantages.
“IBDs who cling to higher profit margins from advisory platform and custodial access fees will have to adapt to be competitive,” Hoyle said. “As the independent RIA gate swings more widely open we’ll see increased numbers of IBDs lowering and possibly eliminating some practice-related fees.”
Independent RIAs, for instance, typically charge a flat fee of between 8 to 12 basis points. IBDs will likely share more of their scale with the advisors to be competitive.
They’ll also outsource more of the big technology components, Hoyle argued.
“The legacy proprietary technology that worked a long time ago isn't typically as effective, nor does it seem to perform as well as the off-the-shelf solutions,” Hoyle said.
For example, IBDs may use their technology budgets to enhance their Orion/Salesforce relationship via in-house or contracted experts, to further integrate internal functionality that not only frees up more of an advisor’s day, but also enables clients to access account information with fewer login steps.
Three to four years ago, there were some emerging technology capabilities in the IBD space that might have tilted the scale in favor of one firm or another, Lynch said. Now, all the tech stacks are pretty similar. But the support of that tech stack and consultative approach—the training, the help desk, ease of use, is where some IBDs can have an advantage over others in 2024.
“There’s less room to carve out a distinction just based on tech,” Lynch said.“If we look at the IBDs that continue to thrive and grow—in the time certainly that I’ve been around the business—they’ve reinvented themselves 10 times.
I see that continued, entrepreneurial spirit,” Lynch added. “I think it’s a bright future for the IBDs that have flexibility and are listening to their customers.”
Inside Osaic's plans for Lincoln's Wealth Business after the $700M deal
December 20, 2023
Osaic's latest giant deal to acquire the wealth management business of Lincoln Financial Group will spin another insurance company out of a rapidly consolidating — yet growing — industry.
Phoenix-based Osaic, the private equity-backed firm formerly known as Advisor Group, secured an agreement to purchase Radnor, Pennsylvania-based Lincoln Financial’s wealth arms — Lincoln Financial Advisors and Lincoln Financial Securities — at a price of $700 million in “capital benefit” upon the expected close in the first half of 2024, the firms said last week. As only the most recent insurance firm to follow a long line of and onetime Osaic parent AIG that have sold companies like Securian Financial Group their wealth businesses, Lincoln has been on a self-described “rebuilding” plan amid its removal from the S&P 500 index earlier this year.
The influx of about 1,450 financial advisors with $38 billion in assets under management and another $71 billion under advisement poses complications to Osaic’s debt levels and advisor retention strategy as the firm goes through its own restructuring from eight brokerages into one. Rivals are peeling off teams of advisors who say they got fed up with declining service and attention from the corporate office, and Moody's Investors Service put Osaic’s parent on review for a potential credit downgrade after the Lincoln announcement.
Osaic has “a lot of work to do” roughly halfway through what is “a transformation of our relationship model while we're getting larger,” CEO Jamie Price acknowledged in an interview. The firm is investing more resources into managing its relationships with more than 10,500 advisors across Osaic by “sub-segmenting them” into groups such as independent registered investment advisory firms, solo practices or large branches in a similar way to how consumer-facing companies classify potential customers, Price said.
“That is exactly how we have been thinking about our relationship management efforts in the field,” he said. “It’s less about scale and size and more about, how do you actually bring value to the advisors in the unique way they do business, but do it in a scaled way?”
Price said the company hasn’t made any announcements about whether the incoming Lincoln advisors will get retention bonuses but pledged that Osaic is working with the sellers on that question and will have “more to say about that later.” Osaic also has yet to set an exact timeline for the transition of Lincoln’s advisors to Osaic, although Price noted that would come at some point after the regulatory approvals for the deal and the date of the close.
Lincoln’s rebuilding plans
Lincoln has been “one of the top providers of protection products on our platform” for years, and the fact that it and Osaic use Fidelity Investments’ National Financial Services as a custody and clearing firm means that there will be “little or no repapering at all” for advisors and clients in the migration, Price said.
“They have always had a really good reputation in the industry. … They are heavy advisory, heavy financial planning, and yet still do estate planning and protection as well,” he said. “It made for an easy transition for advisors — that's the second hurdle that we always have to think about.”
Representatives for Lincoln declined to comment on whether there will be retention bonuses, with spokeswoman Sarah Boxler saying in an email that the company considers personal compensation to be private information. About 500 corporate employees will move to Osaic, without any job losses associated with the deal, she noted.
David Berkowitz, the head of Lincoln Financial Advisors and president of its wealth business, will stay in a leadership position through the close, Boxler noted.
“David does plan to retire in 2024, and Lincoln had already been preparing for David’s upcoming retirement with a succession planning process that involved working closely with his immediate leadership team,” Boxler said. “The plan is for [Chief Operating Officer and Head of Wealth Management] Ed Walters to transition into a leadership role as David retires.”
The firm will send “negative consent letters” to clients informing them of the transaction, but they “should not experience any immediate changes or disruptions,” Boxler said. Following the close, they’ll start to see new branding on account statements and other materials.
“Lincoln entered into an agreement with Osaic because the transaction enables Lincoln to continue to focus on growing our individual insurance solutions and workplace solutions businesses and leveraging our core strengths, including our distribution leadership and strong brand, to deliver future value for all of our stakeholders,” Boxler said.
The company and other life insurance carriers struggled during the pandemic from the uptick in deaths, and Lincoln faced other losses stemming from holding tens of millions of dollars in Silicon Valley Bank’s unsecured debt and changes to its statistical assumptions about certain annuities, according to an analysis in September by investing website The Motley Fool. The proceeds from the Osaic deal will “primarily” go toward boosting the firm’s risk-based capital ratio, with a portion helping to reduce Lincoln’s debt leverage and no expected impact to cash flow or earnings, according to the firm’s announcement last week.
“We entered 2023 with a clear focus on taking actions to support rebuilding our capital position and delivering long-term profitable growth,” Lincoln CEO Ellen Cooper said in prepared remarks on the firm’s third-quarter earnings call last month. “We have a powerful franchise, trusted brand, distribution leadership and broad diversified product solutions across our four businesses. These elements serve as a solid foundation as we reposition the company to deliver increasing value to our shareholders. While our third quarter results fell short of our expectations; I firmly believe we are continuing to make good progress on improving the underlying strength of the business, taking the necessary steps to repair the balance sheet and evaluating additional actions to further accelerate our path to recovery.”
Industry experts’ views
Lincoln “supports an ecosystem of networking” among its advisors, whom the company has encouraged to provide planning services through resources such as the comprehensive tools from its National Planning Institute, according to Simon Hoyle, the former director of business development for the Securities Service Network.
Osaic purchased that firm in 2020 as part of its last mega-acquisition for the Ladenburg Thalmann network. Hoyle has since launched RIA Choice, a recruiting firm for independent brokerages and RIAs. Stay bonuses would be “smartly offered and need to be agreed upon by advisors well before the actual transition,” especially to avoid departures by the top advisors at the firm operating as centers of influence among their peers, Hoyle said in an email.
“When companies are in mega-growth mode like this, private equity ownership can feel even more corporate to their independent advisors who’ve enjoyed smaller communities and close relationships, but with big firm backing and resources,” he said. “Tucking into a huge firm can dilute relationships. And repeated broker-dealer purchases, while significant internal operational overhauls are in progress, don’t feel as friendly, especially when consolidation impacts seasoned home-office staff.”
Firms like Osaic, Cetera Financial Group and Atria Wealth Solutions are deploying substantial private equity capital toward economies of scale in response to rising expenses in areas like technology and regulation, according to Brian Lauzon, a managing director with Boston-based investment bank and transaction advisory firm Colchester Partners.
The Osaic-Lincoln deal “struck me as continued consolidation in a market that has very low margins,” he said. “The definition of ‘large’ is being redefined all the time.”
Profit margins at independent brokerages and RIA custody firms “are razor-thin,” according to John Furey, managing partner of consulting and deal advisory firm Advisor Growth Strategies.
“Clearly this a capability and distribution play. Lincoln has an army of registered representatives, and Osaic is consolidating broker dealers. I see this as a clear indication of building one of the largest integrated wealth platforms in the U.S.,” Furey said in an email. “To better compete with RIAs, independent brokerage platforms will need to deliver far better technology and practice support to their advisors. Smaller independent brokerages will continue to be consolidated or simply shutter.”
Interestingly, the news reports from earlier this month that Osaic owner Reverence Capital Partners is soliciting offers of up to $2.5 billion for a 20% stake in the firm are citing roughly the same price tag for the entire firm that circulated when Reverence purchased Advisor Group in 2019, Hoyle pointed out.
“By selling off just 20% at their asking price, they will break even, and anything more could be profit,” he said. “So, financially, it would be hard to argue this wasn’t an effective strategy. But for some advisors, the changes feel more like a rolling wheel. Osaic is in the midst of consolidating all their BDs into one — the Osaic brand — and will be onboarding many of Lincoln Financial's 1,400 advisors.
“Some Osaic advisors feel headquarters had unfinished house chores to do before fishing again. PE’s ability to generate shiny returns may be shrinking; potential profits are likely lower over time as previous buyers harvested the lowest hanging fruit,” Hoyle added.
Review for credit downgrade
Moody’s is reviewing “the planned acquisition's possible negative effect on Osaic's financial profile,” according to a Dec. 18 note by analyst Gabriel Hack. The stated capital benefit to Lincoln of $700 million implies that “the purchase price paid by Osaic will be at least that amount and likely higher,” he wrote. The acquisition might require the firm to issue more debt notes for financing on top of its existing cash on hand from another raise this year.
“A new debt issuance could lead to a worsening in Osaic's interest coverage and debt leverage that could adversely affect its financial profile,” Hack wrote. “Increased scale and the possible synergies that could exist from the transaction may provide credit benefits.”
For his part, Price said he’s “not worried about our financial modeling at all,” praising Reverence as “very, very good stewards” of the firm and noting that there are many divergent views on whether it’s better to be a private company or a publicly traded one.
“We could argue that all day long,” Price said. “I, quite frankly, like the fact right now that we're not public. We have much more flexibility in our capital structure because of it.”