[Editor's note: The full source for details on the negative organic growth rate of RIAs in 2022 -- Steve Sanduski -- has has been added and was unintentionally excluded from an earlier version of this commentary piece.]
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The independent RIA industry remains the fastest-growing segment in financial services, a crown it has held onto for the past several decades.
But despite this continued growth — which is tied to RIAs' ability to win in the marketplace by leveraging their fiduciary, fee-based advice models — there remains an underlying and troubling concern: the majority of recent "growth" has been coming from market appreciation and accelerating merger and acquisition activities, rather than from true organic sources, such as current clients depositing incremental new assets and the onboarding of new clients.
Market appreciation has been a major factor in the growth of the industry and perhaps has led to complacency on the marketing front for advisors, as strong bull markets drove incremental fee-based revenues year after year, potentially covering up for a lack of focus. As international cricketer Kapil Dev once said, "If you play good cricket, a lot of bad things get hidden."
Mega-RIAs, Wirehouses Still on a Roll
While growth has been consistently strong for the 30,000-plus RIA firms in the industry, it has not been equal. Research from the Investment Adviser Association shows that the vast majority of industry growth has been accruing to the largest firms, such as the emerging market dominators that each have north of $5 billion in assets under management.
These mega-RIAs represent only 10% of the total number of advisory firms, yet control 93% of all RIA assets. In other words, 90% of RIA firms are struggling to remain viable businesses.
The average RIA firm had negative revenue growth over the past five years when market appreciation is excluded — using a traditional 60/40 market portfolio as a proxy for RIA investment allocations, according to business coach and CFP Steve Sanduski's analysis of Schwab's 2022 RIA Benchmarking Study.
This trend is becoming an increasingly troubling development for the long-term sustainability of the industry, as competition increases rapidly from both new and old sources.
Once viewed as dead in the water and obsolete after the financial crisis of 2007-2008, the traditional wirehouses are remaking themselves. They're co-opting the messaging of independent advisors by referring to their financial planning capabilities in broad-based marketing campaigns, which has resulted in regular headlines that broadcast "record-breaking" wealth management revenues for these once-tarnished Wall Street brands.
In fact, one wirehouse firm brought in $110 billion in net new assets last quarter, and now has $4.6 trillion in client assets in its wealth unit, showing that the wirehouses are on a roll.
Industry Under Pressure
At the same time, discount brokers and digital players are promising investors comprehensive wealth services for a fraction of what other firms charge. Industry consolidation through M&A is creating the RIA mega-firms mentioned above, which are sopping up the majority of the independent-advisor industry's organic growth.
Compounding this increasingly competitive environment is the aging of the industry — in terms of both advisors and investor clients. As popular industry consultant Mark Tibergien, the former CEO of Pershing Advisor Solutions, explained, "The RIA industry was built by baby boomers for baby boomers."
This means that as these baby boomers enter retirement in massive numbers each year, they're no longer accumulating assets for their aging advisors to manage. Rather, they're decumulating assets, and by taking withdrawals to fund their retirement, this further constricts firm growth.
At the same time, the No. 1 source of new business for advisory firms continues to be referrals, and they're under pressure as a reliable source of growth as partnering professionals like CPAs rapidly enter the wealth business. Thus, traditional referral activities are just not enough to make up for client withdrawals being used to fund retirement spending.
When combined with a much more volatile market climate, advisors find they can no longer rely on steady market-fueled windfalls every year to drive their growth and compensate for lost revenues tied to client turnover and asset decumulation.
