Page 26 - Investment Advisor June 2023

Cover Story

just growing in size,” noted Shtyrkov. “It’s growing up and get- consolidation after a short pause created by the pandemic,
ting more mature and more sophisticated in terms of the types according to Caruso. He expects to see more consolidation
of firms that are in the RIA channel [and] the largest RIA firms but doesn’t think “we’ll reach a point where there’s just 10
control the vast majority of assets,” while employing over 60% players in the market.”
of advisors in the RIA sector, she said. Meanwhile, there remains a “steady undercurrent of private
As a result, the researcher said, challenges of those larger RIA capital that’s woven through the RIA channels,” he said, noting
firms are “just a lot different than their smaller peers.” Some private capital “really stepped in” to support the recent growth
main challenges reported by RIA firms are the same regardless in the RIA industry.
of their size, such as compliance and regulatory filings. the addressable market for rIA acquisitions will reach $3.7
“But in some of the other aspects, there are some crucial trillion over the next 5–10 years. That includes $2.6 trillion
differences depending on the size of the firm,” she explained. from advisor retirement, about $600 billion from growth-
For example, smaller RIAs are “much more concerned about challenged RIAs, and $506 billion from breakaway advisors,
the impact of future regulation.” according to Caruso. He called the $2.6 trillion an “amaz-
Custodian use is tied to ing amount” of available
rIA firm size, with $250 “RIAs are very happy with getting ... capital, adding the lack
million being the tipping business model support. Building a scale of succession planning is
point. There has been a business in the wealth management space a major issue across the
great deal of change in the industry.
custodial space, Shtyrkov requires a significant level of operational rIAs need more than
noted. And “RIA firm size expertise from connecting the disparate money to grow. Cerulli
definitely plays a role” in has “identified three key
what custodian is select- technology pieces that you’re using on a value-add support areas”
ed by an RIA firm and daily basis to centralizing marketing.” in its research, Caruso
how many custodians are said. He pointed to the
selected, she said. —Stephen Caruso importance of having an
Most RIAs are small M&A strategy, business
and have “relatively limited resources [and] less operational com- model support, and marketplace development. Consolidators
plexity than larger firms, and so having just one custodian is typi- can often be very helpful, he added.
cally simpler” for those smaller firms, she explained. Custodians “RIAs are very happy with getting … business model sup-
also “typically give more favorable pricing [and] better support to port,” he said, noting: “Building a scale business in the wealth
RIAs that have more assets on their platform,” she said. management space requires a significant level of operational
Inertia and the inconvenience of repapering benefit incum- expertise from connecting the disparate technology pieces
bent players. Very few firms add a custodian or switch to a that you’re using on a daily basis to centralizing marketing.”
different one, Shtyrkov said. Only 24% of RIA firms polled Private equity is setting its sights on the next generation of
said they were exploring adding a new custodian in the next 12 rIAs. The growth opportunities for RIA acquirers continue,
months and just 4% said they switched custodians in the past and private equity firms want to be involved as the “opportu-
12 months, she noted. nity becomes more accessible,” Caruso said. “Growing rapidly,
It is “far more likely that an RIA is going to add a custodian emerging consolidators access growth capital much earlier in
to try to fill in any gaps in the services, the capabilities that their life cycles” than other firms, according to Cerulli.
they’re currently getting at their existing custodial providers,” Frequent changes and increasing complexity are leaving
she said. Larger RIAs are more likely to be looking for a new wirehouse advisors dissatisfied with their compensation plans.
custodian and nearly 50% of RIAs with $500 million or more “The wirehouse channel has significantly more advisors who
in assets say they’re exploring adding a new custodian over the are saying that they’re dissatisfied with their compensation
next year, she added. overall” than the other channels, according to Cerulli research,
These bigger RIAs are also “more willing to take on new Shtyrkov pointed out.
custodial relationships to accommodate practices that they’re She highlighted advisor polling data that shows 24% of
acquiring,” she added. “Unwinding a custodial relationship is respondents from the wirehouse channel disagree or strongly
still operationally really difficult [and] there’s just a lot of iner- disagree with the statement that they’re “happy” in their
tia that keeps advisors with their current” custodians. That jobs, compared with just 5% in the national regional broker-
and a desire to not “disrupt the client experience unless they dealer channel and 7% in the independent BD channel. As a
really have to.” result, the industry is seeing “a lot of modification [and] a lot
A decade of rapid consolidation is expected, buoyed by of changes to compensation plans among the wirehouses,”
private capital investment. There has been a return to Shtyrkov said.

24 Investment AdvIsor June 2023 | ThinkAdvisor.com