The wealth management industry is much different today than what many independent financial advisors got used to over the last decade.
From 2011 to 2021, the number of registered investment advisors swelled from 10,511 to 14,806 firms, according to data from the U.S. Securities and Exchange Commission collected by the Investment Adviser Association in their Investment Adviser Industry Snapshot 2023. According to the IAA, over that same period, assets managed by SEC-registered RIAs grew from $49 trillion to more than $128 trillion. Interest rates were low, M&A was high and it feels like independent advisors got fat and happy from an equity bull market that not even a global pandemic could stop.
It seems everything changed in 2022. The Federal Reserve raised interest rates to combat inflation and markets responded with a correction. According to the IAA Snapshot 2023, while the number of RIAs continued to increase in 2022, total assets under management fell 11% from the previous year, the first decline since 2008. For the thousands of advisors who made the move to independence over the previous decade, some were likely shocked to learn that the gravy train could, in fact, slow down.
From my view, the dip exposed something about the industry: that many financial advisors were simply coasting on market gains rather than actively working at growing their business. Capital market performance was responsible for 70% of asset growth across U.S. wealth management, McKinsey & Company estimated in January 2023. A white paper from Mark Hurley, founder of Fiduciary Network and CEO of Privacy & Protection, estimated that more than 70% of RIAs would have shrunk if not for the U.S. equity market.
How did this happen, especially given that most (95%, according to the IAA) RIAs’ compensation is tied to AUM? Was the industry simply “lulled to sleep,” as Hurley suggested?
One reason, I believe, is that many of the new RIAs founded over the last decade came up through the wirehouse world, where they primarily found new customers through internal referrals. For all their experience in managing portfolios, these advisors didn’t necessarily get a lot of hands-on experience in finding new clients and assets.
Independence also means advisors must be business owners, something that isn’t asked of them in the employee model. Between technology, office space, compliance, trading, asset custody and clearing, and finding and hiring employees, there is a lot that independent advisors do all on their own, before figuring out and executing a growth strategy.
Whatever the reason may be, it is imperative that the RIA industry get back to organic growth. The dip in 2022 should have been enough of a wakeup call, but just imagine what a larger, more prolonged market event could do to firms that aren’t focused on bringing in new clients.
There is also the impending succession crisis in wealth management. Roughly 100,000 financial advisors controlling $10 trillion in client assets are on track to retire over the next 10 years, according to data from Cerulli Associates. A quarter of those advisors don’t have a concrete succession plan, while another 30% are hoping to sell their business.
But if those firms can’t prove they are growing organically, that they are doing more than just riding the markets, I don’t believe they’re going to receive the kind of paycheck they dream of for a happy retirement.
This is especially true in the current market environment of higher interest rates and restrictive financing caused by last year’s banking crisis. It should be no surprise that M&A activity in the RIA industry was down 5.9% year-over-year in 2023, according to Echelon Partners’ second-quarter RIA M&A Deal Report, and January had less activity than the same month in 2022.
On the other side of the M&A equation, aggregators also need to jumpstart stagnating RIAs they’ve acquired. With the increased role that private equity plays in our industry (PE firms were directly or indirectly involved in 61% of M&A deals in 2023, Echelon reported), aggregators need to ensure that acquired firms are generating the ROI that their backers expect to see.
Advisors need to get back to the grassroots efforts of building an RIA: client referrals, shaking hands, making phone calls, attending industry events, getting into professional circles and networking with other professionals. And they need coaches, mentors and service providers dedicated to helping their firm design and implement a plan for growth, and a succession that maximizes the value of the business they built.
It's how, I believe, we can work together to reignite the powerful growth engine of the RIA industry.
Robb Baldwin is the founder, president and CEO of TradePMR, member FINRA/SIPC.