Super RIAs dominate the industry to such an extent that they can drive changes in wholesaling and other third-party services, according to new research by Cerulli Associates. Even so, challenges caused by their very size undermine their superiority.
At least 687 firms out of 18,225 retail-focused RIAs have reached more than $1 billion in assets under management, the Boston-based consulting firm said this week. Such RIAs manage $2.4 trillion in AUM, which Cerulli says is an increased market share requiring bulked-up capacity for high-net-worth clients.
Record-setting M&A deals and breakaway advisors are boosting assets at the largest RIAs. Consolidators and platform providers like Dynasty Financial Partners, Focus Financial Partners and HighTower Advisors provide capital and turnkey support. Still, the growth poses questions about recruiting and succession, Cerulli says.
“As firms professionalize and create more specialized roles to deliver high-net-worth-level services, the talent required to execute on those functions also increases,” according to the firm’s report. “Billion-dollar RIAs need to seriously consider creating professional management roles, which is expensive talent to retain and source.”
RIAs should reel in CIOs, analysts and operations executives from wirehouses and other large brokerages to address the issue, Cerulli says. Independent firms may need to match steep counteroffers, but they will be able to leverage the larger responsibility presented by C-suite roles at growing RIAs.
TENSIONS WITH IBDs, WHOLESALERS
Billion-dollar RIAs threaten independent broker-dealers, even as the hybrid channels at top IBDs like LPL Financial and Raymond James serve as a viable alternative, according to Cerulli. Only 35% of hybrid RIAs agree or strongly agree that they will eventually drop their BD, advisors said in the firm’s annual survey.
Hybrid advisors want to remain with their BD so they can provide both commission and fee-based services, along with using the technology and compliance provided by their BD, according to the survey. On the flip side, advisors ready to leave hybrids cited operating only as a fiduciary as the primary reason.
The survey also revealed tension between RIAs and product sales staff at insurance and investment firms. On average, RIAs classified only nine out of 33 weekly contacts from wholesalers as meaningful, while more than 80% of wholesalers said a lack of receptivity from RIAs is a challenge to business.
Greater in-house staffing and autonomy at RIAs “necessitate a different type of engagement,” according to the Cerulli report. Wholesalers can adjust by creating a specialist support layer equipped to deal with the immediate problems of RIAs in a timely manner, Cerulli says.
BY THE NUMBERS
Regardless, third-party firms can tap into the continued growth of RIAs. Some 21% of all advisors worked at RIAs of all types and sizes in 2016, up nearly 11 percentage points over the past decade, according to Cerulli.
Focus Financial’s AUM jumped 30% last year, slightly more than the 26% growth at the nearest rival firm, Dynasty, and above the 19% increase at HighTower. In terms of three-year compound annual growth rate, Dynasty outpaced all other firms at 31%.
Despite these impressive results, the giant consolidators and platform providers have already begun adjusting their offerings for a changing space. HighTower launched an RIA platform with no required equity stake for the firm, and Dynasty is considering equity deals outside its core platform, according to Cerulli.
They have to make such changes to address “the risk of long-term attrition,” the report says.
“As an RIA builds scale and infrastructure, they could decide to forego paying a platform fee and instead operate autonomously by affiliating directly with a custodian,” according to the report. “Platforms need to consider service and pricing models that evolve with their clients’ needs over time.”