Are smaller RIA firms facing extinction? Maybe not

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The RIA industry is rapidly consolidating, right?

No, actually, not at all.

Over the last decade, the total number of state-registered RIA firms has not declined in a single year (specifically, firms with less than $100 million in regulatory assets under management register with the relevant states). At the end of 2008, there were approximately 13,800 firms. That number soared to more than 17,500 firms by early 2018.

Of the more than 30,000 RIA firms now registered with SEC or at the state level, roughly two-thirds have less than $100 million in AUM.

As the number of RIA firms consistently grows each year, our industry is not becoming more consolidated. It’s becoming more fragmented.

Using traditional business logic, we would assume that smaller RIA firms must be struggling, perhaps at risk of extinction. But industry statistics can sometimes paint a confusing picture. In fact, the number of smaller investment advisory firms continues to expand.

Case in point: The average AUM for all RIA firms is close to $2.6 billion, according to the latest public filing data from the SEC. Yet only 2,000 firms exceed that average. A more revealing statistic is the median AUM, approximately $38 million. That means at least 15,000 firms each manage less than $38 million.

Far from collapsing, however, smaller firms appear to be thriving.

In 2017, more than 1,500 firms were started. The total number of RIA firms grew to 30,193 from 29,685, the latest SEC data shows. Deal-making hasn’t reduced the number much. A total of 147 firms were acquired in 2017, according to DeVoe & Company.

Approximately 845 firms went out of business without being acquired.
With around 30,000 firms in total, this translates to 2.8% of all RIA firms. Thus, the combined total of roughly 1,000 firms being acquired or going out of business can’t keep pace with the 1,500 new firms starting each year.

As the number of RIA firms consistently grows each year, our industry is not becoming more consolidated. It’s becoming more fragmented.

Indeed, we may be in the early innings of an even more fragmented RIA market in years to come. As the recent 2018 FINRA industry snapshot shows, more than 685,000 registered individuals work in the securities industry; fewer than 60,000 of those are registered exclusively to RIA firms.

Not so long ago, starting and managing an RIA firm was an arduous process. Now, broadband internet access, email and web-based software empower entrepreneurs to do things no small business owner could have imagined less than 20 years ago — all while driving down the cost of doing business.

Even the smallest firms can gain access to technology that improves efficiency and delivers a big firm client and investment experience. The continued emergence of better, and more automated, adviser technology is a key driver of the industry’s continued fragmentation.

Skeptics may argue that the long-running bull market masked the challenges ahead, as inflated industry profit margins decrease dramatically during the next inevitable market downturn. Yet during the 2008-2011 market downturn, the number of RIA firms grew, surprisingly, by nearly 1,000. Will the next time around be different? It’s possible, but we must acknowledge that, to date, the RIA industry has been the antithesis of a consolidating industry.

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