How does the RIA industry justify acquisitions with high-flying multiples while net organic growth stagnates?
Managed assets don’t tell the whole story. To get a clear answer, we need to look under the hood at the engine driving business growth right now.
A study released in November 2023 by Fidelity highlighted that organic asset growth at $1 billion-plus AUM RIA firms dropped from 8.2% in 2021 to 3.6% in 2022. The results made some industry news headlines, but for the most part, dealmakers at serial acquirers and private equity shops shrugged off the news. The truth is that many RIAs are finding ways to add to revenue, with upside not captured by traditional AUM statistics.
The confluence of three trends creates an alternative pathway to revenue growth outside the fees for advice on assets under management:
- The concept of being a fiduciary has been interpreted differently. It wasn’t long ago that fee-only advice business was deemed the most “pure” way of being a fiduciary advisor. There could be no way that compensation wouldn’t create conflict with the advice a client received. However, many well-respected RIAs have built comprehensive, systematized insurance programs alongside their traditional advice businesses. They recognize that in most financial plans, there should be an insurance review to cover risk management and estate planning needs. A fiduciary advisor should ensure that any gaps that exist are addressed for the client’s benefit. That is acting in the client’s best interest.
- Competition drives advisors to offer more services for the same fee. As more RIAs compete to manage money for wealthy clients, the firms that offer conventional retirement planning or investment management services are challenged to keep up with those that can more holistically address clients’ entire financial life picture. Clients ask, “What else can my advisor do for me?” Growing RIAs answer them with integrated guidance around financial decisions, investments, risk management, taxes, estate planning and retirement needs.
- Efficiencies of scale allow firms to implement cohesive, repeatable processes to address more client financial issues. As they assimilate offices with different processes or recognize the need to introduce new services, the firms with scale have the resources to create solutions around estate planning, tax, investments and insurance that are less attainable for the average firm. There is both the opportunity to deliver a refined service and the risk of not aligning all their advisors under the same approach.
By rethinking what a fiduciary advisor should deliver while meeting the demand for a more robust service offering, these ascending firms have unlocked a pathway to more revenue.
There are $10 billion RIA firms out there that historically make less than $500,000 a year in insurance revenue, for example. But they’re waking up to comprehensive, supporting services as a means to grow their business and meet clients where they are at in their financial lives. Successfully broadening their services and engaging on issues like insurance can increase their revenue by millions, creating growth not captured by traditional AUM metrics.
While the reference metrics for growing RIA firms nearly always center on increasing AUM, the reality is that the total revenue capability of the RIA is where buyers set their valuation. As M&A continues to be the most direct path forward for firms looking to attain scale in their enterprise, a close look at services provided outside of investment management should point the buyers to where they can best achieve a return on their investments.
Chad Druvenga is President and CEO of CBS Brokerage.
