How does the RIA industry justify acquisitions at high-flying multiples while net organic growth stagnates?
Assets under management 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 published in November 2023 by Fidelity noted that organic asset growth at $1 billion plus AUM RIA firms fell from 8.2% in 2021 to 3.6% in 2022. The results made some industry headlines, but for the most part , traders in series buyers and private equity shops did not accept the news. The truth is that many RIAs are finding ways to add revenue, with advantages not captured by traditional AUM statistics.
The confluence of three trends creates an alternative path to growing non-fee income for advice on assets under management:
- The concept of being a fiduciary has been interpreted differently. Not too long ago, the fee-only consulting business was considered the “cleanest” way to be a fiduciary advisor. There could be no way that compensation would not conflict with the advice a client received. However, many well-respected RIAs have built comprehensive and systematic insurance programs alongside their traditional advisory businesses. They recognize that in most financial plans, there should be an insurance review to cover the needs of risk management and wealth planning. A fiduciary advisor must ensure that any gaps that exist are addressed for the benefit of the client. This is acting in the best interest of the client.
- Competition drives advisers to offer more services for the same fee. As more RIAs compete to manage money for wealthy clients, firms that offer conventional retirement planning or investment management services are challenged to keep up with those that can more holistically address the entire picture of clients' financial lives. . Clients ask, “What else can my advisor do for me?” Growing RIAs respond to them with integrated guidance around financial decisions, investments, risk management, taxes, estate planning and retirement needs.
- Efficiencies of scale allow firms to implement cohesive and repeatable processes to address more clients' financial issues. As they assimilate offices with different processes or recognize the need to introduce new services, scaled firms have the resources to create solutions around estate planning, tax, investment and insurance that are less accessible to the average firm. There is also the opportunity to provide a refined service and the risk of not aligning all their advisers on the same approach.
By rethinking what a loyal advisor should offer while meeting the demand for a more robust service offering, these growing firms have opened a path to more revenue.
There are $10 billion of RIA firms out there that historically make less than $500,000 a year in insurance revenue, for example. But they are waking up to comprehensive, supportive services as a means to grow their business and meet clients where they are in their financial lives. Successfully expanding their services and engaging in issues like insurance can increase their revenue by millions, creating growth not captured by traditional AUM metrics.
While the benchmark metrics for growing RIA firms almost always focus on AUM growth, the reality is that the total revenue capability of the RIA is where buyers place their valuation. As M&A continues to be the most direct path forward for firms looking to scale their enterprise, a close look at the services offered outside of investment management should tell buyers where they can best achieve a return. from their investments.
Chad Druvenga is President and CEO of CBS Brokerage.