The wealth management industry today is very different from what many independent financial advisors have become accustomed to over the past decade.
From 2011 to 2021, the number of registered investment advisers increased from 10,511 to 14,806 firms, according to data from the US Securities and Exchange Commission. collected by the Association of Investment Advisers in their 2023 investment advisor industry snapshot. During the same period, assets under management by SEC-registered RIAs grew from $49 trillion to more than $128 trillion, according to the IAA. Interest rates were low, M&A was high, and it seems as if independent advisors got fat and fed up on an equity market that not even a global pandemic could stop.
It seems that all changed in 2022. The Federal Reserve raised interest rates to fight inflation and the markets responded with a correction. According to the IAA Snapshot 2023, while the number of RIAs continued to grow in 2022, total assets under management fell 11% from last year, the first decline since 2008. For the thousands of advisors who made the move to independent compared With the past decade, some were probably shocked to learn that the gravy train could, in fact, slow down.
From my perspective, the downturn exposed something about the industry: that many financial advisors were simply engaging in market gains instead of actively working on growing their business. Capital market performance was responsible for 70% of asset growth in US wealth management, McKinsey & Company is estimated in January 2023. A white paper by Mark Hurley, founder of the Fiduciary Network and CEO of Privacy & Protection, evaluated that more than 70% of RIAs would have shrunk if not for the US stock market.
How did this happen, especially given that most (95%, according to the IAA) RIA compensation is tied to AUM? Was the industry simply “occupied to sleep”, as Hurley suggested?
One reason, I believe, is that many of the new RIAs founded over the past decade emerged in the networking world, where they primarily found new clients through internal referrals. For all their experience in managing portfolios, these advisors didn't necessarily have much hands-on experience in finding new clients and assets.
Independence also means that advisers must be business owners, something they are not required to do in the employee model. Between technology, office space, compliance, merchandising, asset warehousing and clearing, and employee sourcing and hiring, there's a lot that independent advisors do all on their own before understanding and executing a growth strategy.
Whatever the reason, it is imperative that the RIA industry return to organic growth. The 2022 crash should have been enough of a wake-up call, but imagine what a larger, longer-lasting market event could do to firms that aren't focused on bringing in new customers.
There is also the looming continuity crisis in wealth management. About 100,000 financial advisors overseeing $10 trillion in client assets are on track to retire over the next 10 years. according to data from Cerulli Associates. A quarter of these advisors do not have a concrete succession plan, while another 30% hope to sell their business.
But unless those firms can prove that they're growing organically, that they're doing more than just riding the markets, I don't believe they'll get the kind of payout they dream of for a happy retirement.
This is especially true in the current market environment of higher interest rates and tighter financing caused by last year's banking crisis. It should come as no surprise that M&A activity in the RIA industry decreased by 5.9% year-over-year in 2023. according to Echelon Partners' RIA M&A Deal Report for the second quarterand January had less activity than the same month of 2022.
On the other side of the M&A equation, aggregators also need to start lagging the VNRs they've earned. With the increasing 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 must ensure that acquired firms are generating the ROI that their backers wait to see.
Advisors should return to the core efforts of building an RIA: client referrals, handshakes, making phone calls, attending industry events, networking and networking with other professionals. And they need dedicated coaches, mentors and service providers to help their firm design and implement a plan for growth, and a succession that maximizes the value of the business they built.
This is 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 TradePMRmember FINRA/SIPC.