Independent Registered Investment Advisors (RIAs) are the fastest growing segment of the wealth management industry. Now, the segment is entering a new phase of growth driven by consolidation. Here’s how mergers and acquisitions in this $5 trillion sector are generating wealth for wealth managers.
There are an estimated 17,000 RIA firms in the U.S., according to LLR Partners, a middle-market private equity firm. Collectively, these firms manage $5 trillion in assets. LLR’s research suggests that RIAs have expanded their market share from 17 percent to 29 percent over the past 15 years. Assets under management have grown at a compounded annual rate of 11 percent over the past ten years.
The RIA structure gives advisors more autonomy and a greater share of revenue than working for a large wirehouse or broker-dealer. Meanwhile, regulatory changes have made the RIA fiduciary model more attractive for clients and advisors, according to a survey conducted by TD Ameritrade. This is why growth in the segment is expected to continue for the foreseeable future.
However, the industry is severely fragmented. The vast majority of RIA firms (roughly 94 percent) manage less than $1 billion in assets. That presents an opportunity for industry veterans like Peter Mallouk. Mallouk is the CEO of Creative Planning, a Kansas-based RIA with over $235 billion in AUM. For much of its history, Creative Planning has expanded organically. Recently, the team has been more engaged in M&A to drive growth.
“There is rapid consolidation taking place and many smaller firms are finding the landscape becoming far more competitive,” says Mallouk. “They are commanding a good valuation as the bigger players angle to become leaders in the space and this window will eventually close. I think many realize this and are trying to find a good partner to realize value and also become more competitive.”
Mallouk’s team has completed 15 deals in the past eight months, adding over $135 billion in additional AUM over that period. The recent market downturn has substantially expanded his pool of potential targets. “Valuations have softened a bit, partially due to the flood of firms selling, but they are still holding up. I expect valuations to soften substantially as rates rise and even more firms come to the market,” says Mallouk.
Creative Planning isn’t the only one in the race. Giants such as Focus Financial Partners, Wealth Enhancement Group (WEG), Mercer Global Advisors, Captrust, HighTower Advisors, and CI Financial completed a record-breaking 78 RIA deals last year alone, according to Echelon Partners RIA M&A Deal Report.
Rapid consolidation in a market with robust organic growth could unlock immense value for these dealmakers.
-Vishesh Raisinghani
