Welcome to Financial Advisor IQ

As Charles Schwab, Fidelity and TD Ameritrade Grow, so do the ‘Mega’ Independent RIAs

By Murray Coleman November 2, 2017

The days of wirehouse advisors dominating U.S. wealth management might be fading. But as big independent retail broker-dealers like Schwab, Fidelity and TD Ameritrade keep growing in advisory services, so are large RIAs.

And the gap between big and small is widening, asserts Aite Group analyst Alois Pirker. “The client assets managed in the independent RIA space are very concentrated these days,” he says. “Large wealth practices are clearly becoming a major presence across this industry.”

New research by Cerulli Associates bears this out. According to the Boston-based consultancy, RIAs now in the “billion-dollar club” control 60% of U.S. wealth management assets. This comes despite representing less than 4% of all firms.

The Aite Group’s Pirker finds much the same. “Over the past nine years we’ve seen independent RIAs increase their market share by more than 50%,” he says. “At the same time, wirehouse market share has dropped by about 20%.”

One dramatic example is Leawood, Kan.-based Creative Planning. The member of the FT 300 list of elite RIAs reports that its assets under management have increased from $34 million in 2004 to around $32 billion in 2017.

But only about $1 billion of that growth has come through acquisitions, estimates Peter Mallouk, the indie firm's president. “If you look at most of the mega RIAs, they’re a bunch of smaller players who were bought and put together – this is an industry that’s becoming more dominated by conglomerates,” he says.

Mergers and acquisitions are playing a more prominent role in fueling industry growth, agrees David DeVoe, a San Francisco-based investment banker and market researcher.

By his calculations, M&A activity by RIA sellers with $1 billion to $5 billion in assets jumped in the past two full calendar years by more than 228%. This year, he sees these large acquisitions on pace through three quarters to break 2016's record 23 deals. In larger firms, DeVoe is finding M&A activity growing at an even stronger clip.

But even with greater volume at the market’s higher end, he says “it’s important to realize this independent market remains hyper-fragmented” with 10,000-plus separate firms. “It’s true that in today’s environment more advisors are realizing the power of scale in operations,” DeVoe adds. “Firms of every size are exploring mergers, sales and acquisitions to achieve greater scale.”

At Creative Planning, Mallouk is urging practice managers to not lose sight of “organic” growth in attracting new clients. That means focusing on hiring “the right type of advisor” who fits a firm’s philosophy on serving clients.

Advisors need to lead more with their “comprehensive planning hats,” according to Mallouk, and less with their portfolio management expertise.

Alois Pirker

“Whether you’re a billion-dollar firm or not, in this market doing the basic blocking and tackling of holistic wealth management is key to separating yourself from the pack,” he says. “It’s a big mistake to try to brand yourself as a true fiduciary and do things like push proprietary products and blur the lines between what a broker does and what a real indie RIA is known for providing to clients.”

Another caveat to new industry research indicating a concentration of wealth clients going to $1 billion-plus advisors, Mallouk points out, is that different analysts categorize indies in different ways.

Indeed, a separate Cerulli report earlier this year lists indie RIAs as holding 23% of the market’s assets, up from 13% in 2005.

By contrast, Aite Group estimates that entering 2017 about 15% of the U.S. wealth market’s client assets were held by such advisors. Meanwhile, smaller broker-dealers comprised about 14% of the total pie.

The Aite Group also breaks down wealth into discount brokers and online service providers. These firms, which Pirker notes also own RIA custody platforms, are counted by his team of analysts as representing about 20% of the domestic marketplace.

“No matter how you look at it, the trend is clear – as more experienced and successful brokerage advisors are moving to independence,” he says, “clients are increasingly shifting their business to top-tier firms. That’s a trend we don’t see reversing anytime soon.”