We are witnessing a powerful new force in the advice business, what we refer to as the mega-RIA. They are going to be the new kids on the block in gaining market share in acquisitions of other firms and garnering new client assets. They will very effectively compete with everyone from Vanguard to broker/dealers, and to other wealth managers including smaller RIAs, trust companies and family offices.
What do they look like?
- $5 billion to $100 billion AUM
- Excellent bench of millennial (and younger) advisers, portfolio specialists and back-office personnel
- Direct access to true alternatives, complete understanding of diligence and reporting requirements
- Offering deep expertise in things other than investments, encompassing risk/insurance; retirement planning; legacy and charitable planning; estate, trust and business planning; tax planning; credit and lending; family office services including real estate and bill paying; truly integrated and highly functioning IT, compliance, disaster recovery, digital communications
- Some have marketing acumen, others are seeking it
- Provide succession for advisers, their clients and clients’ families so they have the balance sheet, resources and intellectual capital to weather storms (COVID-19, for example)
- Have purchasing and pricing power
- Function as real businesses, not “practices”
Who will the winners be among this group? Those with a capable internal staff dedicated to acquisitions and integrations, who understand their market niche, and have a reason for expansion and a growth vision beyond falling under the allure of empire building. It’s also important to have access to funding sources other than their own balance sheet, such as permanent capital from the right private equity firms, minority investors or parent company.
Because of the difficulty of organic growth, buying AUM and clients is and will continue to be a speeding locomotive, for the revenue growth factor as well as acquiring talent and scale. One of the options, aside from buying other firms is recruiting “breakaway brokers.” Although I hate this term, we all know what it means. Does this trend portend the death of the wirehouse? Not by a long shot.
RIAs had a moral high ground over the wirehouses in that they were fee-based, not commission-based. How many high-end wirehouse advisers are not fee-based nowadays? Same with proprietary product. That game changed years ago, and the wirehouses have made massive investments in product diligence and analysis on “outside” products. And there are still many RIAs who are discretionary advisers selling their own composites and portfolio management expertise; in fact, despite their predicted demise, many are still around and flourishing. Isn’t that a “proprietary product”?
Wirehouses have figured out how to quarantine their best producers with retention and succession programs. If you keep your nose clean and follow the rules as a wirehouse adviser, you are backed by teams of attorneys to protect you from the legal and regulatory jungle. I have friends who strongly disagree with this based on personal experience, but things have changed in favor of the “clean” adviser.
Life as a successful wirehouse adviser does not suck. Sure, you have to deal with the corporate suits, but you don’t have to worry about the myriad things you must oversee when running your own business. Not everyone is cut out to be an entrepreneur; in fact, very few of us are. And if you are a wirehouse adviser successful at getting and keeping clients, you can make a really good living with a substantial pension.
If you think the wirehouses are sitting ducks, think again. There will always be a population of successful wirehouse advisers with the ego drive and energy to “own it” and break away, but the majority will not.
By the way, the wirehouses (and throw in the global banks and trust companies) are still collectively the biggest force in the high-net-worth and ultra-high-net-worth client space. The question is: Would some of these teams enjoy life more tucked into a mega-RIA as opposed to opening their own shop?
Now you’re onto something.
Dan Kreuter (email@example.com) is CEO of Gladstone Group.