Two years ago, 2020 dawned with high expectations for the RIA universe. But no one predicted what actually happened: the pandemic, a market crash and then a rapid boom, followed by a vast reordering of priorities for both clients and advisors as many shifted to work from home.
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So forecasting what will happen in 2022 seems like tempting fate. RIA executives and experts think current trends will accelerate — if nothing major changes. Here’s what they expect to see in the new year:
Going independent
Most advisory clients today hold brokerage accounts, and most advisors work for brokerages. In many cases, these advisors acquire clients when existing bank customers look to their own institution for investment help — often by approaching the advisors sitting at desks right in the branches.
“The millions of people who will walk into a Bank of America branch today, that’s a lot of at-bats for Merrill Lynch,” said Peter Mallouk, the CEO of Creative Planning in Overland Park, Kansas.
But despite this near-guaranteed influx of new clients, the flow of advisors leaving brokerage houses to become fiduciary RIAs is likely to increase.
“The momentum away from the wirehouses will continue,” said Eric Kittner, CEO and chairman at Moneta Group Investment Advisors in St. Louis. While there is still a massive amount of assets sitting in brokerage accounts, the going-independent and M&A deals of the last five years show that the move from brokerages to RIAs is picking up, he said, both with clients’ money and with advisors themselves: “The RIA is the model that’s winning,” Kittner said.
The problem RIAs will face this year and beyond lies in how to communicate this difference in approach to clients, said Mike LaMena, CEO of Wealthspire in New York City: “We talk about the Sea of Sameness: How do RIAs differentiate from each other? How do we differentiate from the brokerage world?”
Consolidation
RIAs will continue to merge this year, forming bigger and bigger companies.
“I think we’ll have 10 to 20 really large firms on a national basis,” Kittner said. He expects an acceleration of $500 million to $1 billion RIAs joining consolidators, as well as giant firms merging: “I wouldn’t be surprised to see a metafirm join a metafirm,” he said, citing the San Francisco investment bank DeVoe’s term for the biggest RIAs.
This trend will likely widen the distance between smaller and larger RIAs.
“I do think there is a subset of firms to scale into national, leading RIAs,” LaMena said. “We aspire to be one of them.”
With its recent acquisition of Private Ocean on the West Coast, Wealthspire aims to go nationwide, LaMena said. He expects that many RIAs will choose to remain small while others, like his firm, grow rapidly, expanding the current wave of M&A. The attraction of joining a larger firm or selling a small firm to an RIA consolidator is to “avoid the distraction of running the business instead of advising clients,” he said. “Take advantage of this and get back to the reason why you got into this business in the first place.”
Private equity
Someone has to fund the wave of transactions as firms buy one another, and it’s typically private equity funds. Industry executives are interested to see how PE-backed RIAs fare once the fund decides to sell its stake.
“What’s going to be very curious is, where does the next rollup exit?” asked Matt Brinker, a managing partner at New York City-based Merchant Investment Management, which invests in wealth management firms. “Once the PE firms stop trading within themselves, there’s no next stop on the PE train. IPO? SPAC? Merrill Lynch?”
Brinker formerly ran M&A at United Capital Financial Advisors, an RIA that Goldman Sachs bought in 2019 and renamed Personal Financial Management. He doubts many of United Capital’s advisors had originally joined the RIA intending one day to work for a division of Goldman, just as he wonders what would happen if one of the larger or consolidated RIAs is eventually sold to a large brokerage: “Is it good for the RIAs as a channel that’s always held itself out as the anti-bank, the anti-wirehouse?”
More tailored money management
“Firms are having to customize more than they used to,” Mallouk said. This can be seen in the trend of banks and custodians investing in direct-indexing technology, which allows advisors to create custom portfolios for clients using ETFs, often with an ESG lens or a focus on the client’s specific interests (companies based in Ohio, or in the solar-panel industry, or with a diverse board of directors, for instance).
Advisors are also expected to continue placing their clients in alternative investments as a way to find returns outside the public market. In particular, they report hearing increasing calls to help their clients invest in cryptocurrency. But many say they don’t understand the investment fundamentals behind crypto or face logistical challenges with custody of the digital assets.
Bringing more services to the client
Firms will continue to add specialists in tax, estate planning and other adjacent areas to help clients get help with all their financial questions, predicted Mallouk, who oversees several hundred CPAs and CFPs as well as lawyers at Creative Planning.
“To the extent you can deliver that service to the client cohesively, they see value in it,” he said.
For the past decade, Brinker said, client satisfaction surveys have delivered a consistent answer to the question of why a client leaves an advisor.
“It’s not fees,” he said. “It’s, ‘my advisor doesn’t call me back, I don’t get responses fast enough, the communication isn’t great.’” This is one reason why firms have scrambled to put in place regulatorily compliant texting, so that advisors can be in real-time communication with clients who expect text-speed answers.
Who will win this race?
“Those firms that are figuring out that formula, that have an interesting scope of services other than just portfolio construction and a quarterly output of a financial plan, surrounding the clients with more than one advisor, with systems and infrastructure in place on how to engage with clients between meetings,” Brinker said.
He cited a short list of features RIAs need to succeed: rapid compliant communication, a consistent client experience, professional management of the firm, a focus on an operating platform that allows for efficiencies, a team-based approach, and estate and tax planning.