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With the best clients aging, RIA business will be shaped by how about 2,000 'tweener' firms react to fast-deteriorating business conditions
April 29, 2013 — 6:06 PM UTC by Brooke Southall
Brooke’s Note: I admit that when most people send me a white paper, I groan. What makes such a report interesting is good research coupled with the author’s ability to take an original angle and support it with good analysis. I don’t see much of that. But when Mark Hurley does a report, you seek it out. He hangs around in the industry enough that he accumulates thoughts and he’s not afraid to take a point of view. I don’t do Mark any huge favors by summarizing his report as briefly and bluntly as I do here but I think I capture much of his thesis. The report itself is available on his website as of today. Hurley fans will notice similarities with past reports and some fresh touches. One similarity is that it encourages big firms to buy and smaller firms to sell — and Hurley is in the business of buyouts. In case you didn’t know.
Mark Hurley has produced an 80-page case for why most RIAs need to make some hard decisions pretty fast or have their fates determined for them in an unkind way. See: Why Joe Duran believes that classic RIA firms face extinction.
The CEO of Fiduciary Network LLC today published a report under the name, Brave New World of Wealth Management, that suggests that the RIA business will be concentrated — but not consolidated — over the next decade into an industry.
Leading the pack will be “quite a few” RIAs with at least $75 million in revenue (the monsters of today have more like $45 million, he says) that will get to that happy, stable state by making acquisitions. Those dominant firms will emerge mostly from a group of about 150 firms that sit atop the pyramid of size and competence right now.
Rise of the 'tweeners’
Their acquisition targets will be drawn from a pool of 1,000 to 2,000 “tweeners” RIAs whose principals have net worths of $10 million to $20 million. See: How a swath of billion-dollar-plus RIAs are posing a threat to indie advisors.
Hurley believes that these 'tweeners’ will be wise to sell, sooner than later, because their failure to do so will result in them falling into his third (and final) model of advisory firm, “books of business.”
This new dynamic has both an upside and a downside.
“The middle ground (of tweeners) is going to go away, and there’s a staggering amount of opportunity (for buyers, and to some extent for tweeners who don’t wait until it’s too late to sell),” he says.
But Tim Welsh, principal of Nexus Strategy LLC, disagrees with Hurley and believes that there are thousands of advisors who still control their own destinies.
“Those 'tweeners’ he desperately wants to sell to him are much more sophisticated and savvy to have deployed systems, created a career track for succession and brought in professional management,” he says. “It’s no secret that every custodian, independent broker-dealer and consultant is preaching practice management to ensure that their money engines figure this out and advisors, to their credit, are listening. They also have a lot at stake to ensure that they don’t make mistakes here.”
Even bigger on the big end
On the other hand, Joe Duran, CEO of United Capital Financial Advisers says he believes that Hurley is pretty much on the mark as far as the thrust of the thesis goes.
His bone of contention is that he believes the industry will be dominated by even larger firms on the top end — more like 12 or 25 firms with sales in excess of $75 million.
“I just think Mark isn’t thinking big enough on the big end,” he says. See: Joe Duran lays out his latest case for why wirehouses — and classic RIAs — risk losing out to a coming oligopoly of new-model holistic firms.
His own firm he says already has $75 million of revenues and it’s still growing 30% or 40% each year. He says it is very much an RIA — as opposed to a roll-up of RIAs — in that it has one ADV, one set of employees, one investment platform and one brand.
Duran doubts that smaller RIAs will have much of a chance against the giants. “Advisor businesses are also in the risk management business,” he says. “And people want big balance sheets that can handle the risk.”
He adds that brand is necessary to bring in prospects at a sufficient rate.. He adds that a big firm like his can negotiate deals with vendors, custodians and the like that “a small firm can not imagine.’
Porcupine mating dance
Hurley doesn’t believe that these 'tweeners’ are necessarily in a good position to team up with each other. “It’s like two virgin porcupines trying to mate,” he says.
What is making the ground disappear under the feet of tweeners is a pernicious confluence of five factors that alone seem unthreatening but taken together spell trouble for the classic RIA. See: Joe Duran lays out his latest case for why wirehouses — and classic RIAs — risk losing out to a coming oligopoly of new-model holistic firms.
1. The supply of potential clients has shrunk and will continue to as the population ages
2. Clients are older on average and more risk averse, and tend to be consuming capital rather than building it. See: Nine threats to the RIA business and how they can be avoided.
3. Operating costs, driven by labor, regulatory and other factors, are rising five percent to seven percent
4. Returns on fixed income and money market funds are the lowest on record See: A cottage industry of hedge funds-to-RIAs is springing up but so far the mutual fund industry looks like the big winner.
5. Financial advisors themselves are aging. See: Two Silicon Valley RIAs marry their practices to lay the groundwork for succession.
Get big or get gone
With this convergence of factors, the tweeners, or “quasi-enterprise,” need to get big or resign themselves to fading into book-of-business status — something that has been largely unnecessary to worry about until now.
“It’s been a very rational strategy [to exist on the semi-elite tier] until now,” Hurley says.
But Welsh disagrees that it’s a sell, buy or die market for RIAs.
“Ten years ago when he wrote his first white paper, he predicted the ultimate roll up of all firms into 50 'market dominators.’ That has simply not happened. I don’t see anything different here, other than a variation on a theme. Mark is a great visionary, however, he can’t keep glossing over the fact that the industry is vibrant and won’t let its golden goose fail.”
Mentioned in this article:
United Capital Financial Advisers
Consolidator/Roll-up Firm, RIA Welcoming Breakaways
Top Executive: Joe Duran
Top Executive: Timothy D. Welsh
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