2023 was great RIA year and nobody really noticed, setting up 2024 for a more visceral reap

The RIABiz Phenomenon of the Year for 2023 goes to …the redoubtable free market, again – which allowed scale plays to happen and made a mockery of them at the same time.

The creative destruction and rehabbing effect of market forces went into overtime in the past 12 months, working through its macro problems, straightening micro misalignment and setting up 2024 to burst with possibility.

Buoyed by a stock market resuming its winning ways – with the SPY S&P 500 ETF up 26% year-to-date – and a business model of selling high-margin, low-conflict financial and life advice, RIA firms of all kinds prospered.

They gained market share and staved off chicken-little concerns about splintering into a world of big-firm haves and small firm have-nots.

The vaunted inflation monster is tamed, and interest rates seem destined to begin falling, though few expect nearly as pronounced as a couple of years ago.

Industry disruption

If any firms experienced extreme stress, it was the big ones.

The RIA  custodians, the roll-ups and the biggest technology firms continued to dominate the RIABiz news cycle. 

If Fidelity Investments held the spotlight in recent years by adding tens of thousands of staff, then Charles Schwab Corp. was caught in its full glare in 2023. See: Charles Schwab Corp. gets over 'hump' after furious bond rally takes bite out Schwab Bank's $19.6 billion in unrealized losses, though debt overhang could still take a decade to erase

Schwab largely completed its merger – with technology, service and staffing drama – and managed around the monkey wrench of an unscheduled March banking crisis. 

Three of the four roll-up firms most often in the news – Focus Financial, CI Financial and United Capital – went through the sheet mangler in 2023. 

M&A mayhem

Focus went private, its founder and CEO Rudy Adolf is out, and the firm is restructuring. CI Financial went into a triage mode of its own, saved by a radical deal with Bain Capital to keep racking – even as its deal flow slowed dramatically.

United Capital is no longer part of Goldman Sachs. 

Peter Mallouk now owns most of the firm, with pieces scattered to owners all over the United States. See: Peter Mallouk ends up losing the majority of Goldman-United Capital advisors in headline-intensive deal but keeps the lion's share of the managed assets

Hightower stayed out of the news, but off-the-record sources are telling Citywire that it won't stay, under the radar much longer because it is for sale. 

Stepping In and out

The big-name bundle technology firms like Orion and Envestnet experienced no less tumult. 

Envestnet had to accept activist board members and watch its shares sink. 

Orion saw ex-AssetMark CEO Charles Goldman take control and bid farewell to Eric Clarke as CEO; another Ex-AssetMark CEO, Natalie Wolfsen, stepped into the role.

Implicit in the turmoil surrounding the software bundlers and the RIA M&A roll-ups are questions about the dogma that led to their formation – namely whether greater size confers advantage in our industry. 

The highly personal nature of giving fiduciary financial advice seems to permeate not only RIAs themselves but their vendors and aggregators. 

Every inch forward in gaining scale and resources seems to dilute the magic RIA elixir that forms the basis of creating a business of greater size in the first place.

To the extent that bigger firms gain advantage through scale, smaller firms seem to benefit too, because outsourcers became increasingly able to share scale. 

Greater flexibility

It's a big help-yourself buffet – either free or at a price that is hard to complain about, whether it's a TAMP, a CRM provider, a Dynasty Financial or an RIA custodian.

Allowing greater flexibility toward an ‘RIA’ model are firms like a DPL-style fee-based annuity platform, an RIA referral fount like SmartAsset, Zoe or the software-as-service provider.

XY Planning Network-type firms or independent broker-dealers are the help-u-be-small firms providing guidance for advisors. 

Of course, there are those prognosticators determined to tell the still hyper-fragmented RIA industry's denizens to quit while they are ahead. 

RIA landscape

Mark Hurley is one. He came to fame in 1999 with a report that predicted RIAs would be swept up into a handful of firms. It's a finding that turned out to be as dead wrong as it is compelling. 

But with a quarter-century gone, it is also ready for a spiffed-up reintroduction as "Welcome to the Jungle: The Next Phase of the Evolution of the Wealth Management Industry.”

The refreshed Hurley hypothesis holds that there will be 30 to 50 “mega” RIA firms with $500 billion to $1 trillion in AUM and 200 to 500 “specialist” wealth managers with $5 billion to $100 billion of AUM.

The 1999 version held out that 40 to 50 large organizations would dominate the RIA landscape.

What delayed the realization of his first prediction, the report explained, was an unforeseen period of easy money that included low rates and a gusher of private equity money.

The private equity money bill will now come due, he says, in the form of these mercenary owners competing in more cutthroat ways that squeeze margins in a way where the big and strong hold the edge.

Next generation

I foresee another possibility, and what happened to United Capital is a potential harbinger. The sum of the parts of larger firms could become worth more than value of the whole. 

So many of those RIAs rolled up could be spun off again. Entrepreneurial owners would be determined to build them back up, again, through the force of personality and the desire to serve clients the way they want to.

Look no further than Joe Duran and Karl Heckenberg See: Joe Duran's second RIA act is rocking with eight staff, four co-founders and a conspicuously anti-United Capital concept that will flip RIA stakes 'eventually' as a minority investor.

These survivors of Roll-up 1.0, are raising capital to fund a Roll-up 2.0,  to buy minority stakes in RIAs that bet on the next generation of management. See: Karl Heckenberg files with SEC to raise a staggering $1 billion, (presumably) to buy, buy, buy RIA stakes in a 'crowded' market

Take out your popcorn and enjoy 2024. 

There are winning and losing firms but the constant is that the people in the RIA business land on their feet. A canary in the coal mine, Amy Richardson left Charles Schwab & Co. for an RIA -- before the 2,000 layoffs -- now a robust job market is saving the Schwab diaspora, she says

If you can't make it big, go small – and vice versa.