According to RIA Database, the total number of registered investment adviser (“RIA”) firms grew by approximately xxx% during the 2017 calendar year. As of December 31, 2017, RIA Database estimates that there are xxxx total RIA firms actively registered compared to xxxx firms as of December 31, 2016 (a net increase of xxx firms). Here, at RIA in a Box, we continue to see small and large RIA firms flourish not only due to the rise of the equity markets, but also due to access to better technology and supporting infrastructure allowing firms of all sizes to grow faster and more profitably. As has been the case for a number of years, we believe this growth in RIA firms will only accelerate as more clients and advisers recognize the benefits of the investment adviser model.
2017 RIA acquisition volume is more than offset by the number of new RIA firms started
As we wrote on July 16, 2014, while many industry analysts have long predicted RIA industry consolidation, the actual figures continue to tell a markedly different story as more new RIA firms of all sizes are being started each year. According to DeVoe & Company, 153 advisory firm acquisitions were tracked in 2017. Similarly, Echelon Partners reports that 168 firms were acquired in 168. Both firms note that 2017 set a new record for total acquistion volume. However, even with 2017 setting new industry acquisition records and we assume now all acquisitions were recorded, with approximately xxxx total registered investment adviser firms, that translates to a .xxx% annual consolidation rate in the industry. In other words, for every one RIA firm acquired in 2017, there were close to xxx new firms started (~200 acquisitions compared to a net increase of xxx total firms from December 31, 2016 to December 31, 2017).
However, in reality, it’s quite a bit more than xxx new firms started per acquisition as the net increase of firms understates the gross number of new RIA firms started during 2017 which was reported to be xxxx. Compared to the xxx new firms started, there were just over xxx firms started per each acquisition.
How many RIA firms went out of business in 2017?
Given that ~xxxx new RIA firms were started during 2017, we can estimate how many investment adviser firms went out of business over that same time period. Assuming once again that ~200 acquisitions took place over that 12-month period, it would appear that ~xxx firms went out of business without being acquired during 2017 (2280-54-744=1,482). If we once again assume 31,000 RIA firms in total, this translates to 4.8% of all investment advisory firms.
A closer look at state vs. SEC-registered RIA firms
While there a number of notable exceptions, in general, RIA firms with $100 million or greater in regulatory assets under management (“AUM”) register federally with the SEC. On the other hand, in general, firms with less than $100 million in regulatory AUM register with the relevant state(s). Here is the break-down of state vs. federally-registered firms at the end of 2016 and 2017:
Most industry observers are often surprised to see the volume growth of smaller, state-registered RIA firms, yet this trend is not new, and if anything, continues to accelerate as the costs to operate an RIA firm continue to decline. As Michael Kitecs recently wrote, “there’s never been a better time to become a solo advisor, thanks to the rise of the internet and all this amazing technology that allows us to be solo advisors.”
At the same time, the number of larger SEC-registered firms also continues to grow as the RIA industry continues to mature into the dominant financial advisor segment. More so than ever, larger teams at traditional brokerages and wirehouses, are considering the path to RIA independence. This growing trend, along with the emergence of more professional management in the RIA industry, appears well positioned to continue for years to come.
Thus, the story of RIA industry growth and consolidation does not feature a small versus large firm plot, but rather touches all segments of the growing market.
Be sure to continue to check back as we provide additional commentary on the future regulatory outlook for RIA firms in 2018 and beyond.
Lexington Compliance and RIA in a Box LLC are not law firms, investment advisory firms, or CPA firms. Lexington Compliance and RIA in a Box LLC do not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.