What’s Driving the Growth in Mega Registered Investment Advisors?
In recent years significant growth has been seen in what is known as Mega Registered Investment Advisers (RIA). Mega RIAs are typically defined as advisers who manage $1 billion in assets or more. Most of this growth can be attributed to two main reasons.
- Record consolidation in the industry through acquisition of smaller RIAs by larger RIAs and;
- The asset management industry’s push to a fee-only business spurred by the Securities and Exchange Commission’s (“SEC”) Regulation Best Interest.
Record Setting Consolidation Amongst RIA firms
In the first half of 202, a record 101 acquisitions transactions occurred amongst RIA firms according to a report by DeVoe & Co. The second half of 2021 is primed to be just as active if not more active in transaction activity due to the anticipated increase in capital gains tax rates being proposed by the Biden Administration. This is coming off a record 2020 when 159 transactions were noted of RIA firms.
The DeVoe & Co report highlighted succession challenges of smaller RIA firms as the primary cause for the increase in consolidation activity over the past two years. Many smaller RIA firms are typically led by one to three advisers who are aging and many of the smaller firms struggle to develop next generation leaders for their practices. The underdevelopment of next gen leaders is creating continuity concerns and leaves many smaller RIAs with no succession plan for their assets under management and leaves those RIAs with no choice but to sell their book of business or firm to larger RIAs. The COVID pandemic further highlighted the strong need for succession planning as RIA firm owners of all ages reflected more on their own mortality and future ambitions accordingly to DeVoe & Co.
Fee-Only RIA Business Model
The second cause for the growth in Mega RIAs undoubtedly can be attributed to a push for a fee only business. For years, registered advisers had an option to charge a fee for their asset management services (typically 50 to 100 basis points of AUM) or a commission at the time of sale or disposition of the investment. The stigma around the commission business arose because advisers usually had no further obligation to actively manage client accounts and only had to determine that the investment was suitable for the client based on their risk profile and overall asset levels. In June 2019, the SEC’s Regulation Best Interest changed the suitability requirement to require broker dealers in securities to act in the best interest of their clients when soliciting investments to them. In turn, many broker dealers are moving their clients to fee-based products which typically fall on the RIA or fee side of the business.
Accordingly to the article, The Fee-Only Model is Scaling Up Fast, Creating More Mega RIAs, the number of $1 billion fee-only firms has risen from 100 to 395 in the past two years. Which means Mega RIAs now managed 70% of the total assets under management by fee-only firms. The shear scale of these Mega firms typically leads to faster growth rates and also provides the much-needed succession plan that many smaller RIAs are seeking. Coupled with the regulatory headwinds swirling again due to 2020 election results, one can only expect that more regulation of the investment industry and the need for a clear succession plan for smaller advisers will only fuel further growth of Mega RIAs.
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