RIA Compliance and Practice Management Blog

No Consolidation: The RIA Industry Continues to Become More Fragmented

Posted by RIA in a Box

Jul 16, 2015 9:47:00 AM

According to Meridian-IQ, the total number of registered investment adviser (RIA) firms grew by approximately 3.1% in the 12 month period ending in May 2015. As of May 2015, Meridian-IQ estimates that there are 32,736 RIA firms actively registered compared to 31,739 firms in May 2014 (a net increase of 997 firms). This compares to a net increase of 744 RIA firms from May 2013 to May 2014 equating to a 2.4% increase in the total number of firms. Thus, there was an acceleration in the growth of the total number of RIA firms in the last 12 months compared to the previous period.

Despite Popular Belief, the RIA Industry is Not Consolidating

At RIA in a Box, we continue to see RIA firms of all sizes flourish not solely due to the continued rise of the markets, but due to a continued decline in the costs of operating an advisory firm. These cost savings are being driven by continued enhancements in technology at more affordable prices and the array of outsourcing options now available. As we discussed last year, we believe this growth in RIA firms will continue to accelerate as more advisers and clients recognize the benefits of the investment adviser model. We very much believe we are still in the early innings of the evolution of the investment adviser industry.

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While investment adviser industry merger and acquisition data is more of an art than a science, Schwab Advisor Services reports that there were of 54 RIA firm acquisitions in 2014 which is no change compared to the 54 firms that were acquired in 2013. Separately, DeVoe & Company Reports that there were 90 total acquisitions in 2014 compared to 57 in 2013. If we assume the higher DeVoe & Company figures are more accurate and also assume that there was an average of 32,000 total RIA firms over that period, this implies a .28% industry consolidation rate (90/32,000). While this implies a slight increase in consolidation compared to the 2013 rate of .17%, this is still a trickle compared to the number of new advisory firms started.

According to Meridian-IQ, in the 12 month period concluding at the end of May 2015, 2,241 new advisory firms were started. This means that for every firm acquired, there were 24.9 new advisory firms started (90 compared to 2,241). 

How Many RIA Firms Closed Shop?

Knowing that 2,241 new advisory firms were started in the 12 month period ending in May 2015, we can estimate the number of advisory firms that closed down over that same time period. Assuming that 90 acquisitions took place over that period, this translates to ~1,154 firms going out of business without being acquired (2,241-90-997=1,154). If we once again assume 32,000 firms in total, this translates to 3.6% of all RIA firms. However, it's likely this is at least a slight over-estimation on the number of firms going out of business as it is possible that there were additional acquisitions over smaller firms that were not publicly reported. In other words, some of the firms we assume went out of business were perhaps instead acquired.

What is Driving Increased Growth in the Total Number of RIA Firms?

It's also interesting to note that it appears that fewer advisory firms went out of business compared to last year. For the 12 month period ending in May 2014, we previously estimated that ~1,482 firms went out of business equating to 4.8% of firms. Comparing this recent time period to last year, the number of new RIA firms started was relatively flat year over year (2,241 compared to 2,280), yet the total number of advisory firms still grew at a faster pace compared to last year (3.1% compared to 2.4%).

Thus, the key driver in the number of total advisory firms increasing this year compared to the growth in the past year, appears to be a reduced business failure rate for RIA firms. While part of this reduced failure rate can likely be correlated to strong markets, it's evident that the investment adviser industry continues to grow and thrive.

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Topics: RIA Operations, RIA Technology

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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