The following article is an excerpt section from our free guide to the "Hyper Boutique RIA Strategy". You can access the free guide, which includes a detailed implementation playbook, here.
The landscape of Registered Investment Advisories (RIAs) is undergoing significant transformation, driven by a decade-long trend in mergers, acquisitions, and private equity (PE) investments. This consolidation trend, while slowing slightly in the immediate post-COVID years, has seen a resurgence as market sentiment improves in the latter part of 2023 and into the first quarter of 2024. The dynamics of this trend offer both opportunities and challenges for RIAs, especially for those striving to maintain their boutique appeal amidst industry consolidation.
Seizing the Opportunity: The Attractiveness of the RIA Model to Investors and PE Firms
Within the broader narrative of RIA consolidation, there lies an incredibly lucrative opportunity for RIAs prepared to invest in growth and strategically position themselves in the market. The RIA model, characterized by its recurring revenue and fee structure, has become a beacon for investors and private equity firms, who view it as a low-risk investment with stable returns. This subsection delves into why the RIA model is so attractive to these investors and how RIAs ready to embrace growth can set themselves up for success.
The Appeal of the RIA Model
- Stable, Recurring Revenue: At the heart of the RIA model's appeal is its ability to generate stable, recurring revenue through management fees based on assets under management (AUM). This revenue model provides a predictable cash flow, making RIAs an attractive investment target for those looking for stability in their portfolios.
- Low-Risk, High-Value Proposition: Investors and PE firms are drawn to the RIA model because it offers a low-risk pathway to tapping into the wealth management industry's growth. The fee-based structure aligns the interests of RIAs with those of their clients, fostering trust and long-term relationships, which further stabilizes the revenue stream.
- Scalability: The RIA model is inherently scalable. With the right infrastructure, technology, and digital marketing strategies, RIAs can significantly expand their client base without a corresponding increase in overhead costs. This scalability makes them particularly attractive to investors looking for businesses that can grow quickly and efficiently.
- Multiples Arbitrage: Firms below the $5B AUM threshold might trade at multiples in the 3-7X EBITDA range. But for firms that scale to become national entities, it is entirely possible to see valuations in then 10-14X EBITDA range. An attractive proposition for current partners, LPs, PE, and other forms of outside capital.
Capitalizing on the Opportunity
For RIAs ready to invest in their growth, the current market dynamics present a golden opportunity to attract investment and scale their operations. Here’s how RIAs can position themselves to capitalize on this opportunity:
- Invest in Technology and Digital Marketing: To attract investors and PE firms, RIAs need to demonstrate their commitment to growth and scalability. Investing in technology and digital marketing not only enhances operational efficiency and client acquisition but also signals to potential investors that the RIA is forward-thinking and poised for expansion. Hyper Boutiques move beyond seeing technology and digital marketing as cost centers. They realize that there is a sweet spot, in digital marketing especially, where an intelligent investment can help break free of the slumping average organic growth rates. RIAs that are able to prove they have built and "engine" that can repeatedly and reliably turn unaware audiences into paying clientele that stick around for the long term will undoubtedly command a serious premium on their enterprise value.
- Showcase a Strong Value Proposition: RIAs should clearly articulate their value proposition, highlighting what sets them apart from competitors, the client verticals and personas they are expert in servicing, their approach to client service, investment strategies, and how they leverage technology to enhance the client experience. A strong, differentiated value proposition is key to attracting investment. This means that
- Prepare for Due Diligence: Investors and PE firms will conduct thorough due diligence before committing their funds. RIAs should be prepared with detailed financial records, growth strategies, client acquisition and retention metrics, and a clear plan for how the investment will be used to fuel growth.
- Emphasize the Long-Term Vision: Finally, RIAs looking to attract investment should strengthen and communicate their long-term vision for the firm. Investors are drawn to companies with a clear, compelling vision for the future, as it suggests a roadmap for sustained growth and profitability. As the boomers sunset and even "coast", a new vintage of Millennial and Gen X partners are getting their moment in the spotlight. These professionals have the chops and the wisdom, forged through more than two decades of commitment and professionalism. And yet, they are still far enough from retirement to simmer. Those that build a seriously competitive vision and plan, show their hunger, get serious about marketing, and put up compelling growth figures, are destined to command industry-leading valuations.
The Opportunity
The consolidation trend in the RIA sector is not just a challenge to be navigated; it's an opportunity to be seized. For RIAs ready to invest in their own growth, the attractiveness of the RIA model to investors and PE firms offers a pathway to significant expansion and success. By demonstrating their commitment to scalability, showcasing a strong value proposition, and preparing for investor scrutiny, RIAs can set themselves up to capitalize on this opportunity, ensuring their place in the future of wealth management.
The Statistics Behind the Trend
Over the last decade, the RIA space has witnessed a marked increase in M&A and PE activity. This trend underscores the industry's attractiveness and the growing interest from investors looking to capitalize on the wealth management sector's steady returns and growth potential. However, the pace of these activities experienced a slight deceleration in the years following the COVID-19 pandemic, as investors and buyers adopted a more cautious stance amidst global economic uncertainties.
Depending on where you look, different analysts have different numbers and reads on the scenario. For example, Echelon viewed Q1 2024 as a dip in transactions, while DeVoe & Co read the numbers and saw an increase. Regardless, the activity and deal volume remain strong, whichever side of the numbers you land on.
- 2023 saw over 300 deals (321 according to Echelon's M&A Deal Report).
- "The number of annual wealth management transactions has grown at a 5-year CAGR of 12.1% between 2018 and 2023" (From an Echelon statement).
- 2023 saw 251 deals in 2023 (according to DeVoe & Co.)
- 2022 saw 264 in 2022 (a 5% YoY decline, according to Devoe & Co.)
- Q1 2024 saw M&A activity slow (50 deals Q1 '24, vs. 60 deals Q1 '23), for a 29% YoY dip in number of deals (According to Fidelity)
- General M&A activity outside of the ria space saw a 9% YoY dip in number of deals (According to Bloomberg)
- March 2024 total AUM transacted hit $139.2 billion - a 63% YoY increase over March 2023
- Average AUM per transaction was $2.8 nillion, an YoY increase of 128% (according to Fidelity)
“This elevated number of larger transactions, in light of buyers facing a higher cost of capital and economic uncertainty, demonstrates buyer resilience and likely indicates that $1BN+ deal activity will increase to 2021 levels or higher once macroeconomic headwinds, namely higher interest rates subside." - From the Echelon M&A Deal Report
Becoming the Wirehouse? Staying True to Your Roots with the "Hyper Boutique" Strategy
In this context, the concept of the "Hyper Boutique" becomes critically important. Hyper Boutiques are RIAs that manage to scale, attract investment, and improve valuation without succumbing to the impersonal service and touch that characterize their larger competitors. They are those that don't expose themselves to poor performance in light of a pricing uptick. They are those that leverage increasingly expensive capital, bravely and with great sophistication, to drive growth in the face of competitors who "play it safe". They represent a new paradigm in the wealth management industry: firms that leverage consolidation trends to their advantage while maintaining the essence of what makes a boutique advisory unique.
- Scaling While Maintaining Identity: The key challenge for Hyper Boutiques is to grow in a way that enhances their value proposition without diluting their brand or compromising on the personalized service that their clients have come to expect. This requires a strategic approach to scaling, one that incorporates technology, digital marketing, and operational efficiencies without losing the human touch.
- Attracting Investment Without Losing Soul: Hyper Boutiques must navigate the waters of attracting PE investments or engaging in M&A activities without losing their soul. This means carefully selecting partners that align with their vision and values, and structuring deals in a way that allows them to maintain control over the client experience.
- Differentiation in a Consolidated Market: As the RIA market continues to consolidate, Hyper Boutiques need to double down on what sets them apart from the wirehouses and larger advisories. This includes offering bespoke investment strategies, maintaining high levels of client engagement, and leveraging a fully-diversified digital marketing portfolio that engages audiences at ALL stages of the modern client journey.
- Pairing Inorganic Growth with Organic Growth: We all know business is about ratios. And at the end of the day, increased valuations through inorganic growth artificially inflate the price-to-earnings ratio (i.e. Warren Buffet would be concerned). Firms that juice top-level metrics with inorganic activity, without backing up the metrics true business performance and organic growth, will find themselves in a tricky situation (especially if their founding and managing partners have a decade or more left before exit).
The trend of RIA consolidation presents both opportunities and challenges for RIAs. For those looking to thrive in this evolving landscape, the Hyper Boutique strategy offers a compelling path forward. By balancing growth and investment opportunities with the commitment to personalized service, Hyper Boutiques can navigate the consolidation trend successfully, setting a new standard for excellence in the wealth management industry.
The Digital Marketing Engine and the Modern Client Journey
This is where it gets tough. There are hard pills to swallow here. Undoubtedly, there will be big winners, but also big losers.
The RIA spaces organic growth issues do not bode well for the firms that cannot crack the problem. And there will certainly be many of them.
But the Hyper Boutiques will figure this out. They will do this by:
- Investing intelligently and substantially in sophisticated, diversified digital marketing growth engines, before taking on outside capital.e.g. Private Equity usually looks for 3 signals: Over $1B AUM, the appointing of a CFO, and an uptick in conference attendance. Highly bold and strategy Hyper Boutique RIAs will build out and prove the performance of their digital marketing growth engines 3-6 quarters previous to these activities, to support improved valuations.
- Leveraging outside capital to enhance the sophistication and performance of these growth engines, after taking on outside capitale.g. After taking on outside capital, Hyper Boutique RIAs, having a predictable and reliable growth engine (i.e. LTV:CAC figures that can be reliably projected forward, and predictable performance from earned/owned/paid media), will be able to build sophisticated NPV analyses to determine the sweet spot for cranking up their digital marketing investments (i.e. talent, software, creative, web dev, management, design, media production, paid ad spend, ad management, etc.).
- Diversifying the media portfolio and aiming for A+ grades across not only earned media (e.g. LinkedIn/social media, podcast, YouTube, etc.). but also on owned media (e.g. landing pages, funnels, nurture sequences, subscriber lists), and paid media (e.g. PPC and SEM advertising, audience building, remarketing strategies, etc.).
- Building marketing plans and strategies with an expanded view of the modern client journey (i.e. avoiding overindexing for audience members ready to take meetings with advisors and instead, nurturing audiences over the longer-term and "PREsuading" them to consider your firm/advisors seriously.
- Avoiding the "build it and they will come" mentality of leaning too heavily into earned media (i.e. podcasts and social media are great; but without offers, funnels and sophisticated paid media; generating serious performance from a digital marketing portfolio is all but impossible).
- Orienting entire teams around the "Three Moments of Truth" (read more in Section 2).
Conclusion
The trend of RIA consolidation presents both opportunities and challenges for RIAs. For those looking to thrive in this evolving landscape, the Hyper Boutique strategy offers a compelling path forward. By balancing growth and investment opportunities with the commitment to personalized service, Hyper Boutiques can navigate the consolidation trend successfully, setting a new standard for excellence in the wealth management industry.
Critically, the Hyper Boutique RIAs will combine the wave of opportunity consolidation represents, with the bravery required to build a high-performing digital marketing engine. An engine that actually takes cold audiences in one end and spits out paying clientele that stick around for the long haul out the other. An engine that actually allows the RIA to measure and predict performance. And an engine and approach that transcends the current obsession with "lead generation", and takes a more holistic view of the modern client journey - generating and capturing already existing demand for the magic advisors can offer - unlocking dreams, building fortresses, and maximizing freedom and peace of mind.
