Rapid RIA growth drives private equity deal flow

June 14, 2023, BOSTON—The impact of mergers and acquisitions in the registered investment advisor channels has rippled across the financial advice industry. A fragmented market with a growing service sector and a recurring revenue model, the RIA channels are attracting the attention of private equity giants that typically dominate sectors like industrials, technology, and healthcare, according to Cerulli’s latest white paper, Private Equity Carves Out Its Place in the RIA Space.

Based on Cerulli’s market estimates, the opportunity for RIA acquisitions grew to $3.7 trillion as of year-end 2021. The “buy to build” model is particularly effective in the RIA space, where the market is highly fragmented and few growth-focused businesses achieve the scale necessary to succeed as an acquirer. This has built a steady base of RIA firms ripe for consolidation and partially fueled the affiliate growth of RIA acquirers over the last decade.
The key drivers of PE interest in the RIA channels include a perfect storm of market opportunity, fragmentation, and revenue. According to Cerulli, total assets in RIA channels jumped from $2.3 trillion to $8.2 trillion over the last decade, a 13.2% 10-year compound annual growth rate (CAGR). Combined, the RIA channels now control 27% of asset marketshare, growing by seven percentage points since 2011.

“The rapid expansion of the RIA channels coupled with consistent consolidation has driven private interest in the marketplace to new heights,” says Stephen Caruso, research analyst. “With the opportunity for RIA acquisitions eclipsing $3.7 trillion in AUM across advisor retirements, new breakaway advisors, and growth-challenged RIAs, there is no shortage of potential acquisition targets.”

A reliable revenue model is also driving PE interest. RIAs operate in a fee-based model with sticky client relationships and a predictable stream of recurring revenue. On average, RIAs derive 82% of their revenue from asset-based fees and experience annual average asset inflows per advisor of $6.8 million across six new client relationships. This organic growth, combined with a strong recurring revenue base, presents an attractive opportunity for firms.

Yet, as the number of private equity firms in the RIA market grows, finding white space will be decidedly difficult. “PE firms will need to ensure their growth metrics, timelines, and business strategies mesh with the consolidators they are looking to acquire,” says Caruso. “While operational guidance from experienced investment partners is advantageous, any misalignment of objectives could cause significant friction,” he concludes.