It looks easy . Organic growth , however , eludes most RIA firms , despite the industry ’ s fast expansion .
This puts the RIA universe in a very different place than either the accounting or legal professions , which have remained largely owned by their principals for centuries or more and show few signs of changing .
Why has the RIA business captivated private equity investors ? Largely because of its recurring revenues , coupled with client retention rates north of 95 %. When these investors look at other industries , they typically see companies with client turnover rates of 30 % to 50 %. That means most of these businesses need to continuously replace a huge swath of clients just to avoid shrinking . In contrast , an RIA firm that loses only 2 % of its clients a year can meanwhile expand that roster 5 % and get 8 % in financial market appreciation , thus generating consistent double-digit revenue growth .
It looks easy . Organic growth , however , eludes most RIA firms , despite the industry ’ s fast expansion . A recent analysis of the sector ’ s growth by Tiburon Strategic Advisors estimated that market appreciation accounted for 70 % of RIAs ’ asset growth while the organic component was only 30 %.
And just because clients haven ’ t left their advisors doesn ’ t necessarily mean they feel the kind of satisfaction associated with 97 % retention rates . Inertia plays a part , too . A recent study by CEG Insights found 14 % of clients with $ 5 million to $ 10 million were considering switching advisors . Among individuals with $ 10 million to $ 25 million , that figure rose to 22 %.
Topping the list of client complaints in the CEG study was that advisors had failed to provide comprehensive financial planning counsel in areas like tax and estate planning and asset protection . Though many independent RIAs stress the breadth of their services beyond basic money management , especially when competing against wirehouses and private banks , a major portion of their clients don ’ t believe they are receiving it .
Older advisors exiting the profession confirm some of these complaints in interviews . Several experienced advisors tell Financial Advisor that since their firms were sold during the pandemic , service levels have declined as the senior partners have pulled back . While the client attrition isn ’ t alarming , it has climbed noticeably .
This raises several questions . Did the founding partners who bowed out underestimate their own sense of importance , or did they simply do an inadequate job of training the staff they left behind ? Or is everyone too distracted by the pandemic and all the money floating in and out of their firms with changing ownership to mind the store ?
Liquidity Cliffs
Peter Lazaroff , partner and chief investment officer at St . Louis-based Plancorp , thinks the generation of founding advisors now leaving the business deserved the big exit checks they got . The 39-year-old advisor , who entered the business in 2007 , also has little doubt that the older generation sincerely cared about their clients .
But when he attends industry events , he often hears complaints from younger advisors about their debt — and the rewards going to their first-gen colleagues .
It goes beyond just the money . “ Some [ younger ] people feel like their clients don ’ t know them ,” he says .
There are multiple disconnects , and they can be traced to poor planning . Indeed , the foresight of Plancorp ’ s founders ( the firm ’ s current CEO and chief planning officer are both in their 40s ), may be one reason Lazaroff is willing to go on the record when several other younger advisors interviewed for this article asked to remain anonymous .
He says some foundering generation advisors sell because they haven ’ t hired talent to replace them . But even if they do have the talent , the younger advisors , or their firms , might not otherwise have access to capital to buy in . That ’ s particularly true among wirehouse reps , who don ’ t enjoy the prospects of selling their firms at the big multiples RIAs are currently commanding .
Such failures to plan are the root cause of today ’ s generational resentment . Plancorp , unlike most firms , had a well-structured succession plan in place for several years before Lazaroff joined in 2015 . A few years later , the firm developed a robo-advisor , BrightPlan , as a joint venture with a family office that eventually invested succession capital in the firm . Today , Plancorp has 24 shareholder employees , up from three a decade ago .
Lazaroff himself is two years into a 15-year plan , which ends when he turns 52 . That doesn ’ t mean he will retire then , “ but I hope my successor will be in the building .”
By 2035 , Lazaroff thinks Plancorp could have as many as 50 shareholder-employees . But even with its current base of 24 advisor owners at present , the firm doesn ’ t face the liquidity cliff crisis afflicting many other firms with concentrated ownerships . If a few partners want to cash out , outside capital won ’ t be needed .
IPO Pipe Dream Fades
One solution firms often turn to when they want to give everybody a happy ending is to go public . But that ’ s turned into a pipe dream . For at least two firms , Focus Financial , which re-
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