The Role of Independent RIA Firms in a Growing Financial Planning Profession

The financial planning profession is a growing, in-demand profession. “The amount of wealth that consumers own is far greater than at any time in history,” says Scott Hanson, CFP®, Co-Founder and Senior Partner at Allworth. Demand for personal financial advisors is expected to grow at a faster than average rate of 7% through 2028, according to the Bureau of Labor Statistics. As a result, the need for quality financial advice — particularly from those with the appropriate expertise such as CFP® certification — continues to grow. The increased demand for financial planning runs parallel to the recent pandemic retirement surge, where nearly three million Americans retired early in recent years, potentially leading to a further increase in services and assets managed by RIA advisors.

According to McKinsey, RIA firms represent the fastest-growing category in the U.S. wealth management market since 2016. An RIA can vary in size and capabilities, but some RIAs are comprised of independent fiduciaries who may associate with several broker-dealers, selling a range of products and services. More than 1,600 advisors join the RIA channel annually, bringing with them roughly $180 billion in client assets. According to McKinsey, many advisors are moving from larger broker-dealers, and more than 700 independent RIA firms are started annually.

According to McKinsey, RIA firms represent the fastest-growing category in the U.S. wealth management market since 2016.

This growth has made the RIA channel ripe for mergers & acquisition (M&A) activity, particularly in recent years. According to Echelon Partners, the second half of 2020 was “by far the most active period” in RIA M&A history, with 124 deals — 61% of all 2020 deals — taking place in the third and fourth quarters of 2020 alone. This explosion in activity continued apace in 2021, as RIA valuations hit an all-time high and are projected to accelerate further in 2022, according to DeVoe & Co.’s 2022 RIA M&A Outlook. Fidelity’s recent RIA M&A update found that activity continued to accelerate towards the end of last year, with 182 RIA transactions deals struck, totaling $304 billion. According to Nationwide’s Advisor Authority study, two-thirds of financial professionals polled expect consolidation and M&A activity in the industry to increase in the next 12 months.

Why is there such an influx of activity in the independent RIA channel? Several factors are leading independent RIAs to serve as key drivers of growth and advancement for the financial planning profession.

The Independent RIA Channel Has Features That Make It Attractive to Many Financial Planners

An advisor’s decision to work as an independent RIA may be influenced by a variety of things. Among the most significant are flexibility and versatility. According to CFP Board’s Guide to Careers in Financial Planning, planners who work at mid-size and smaller companies can expand their knowledge base beyond the financial planning process, sometimes leading operational issues, educating clients on specific product lines, or helping the client find other financial professionals that specialize in meeting their needs. In smaller companies where financial planning may be the primary service, advisors have an opportunity to develop deep knowledge of the company, its business and its financial planning services. Additionally, independent RIAs may have the ability to take on clients with a smaller net worth, run a lifestyle practice, or accelerate growth through large-scale M&A and tuck-in acquisitions. All of these are examples of opportunities for more flexibility than what may be available for individual financial planners at larger firms.

While many advisors begin their careers at larger institutions and later enter the independent RIA channel as “breakaway” entrepreneurs, many young financial planners choose to begin their careers at independent RIAs.

In addition to flexibility, many advisors are motivated by entrepreneurship and a sense of ownership, with greater responsibility for one’s professional growth and success. The variety of service models available to independent RIAs allows them to appeal to a wide variety of clients who have different preferences and needs.

While many advisors begin their careers at larger institutions and later enter the independent RIA channel as “breakaway” entrepreneurs, many young financial planners choose to begin their careers at independent RIAs. For example, Taylor Stathis, CFP®, a Client Relationship Manager at GM Advisory Group, began her career at an independent RIA because of the flexibility it afforded her in her service to clients and career growth. “Working at an independent RIA afforded me incredible opportunities at such an early stage in my career. It has given me the opportunity to learn about all the different aspects of financial planning and business development and how each department works,” she says.

As the market for financial advice has become larger and more diverse, RIAs have had many opportunities to thrive and compete with larger broker-dealers and wirehouses. Stephanie Bogan, whose firm Limitless Advisor focuses on teaching financial advisors to build successful and sustainable businesses, says, “It’s never been easier to build a clientele.”

Trends that Allow Independent RIAs to Thrive

While many trends impact the financial services industry, independent RIAs are particularly well suited to adapt to changes due to hyper-specialization, increased personalization, and digitalization.

Hyper-specialization is a firm’s ability to focus its practice on a niche set of clients who share a set of common needs. Hyper-specialization goes beyond serving broader client bases such as “clients over 55” or “clients saving for their child’s education.” Rather, financial planners who hyper-specialize hone in on smaller populations seeking more nuanced service, such as families with members who have special needs, military families, veterans, or divorced or widowed people.

“Hyper-specialization is driving growth in small and mid-size firms because we're moving into an experience economy and an attention economy,” Bogan says. “Consumers are now expecting highly specialized, personalized experiences that are accessible and affordable. By leveraging technology to be hyper-efficient, advisors are able to systematize a highly specialized experience, serving clients more deeply, serving more clients or even serving smaller clients in ways they could not previously.”

While the idea of offering hyper-specialized services to niche sectors of the population is not new nor is it specific to independent RIAs, the RIA business model may offer clients a variety of ways to engage with advisors and pay for the services they receive.

71% of consumers expect companies to deliver personalized interactions, and 76% are frustrated when the service fails to meet that standard.

Increased personalization is also driving growth within the financial planning profession. According to a 2021 McKinsey report about the power of personalization, 71% of consumers expect companies to deliver personalized interactions, and 76% are frustrated when the service fails to meet that standard. Companies that grow faster drive 40% more of their revenue from personalization than their slower-growing counterparts. As the market for financial advice has grown and clients have become more diversified, demands for further customization from advisors have increased.

One area where this personalization is a factor is with payment options. Independent RIAs are more likely to accommodate customer requests for payment flexibility than some larger competitors. Additionally, independent RIAs can charge AUM fees and offer investment advice without complying with the requirements of a larger broker-dealer. As an independent RIA, Todd Calamita, CFP®, who started his firm Calamita Wealth Management to specialize in retirement planning after over a decade working at larger financial institutions, says, “You can customize [your firm] to the way you want to do business and the types of clients you want to attract.”

Another example of the personalization effect is in the pairing of clients and advisors, and the ability for advisors to attract like-minded clients. Independent RIAs may not have the nationwide brand recognition of larger firms. Because of this, financial planners at independent RIAs have an opportunity to rely on their own individual brands and personal approach to connect with clients. While these factors are also essential for winning business at a larger broker-dealer, it’s very crucial and a great opportunity for financial planners at independent RIAs.

Digitalization is an additional trend in which clients have become more comfortable with remote interaction, further expanding the opportunity to build a larger, specialized client base. Calamita attributes this to modern technology. Widespread adoption of teleconference technology allows financial planners with hyper-specialized target audiences to gain a national audience and client base. Clients are much more comfortable and confident conducting business and receiving services online. This allows hyper-specialized firms to serve clients from all over the country and promote their individual advisors with expertise in these specialized areas; they can therefore stay within their niches, rather than being limited to tailoring their focus to a particular geographic area. Many advisors point out that maintaining relationships with clients who move to new locations or change states has become easier, as they tend to stay with their current advisors instead of switching to new local advisors.

“With technology, you don’t have to choose between scalability and specialization,” Bogan rejoices.

However, while technological advances present more options for advisors and clients to work together despite geographical distances, Calamita adds that “Clients are predominantly still looking for people locally.”

The Future for Independent RIAs

Entrepreneurship in the RIA space is poised to grow, as some advisors will continue to choose to break off from larger firms and form their own RIAs. Previously, Calamita says, it was very common for clients to receive their financial planning services from only larger firms with “brand names.” But over time, independent advisors have gained the technology and resources to start their own firms, bringing their clients with them.

M&A momentum will continue. As older advisors retire, they may sell their firms to aggregators and integrators as part of a succession plan, allowing these firms to serve longstanding clients. Even advisors with smaller books of business who are not ready to retire and let go of their RIAs may partner with larger organizations to gain access to the technology and resources they need to accelerate their businesses, feeding the RIAs back into the growth of the financial planning profession.

“Our industry is in the early innings of massive consolidation,” says Hanson. “Most advisory firms are tiny little businesses. Some of these firms have been merging, creating sizable regional or sometimes even national firms. This will only accelerate in 2022. The opportunity to benefit, both personally as well as from one’s clients’ perspective, is massive.”

Many RIAs are joining networks that provide the investment advisory, technology and in some cases supervisory platforms needed to scale services. For example, Dynasty Financial Partners provides back-end tech support to its network of independent financial advisors through its WealthTech platform. Some networks like Garrett Investment Advisors and Integrated Partners allow advisors to integrate operational workstreams as they focus on client interface. Other networks, like Dimensional Fund Advisors’ Women & Wealth Network, allow thousands of advisors to share specialized expertise around investment solutions, client messaging and business strategy.

Diversity among RIA firms and their clientele will thrive as the independent RIA channel grows, collectively attracting and serving a wide range of client demographics. As the financial planning profession becomes more diverse, independent RIA advisors will be able to further specialize and fill more niches within traditionally underrepresented demographics.

Trends in entrepreneurship, networks, M&A and diversity — among other factors driving the success and growth of RIA firms — will only contribute to growing the number and diversity of Americans served by the financial planning profession. This indicates that the success and growth of independent RIA firms will have a positive impact on consumers, as more people receive financial planning services that help them reach their financial goals and achieve a secure future.