The fee-only model is scaling up fast, creating more mega RIAs

What began as a niche movement has in recent years enjoyed rapid growth in firms and assets as advisers gravitate toward independence and consumers toward more transparent pricing. The rise of $1-billion-plus mega RIAs in the space, fed by an influx of private capital and deal-making, is a further sign of the business model’s maturity.

The number of $1 billion fee-only firms has risen by 100 to 395 over the past two years, according to an analysis of the InvestmentNews RIA Data Center. The database tracks independent SEC-registered firms that serve individuals with financial planning and investment advice but do not accept commissions or employ registered representatives of a broker-dealer. Collectively, mega firms now control about 70% of assets under management among fee-only RIAs.

Mega firms have used their scale to outpace the broader industry, especially since 2019. Over the two years ending in June, assets grew 47% at mega firms, compared with 31% at smaller shops. Mega firms also grew faster on average (10% vs. 8%), a remarkable achievement since their growth is measured from a larger starting point.

These firms have used their weight to foster both organic and inorganic growth.

Since fee-only firms are not dependent on transaction volumes or product sales for revenue, they enjoy relatively stable cash flows. Even independent broker-dealers have increasingly moved toward fee-based pricing in recent years, with the top 25 firms now generating the majority of revenue from fee-based assets.

As fee-only firms grow past the $1 billion asset threshold, they are able to expand staff, deepen their holistic service offerings and land larger clients, perpetuating growth. The support staff at the typical mega firm is also about 10 times larger, making their advisers more productive.

Yet the emergence of mega RIAs has also caught the attention of Wall Street investors and fueled a steady stream of mergers and acquisitions. According to Echelon’s RIA M&A Deal Report, $1-billion-plus transactions nearly doubled in 2020, despite the pandemic.

The 10-fastest growing firms tracked over the past two years owe their expansions in large part to the flurry of deal-making. No. 2 Laird Norton, for example, merged with fellow Seattle-based firm Filament to more than double its size in late 2020, while No. 3 EP Wealth has made a string of acquisitions over the past three years with its private-equity backing.

Overall, eight of the 10 fastest growing mega firms made significant deals during the period, with Arlington Partners and The Clarius Group being the exceptions.

RIA Rankings

• Top RIAs by Total AUM
• Top RIAs by Average Account AUM
• Top RIAs by Discretionary AUM
• Top RIAs by Non-Discretionary AUM

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