Independent firms are supposed to be small, with limited resources — a family-like culture, simple organizational structure, limited resources and the reputation of a well-kept local secret.
But there is a group of 40 or 50 independent RIAs that are none of the above. See: Mariner Wealth Advisors buys a $1.3 billion wealth manager that first unwound its ties to a bank. They may have started as small local competitors that relied on word of mouth, but through the efforts of their founders have grown past $1 billion of assets under management and through mergers, aggressive recruiting of new partners and even acquisitions, they have turned themselves into formidable competitors. If you are an independent advisory firm, these are the competitors you should fear the most. They will challenge you in a way the wirehouses never could — on your own field, in your own local market.
These “super-ensemble” firms have more than $5 billion in AUM and a strong brand supported by large marketing budgets that extend to multiple markets. They have complex organizational structures, often spanning several locations and with well established career tracks. They have the budgets and the negotiating power to create their own technology, set up their own broker-dealers and establish their own research and investment capabilities. They are not satisfied with just working with million-dollar clients and are successfully competing with the family offices, trust companies and premier wirehouse teams for $100 million clients. They are run by chief executives and managing partners who are sophisticated leaders, often in their second or third post as the leader of a large wealth management organization. They are formidable competitors and they are aggressive in their plans and ambitions. See: Big Midwestern RIA buys itself a national presence in deal with CBIZ.
Super-ensembles are the most dangerous competitors to independent firms today. If you haven’t noticed them, look around. I see them advertising on the cover of niche magazines, sponsoring large charity events and appearing in print and television. I see them publishing books and research targeted at the top clients. Most of all, I have seen them compiling extensive lists of the top clients in their markets and strategizing on how to approach them. They may be knocking on your door as a merger opportunity or they might be making that offer to your competitors next door.
What defines a 'super-ensemble’
The $5 billion mark I just proposed is somewhat arbitrary. What truly defines a super-ensemble is its burning desire to establish its own brand, grow beyond a single market and dominate the markets it is in. This label describes well firms such as Aspiriant, Ronald Blue, Oxford Financial Group, Laird Norton, GenSpring Family Office, MyCIO and Lydian. See: Giant Indiana RIA is the latest to take a bite out of Wells Fargo’s UHNW unit.
All are firms with extensive market presence, regional (rather than local) presence and a growing number of offices. The super-ensemble label also fits firms that are more investment managers than wealth managers in their core value proposition but have a similar strategic bent of outgrowing their local markets. Good examples are Litman Gregory, Symmetry Partners and Ferguson Wellman. Finally, accounting firms such as Plante & Moran and Moss Adams have successfully transferred their regional dominance in audit and taxes to wealth management.
This list is by no means meant to be exclusive or exhaustive, it merely intends to illustrate the concept that there is a group of firms with significant size and resources that is reshaping the competitive landscape and the industry. If the accounting industry is any parallel or indication for such industry developments, you may soon hear these firms knocking on your door — or the door of your best clients.
I estimate that are more than 350,000 CPA practices in the country today. The vast majority of them are solo practices or small partnerships with two or three partners. The top four firms dominate the public-company market and are international in size and scope. Each of the four — KPMG, PwC, Ernst & Young and Deloitte — have well over $5 billion in revenue and are pretty much household names as much as accounting firms can be household names. See: How Rob Francais combined two giant RIAs and then added the assets of Deloitte Investment Advisors.
Behind the big four, however, there is a strong contingent of 40 to 50 firms that collectively are known as the Group B. This group, that includes Grant Thornton, BDO Seidman, BKD, Crowe Horwath LLP, Moss Adams and others, has established itself for the last 10 to 15 years as a strong local force that dominates the private-company market, just like the big four dominate the public-company market. What’s more, Group B firms frequently foray into the lucrative markets of the big four, including some public-company work, specialty practices, consulting and even public-company audits. Some firms, especially Grant Thornton, go head to head with the big four on a daily basis.
Group B firms have, over the last 15 years, taken a lot of clients from the big four. Most of all however, they have taken clients away from their smaller competitors. In fact they have “creamed the crop” of many of the smaller local firms.
The high hourly rates and complex engagement mechanics of the big four never really appealed to privately owned firms. Those that did not need a “name brand” audit, rarely related to large teams and high cost of the big four engagements — they always felt like second- class citizens behind the Fortune 1000 clients that paid millions in fees. The Group B accounting firms were a perfect fit — they offered the same level of sophisticated professional but with a more personal relationship. Their rates, while not low, were more reasonable to the privately owned world and most importantly their partners could relate well to the business owners.
Conversely, as strong as the relationship might be between the partner of a smaller CPA firm and the business owner-client, it eventually gave way to the compelling proposition of the Group B firms: sophisticated process, niche expertise, high-quality staff beyond the partner, prestige and recognition of the auditor by investors and creditors, better protection for external board members and more value-added services. See: Moss Adams launches growth strategy with its first RIA acquisition in a decade.
The same could happen in the advisory industry — in fact, it is already happening. The super-ensembles have a very compelling value proposition — large and sophisticated teams beyond the partner, valuable capabilities — especially tax expertise, access to better resources such as trust solutions or separate-account solutions, better acceptance from other professionals — including CPAs and creditors with and expertise in certain niche markets such as multigenerational wealth. Before dismissing this as a threat and saying that your clients will never go to such a firm, talk to your CPA friends about the market they compete in today and ask if they ever lost a client to a Group B firm. You may find that losing your best clients is not so inconceivable.
Consolidators or consolidation targets?
In the accounting industry, Group B firms achieved their prominence through aggressive sales (imagine a CPA aggressively selling — that’s like sumo wrestlers sprinting!) and acquisitions. The super-ensembles are already doing the same — merging and acquiring other firms. When I started with Moss Adams as an entry-level analyst in 1998, the firm was the largest non-big-four firm in Washington but had more limited presence in Oregon and very little presence in California. I believe today Moss Adams is in seven different states and is certainly dominant in market share in Washington and Oregon, as well as California and New Mexico. Most of that prominence was achieved by mergers. See: This generation of advisor aggregators puts the roll-up ghosts to bed, for now.
The super-ensemble RIAs are quietly doing the same through mergers of individual partners and sometimes entire firms. The mergers usually are targeted to provide a beachhead into a local market. The merged firm serves as the starting point for expansion into a different geographic location. It provides the local presence and a known brand as well as the leadership for the local office. Typically, that existing presence is quickly supplemented by additional services offered to clients and an aggressive campaign to the top clients in the market advertising the additional services and depth brought by the super-ensemble. Usually, the top partners from the large firm will soon start visiting the local office and going on marketing meetings with the local partners. Frequently, the firm may even relocate young ambitious partner-candidates to help build market share quickly. See: In a triple merger, fast-growing Florida RIA scoops up an LPL advisor and a fellow asset manager to double firm size.
The long haul
Unlike consolidators — who tend to arrive on the scene, write a check and then leave — super-ensembles tend not to write checks and never leave. Their goal is to expand the local firm and help it reach clients it could not get to before. Their appeal is in the tremendous value of the equity they offer and the ability to increase the income of the local partner quickly. What is more, they are not financial wizards and deal-makers with fancy spreadsheets. Rather, they are fellow advisors who still work with clients and who have the same culture and mentality as the local partner. In other words, they have a strong appeal to the partners who are not looking to cash out immediately. Finally, super-ensembles have a cadre of young and ambitious professionals who can serve as the retirement exit for the local partner.
Some of the super-ensembles may already be under institutional ownership, such as a CPA firm or a trust company, but they are not part of a consolidation effort — they are a consolidator themselves. The key is that they still have control of their equity and can articulate a compelling strategy to their target mergers without the dark cloud of when-we-go-public- or go-through-a-liquidity-event hanging over their heads. At some point every super-ensemble has to determine if it wants to be a target or an acquirer. In fact, some of the firms that could have played that super-ensemble role have already sold to consolidators, and I believe that is hampering their ability to grow.
Too much conformity?
If Group B firms have a weakness, it is in the ability control and manage a large and diverse partner group in a way that promotes a shared culture and uniformity of service and safety. Unity and uniformity become cultural imperatives — they have to be there in order for the firm to be able to function as a firm and not as a collection of practices. That unity, however, can sometimes suffocate the entrepreneurial spirit of the firm and create barriers between the clients and the partners. In other words, the super-ensembles are always in danger of becoming much like their larger brethren — the wirehouses and trust companies. See: What is the value proposition of a financial advisor — and how is a budding RIA culture upping the ante?.
The best competitive response smaller firms have to super-ensembles is to entrench themselves in niche markets and seek to dominate those niches. In the absence of available niche markets, a firm can offer strong resistance if it shores up its capabilities through alliances. Services that can become Trojan horses should be given particular attention. This includes taxes and tax advice, custom portfolio solutions, business consulting, investment banking and credit and, in some cases “softer” services such as family counseling and addressing intergenerational issues.
Philip Palaveev is the president of Fusion Advisor Network — a $50 million revenue franchise network of independent advisors that provides business management and collective bargaining services to its members. As president, Palaveev is responsible for the strategy of the firm and leads its practice management development, focusing on helping the 200-plus advisors expand their businesses.