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Also available as podcast (Episode #154)
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What is an RIA aggregator?
TL;DR – There is no regulatory or industry standard definition of what an RIA “aggregator” is. Instead, the term has been used by market participants to describe several different business models, at times which are not at all similar. It’s important to understand how the terminology is typically used, and which of the business models is most attractive for your particular practice.
Host:
Brad Wales founded Transition To RIA in 2020 after nearly 20 years of prior industry experience, including direct RIA related roles in Compliance, Finance and Business Development. He has an MBA and has held the 4, 7, 24, 63 & 65 licenses. He has been quoted or featured in 100+ industry articles including in the Wall Street Journal, Barron’s, and most every other major industry publication. He is well known for his RIA video explanatory series, and Kitces named his podcast as a “Top Podcast for Financial Advisors.”
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Full Transcription Of Video:
What is an RIA aggregator? That is today’s question on the Transition To RIA question and answer series. It is episode #154.
Hi, I’m Brad Wales with Transition To RIA where we help you understand everything there is to know about why and how to transition your practice to the RIA model.
If you’re not already there, start by heading to TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. There’s a Vendor Profile Series. All kinds of things to help you better understand the model.
Again, TransitionToRIA.com.
On today’s episode, we’re going to talk about what is an RIA aggregator?
Now, I’ll start by saying I put the term “aggregator” oftentimes in the same bucket that I put the term “hybrid,” as well as “TAMP” is another example.
What I mean by that are these are words that mean something, but they mean different things to different people and they’re used in different ways by different people. And so you must be very careful when you hear any of those.
You’ll hear someone say… “that’s an aggregator firm.” Well, guess what? There are different ways that term is being used in the marketplace to describe different kinds of offerings.
It’s not that anyone’s trying to be mischievous or hide something. It’s almost the eye of the beholder and to them, whoever’s using the term aggregator, means one thing, but to someone else, it might mean something else.
And so it’s important for you, particularly if you’re considering options in the RIA space, when you hear about some RIA aggregator firm to understand… exactly what do they mean by aggregator? What is their definition of aggregator?
Or it could be someone describing their firm saying… “that is an aggregator firm.” You want to understand the person that’s using that terminology, what do they mean by that?
There are pros and cons to RIA aggregator firms, just like there are pros and cons to all models and all affiliation channels in our industry. So it’s important to understand what these type of offerings are and again, specifically, what are the different definitions and you want to make sure if you’re considering a particular solution that you understand what their definition of it is and then determine is that a potential fit for you or not?
What I want to do on this episode is go through a couple of the definitions or explanations, if you will, of ways that I’ve seen the term aggregator be used.
At the end of the day, there is no official term, or there is no official definition of what an aggregator firm is because again, it’s being used in different ways. So I want to give you some of the more commonly used ways that I have seen it used. And at the end, I will tell you which one I think is most commonly directionally correct. But again, it can be used in different ways.
In no particular order, the first way, and in some ways maybe the most often used way an RIA aggregator terminology is used is there are firms in the marketplace whose business model, value proposition, how they position things with advisors – which could be breakaway advisors, potentially be someone that already has an RIA, could be an independent broker dealer advisor – they say… “we want to acquire your practice in full 100%.”
Which perhaps I shouldn’t say 100%, usually there’s a little hold back and so the selling advisor team has a little skin in the game for at least some period of time, but effectively they’re buying a majority, if not the entire practice.
And they continue…. “if you’re looking for succession, we would like to acquire your practice and bring you in-house to our much larger RIA. We’re going to aggregate you in, if you will.”
That can be very attractive if you are at the point in your career where you are looking for succession and maybe don’t have an internal solution or at least one that will work out.
Or you don’t have an internal and from the different external options you look at, one of these aggregator firms might be the most attractive offering for you.
But typically these so-called aggregators are buying firms in whole, bringing them in, and then it takes a while, but they’re essentially merging them in, or managing them into one centralized way of doing things, that all firms that they’ve acquired are essentially brought under this one umbrella.
That would be things like, maybe not right away, but ultimately they’ll rebrand the practice to the mothership brand. Oftentimes they’ll, again not typically right away, but they’ll eventually work to centralize all the investment process that’s used with clients and that there’s a more standardized way across all of the firms that have been aggregated in of how investments are used with clients.
There could be reasons that might be very attractive for you and it makes sense to do, but centralizing processes is typically part of this model. They will do things like they will start doing all the client fee billing, and it makes sense for them to do the fee billing all the same way across all the practices that they’re bringing in. As opposed to doing multiple different approaches, they instead work to standardize everything to one model.
You can understand why it makes sense from an efficiency standpoint from them, which ultimately that makes the value of that firm, that aggregator firm, more attractive in the marketplace.
They of course would also argue… “This is better for the clients as well. It’s a more standardized process. We have all these experts and resources that support the standardized process.”
So I’m not suggesting there’s anything necessary wrong or bad with that for you as the advisor, if you’re indeed at that stage of your career where you are looking to essentially turn all of that over to someone to make those changes.
But again, if you are in that succession glide path, no matter what kind of succession you do, even an internal succession, change will eventually happen with the practice after your watch.
The idea of a succession is eventually you are going to step away. Whether you have an internal person or team that’s going to take over the practice, or you’re selling to an RIA down the street, or you’re selling to an RIA aggregator, eventually you will be stepping away and they now own the practice and for different motivations and reasons, they will be making changes.
So it’s not a bad thing that RIA aggregators – of the definition I just described – are looking to make changes. It will happen. It’s just a matter of when and how it happens with a succession type opportunity.
And spoiler, I’ll jump right to it, this model I just described is what I think of the most when someone uses the term RIA aggregator. That is the version of the definition that I typically immediately assume is being discussed.
But as I’ll point out here, that’s why you have to pause and say, okay, let me make sure that whoever’s using that term is indeed offering the same thing I think they are offering.
But that is what is typically, in my opinion, used most often with the term aggregate.
Another way I’ve seen RIA aggregator use is there are firms out there where their business model is to not take majority or entire positions in advisory practices, but to take minority positions where they say, hey, we want to come in and buy perhaps 10, 20, 30% of your firm and we’re then going to be hands off.
They basically say, “We feel the advisory business is a wonderful space to be in. We love the reoccurring revenue streams that are part of this model. And so we’re looking for find good operators like you and your team that are looking to take some chips off the table, or to take on capital for your own growth desires. We would love to get a scrape of it, 10, 20, 30 percent, and we’re going to let you operate it from there.”
That is a version of an RIA aggregator. Now, that exists, that’s been done, that continues, new players come along and do that.
However, I would say that’s easier said than done. I think there is some, if we want to call it service creep, for lack of a better term.
While these RIA aggregators that take these minority hands-off positions could say we’re going to be hands-off, I think over time there comes conversations where they say… “well, you know what, it might be easier, we’ve got all these firms and everyone has payroll with their respective employees and you all are doing it different ways at different price points with different vendors and hey, wouldn’t it be easier if just everyone used maybe this one payroll vendor? And yes, you’re still going to be running the show and yes, you’re still going to be majority owner, but maybe it makes sense for you all to be using the same payroll.”
So there’s this kind of implied suggestion that things should be centralized. And the question is how heavy handed does that get or not get? Again, I think some of these models start with a fully hands off value prop. And then I just do worry that sometimes over time, they kind of creep farther and farther down that kind of centralized theme. So it’s something to be aware of.
Next, there is arguably another version of RIA aggregators that again take that minority position, but they very vocally say… “Not only do we want to take a minority position, we want to be hands-on with how the practice is run. We’re not going to be hands-off.”
Part of their value prop, and oftentimes these are very experienced operators that have built and sold RIAs successfully in the past, they say… “We’re going to come in, we want to buy a minority position of your practice, because we want to have skin in the game. But for all of our experience, all of our resources, all of our know-how of how to do this – just look at our track record – we can help you grow faster than you would have ever been able to grow on your own. So yes, you’re going to stay majority control, but we do want to come in and be an active partner in helping you make your technology more efficient, or your business development marketing efforts better, your organic growth significantly better than it is now.”
All different kinds of things where they feel they can add value and their objective is a shared objective with you of, they just want to help you grow faster. The faster you grow and the bigger you grow your practice, the more it benefits you.
And likewise, because they have that minority position, they grow as well. And they’re looking to do this with several different firms and put their capital and expertise to use in several different firms.
Sometimes that’s referred to as an RIA aggregator. And that can be a very attractive model to you, depending on where you are with your practice. Maybe you’ve stagnated, maybe you’ve grown to a certain point and just can’t break through to get to that next level. And you can bring in these experts.
But they are going to be more hands-on. And the idea being that hopefully if that’s a good arrangement and you’ve chosen a good partner that one plus one will equal three. That’s the objective. So that exists as well as a version of RIA aggregator.
And then the final one I’ll point out, and this I actually think is used incorrectly in this regard, but there are some wonderful 1099 RIA platforms out there that are very good proxy in comparison to having your own RIA.
These 1099 options say… “Come join us. You will retain 100% ownership of your practice. You will use your own brand. You will be 1099 and control your local expenses. You can continue to manage assets how you want. But what we’ve done is we’ll take the nuts and bolts off your plate for you. We’ll handle the compliance. We’ll handle the client fee billing. We’ll make sure the tech stack is still talking to each other. We’ll do the cybersecurity. You get to do all the client facing things, the things you enjoy doing yourself. We handle the so-called middle and back office stuff behind the scenes for you.”
There are some wonderful reasons you might want to explore that. I help advisors understand what those value props are, who those firms are, how they compare to having your own RIA.
But I have heard, typically not those firms themselves, they don’t call themselves RIA aggregators, but I’ve heard other commentators in the marketplace, in the industry, sometimes refer to that model as RIA aggregators.
I personally disagree with that use of the definition. I tend to lean toward where “aggregator” involves acquiring some or all of a practice. Whereas these 1099 models, as I’m explaining them, don’t acquire a minority position as a requirement as part of using their platform.
It’s not that Brad Wales gets to decide the official definition for RIA aggregators, but I have seen that used. And again, I would 100% disagree that that’s an appropriate way to use the term with respect to those offerings. But it just shows how if someone’s using the term RIA aggregators to describe that 1099 model, and others are using the same term to describe the first model I explained, those are wildly different value propositions and yet somehow the same term is being used for them.
To wrap up – and hopefully I’ve proven a point here by showing the different ways that this terminology is being used – at the end of the day who cares when and how this term is used. Whether a firm themselves are calling themselves an RIA aggregator (which typically firms themselves don’t use that term), or it’s a third party commentator, or reporter, referring to a firm as an RIA aggregator, I would just suggest don’t get caught up if they’re using that term and whether they’re even using that term correctly.
If there’s some potential path you might be interested in, or you hear about some firm or some solution or some platform, it’s like, hey guys, call it whatever you want. I don’t care. What is important is that you understand what their business model is, what their value proposition is, how they price it out, why it may or may not be a fit for your current practice, what you hope to do with your practice going forward.
That’s the important part. They can call it whatever they want. If it’s a match, it’s a match. If it’s not a match, it’s not a match. Don’t get too hung up on terminology here.
But at the same time, as I’ve alluded to, it’s important to also not get blinded by someone using that term. Where you assume it means one thing when potentially whoever’s using that term could possibly be meaning something entirely different than what you think they are referring to. So be careful when the term’s used.
That’s a big part of what I help advisors with is to know all these different models in the marketplace and who the different firms that are providing these solutions are. Are any of them going to be attractive to you? Which might be a fit?
I’m happy to walk through that with you as well and how that relates to your particular practice.
First things first, like I said at top, my name is Brad Wales with Transition To RIA. If you start out by heading to TransitionToRIA.com you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. There is a Vendor Profile Series.
At the top of every page is a Contact link. Click on that and you can instantly and easily schedule time to have a one on one chat with me, whether you want to talk about today’s topic or anything else RIA related. I’m happy to have that conversation with you.
Again, TransitionToRIA.com.
And with that, I hope you found value in today’s episode and I’ll see you on the next one.
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