Quality Growth

I want to tell you about why Ritholtz Wealth Management is coming to the West Coast of Florida in the first week of March. But before I get there, let’s talk about the state of the wealth management industry.

The ZIRP era of cheap money is over, but that doesn’t mean its impacts aren’t still being felt. Infinite leverage turned our world upside down and gave it a good shake.

In Welcome to the Jungle: The Next Phase of the Evolution of the Wealth Management Industry, Mark Hurley et al writes:

Private equity firms also raised trillions of dollars – including more than $2.2 trillion since 2016 – for which they needed places to invest. They took notice of the industry, and it was an inviting target. Particularly attractive was the stability of wealth manager client relationships because they generate predictable, recurring fees which allow buyers to use large amounts of leverage when acquiring these businesses.

Additionally, participant owner demographics created many transaction opportunities of size. Numerous $2 billion to $10 billion AUM participants had been founded in the early 1990s with owners who were now in their mid-60s and needed a way to monetize their ownership stakes.

Under such conditions, it was unremarkable that more than a hundred acquirers suddenly emerged, buying anything and everything that was for sale. Nearly 1,600 transactions were completed.

Size was what mattered most. Quality quickly became an afterthought. PE firms backing these buyers had oceans of money they needed to invest if they were going to collect the associated management fees that now dominated their own profitability

Higher interest rates will ultimately impact the strategy that private equity buyers employ, but a lot of money was already raised when rates were much lower, and that money has to find a home. Indeed, it has.

RIA M&A activity hit $331 billion in 2023 on 227 total transactions. This improved upon 2022’s record-breaking year of 230 transactions and $283 billion.

These transactions have hollowed out a large area of the market. The area that was once considered large. The area that my firm currently occupies.

Again, here’s Hurley et al. “However, what is different from only a decade ago is that there are now far fewer firms that previously would have been considered “large” (i.e., with $2 billion to $10 billion of AUM) but that today would be considered “medium-sized.” The preponderance of such “medium- sized” firms have been acquired and the difference between the big and the small (for much of the industry) is now much greater.”

We started our company in September 2013 with less than $100 million under management. By our tenth birthday (September 2023) we had grown to $3.9 billion. And we did it our way. If we were a stock, we’d be in the quality growth bucket.

We never took any outside capital. Private equity and other potential buyers have come sniffing around over the years. We never entertained the idea. We are 100% employee-owned. We also never participated in the client referral program offered by the largest custodians, which is a huge source of growth in our business. Our clients are here because they want to be.

All of our growth was organic for the first couple of years. We put our thoughts out into the world, built a fan base, and turned some of those fans into clients. This is for another day, but not a single person has ever come to us and said, “I love your content, please take my life savings.”

We’ve been able to grow because the engine that we built internally has every bit as much horsepower as the content that our audience devours. The blogs and podcasts get them in the door, but that’s when the real work begins. Our advisors and ops team are, in my biased opinion, the best in the business.

Along our journey, we’ve successfully been able to mix organic growth via new clients, and inorganic growth via new advisors. And let me tell you, the latter is indeed a jungle.

As I wrote earlier, M&A via private equity-backed giants has dominated the advisor landscape for the last decade. And that world got very competitive very quickly. Demand for assets outpaced the supply, and so the prices of these deals went up, and up, and up.

If you’re an advisor with a decent-sized book, chances are someone’s come knocking at your door with an attractive offer. And while the financial terms might be great for the advisor, they’re not always right for the end client. Again, a different topic for a different day.

We get a lot of advisors reaching out to see if Ritholtz Wealth Management could be a good home for them and their clients. But it’s only a fraction of what we would see were these bottomless pocketed investors not part of the equation. They are stiff competition, no doubt.

I called us quality growth for a reason. We believe the advisors that join us are of the highest quality in terms of their character. We’re not writing them a check to join us. The industry is going left, we’re going right. For these advisors to forgo a more attractive financial offer says a lot about them. One of those people is in beautiful Naples, Florida, and we’re coming to see him and his clients in the first week of March.

If you’re in the area and are curious about what our planning and investment process looks like, we’d love for you to get in touch. Please email us at info@ritholtzwealth.com with “Naples” in the subject line.

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