Jim Cahn of Wealth Enhancement Group says he's no longer making predictions about how big firms might become in the wealth management business.
Cahn, chief strategy officer and chairman of the firm's investment committee, said he has almost always come up short whenever he has ventured a guess at just how high Wealth Enhancement Group's assets under management total might rise. With the firm's announcement this week of its purchase of FinTrust Capital Advisors, a hybrid practice with $2.39 billion under management, WEG's asset total is now approaching $95 billion.
"I remember when we were at $2.5 billion, and I thought we would never get to $5 billion. And it was a really big deal when we did," Cahn said in an interview on Thursday. "And then I never thought we'd get to $10 billion. So I've been consistently wrong about how fast the RIA space is going to scale."
The benefits of being big
WEG is just one of many RIA aggregators driving consolidation in the advisory industry — much of it financed by the deep pockets of private equity. Its direct rivals include the even bigger firms
READ MORE:
WEG's purchase of Greenville, South Carolina-based FinTrust Capital Advisors brings it not only nearly $2.4 billion in additional AUM, but also 14 advisors and a stronger presence in the southeast U.S. The deal, whose terms aren't being disclosed, comes on top of WEG's purchase earlier this year of the
Although Cahn is wary of making predictions about how big any of these firms can become, he is among the industry executives who thinks much of the RIA world will eventually be brought under the umbrella of a handful of big aggregators. That's not to say there isn't a place for small, independent firms.
But RIA practices seeking to grow inevitably run up against the reality that there is only so much they can do on their own. Like other aggregators, WEG has invested heavily in the sorts of services that advisory clients tend to clamor for but that small shops struggle to supply without outside help.
Services on tap
Over the years, WEG has added trust-planning and tax-preparation services to its list of offerings. Cahn said the firm helped submit more than 7,000 tax returns this year.
WEG is also investing heavily in digital systems that will let clients engage the firm in much the same way as they might an online bank account. Cahn said he and his colleagues are not believers in robo advisors.
Wealth management almost always involves emotional situations that are still best left to human beings. But he also recognizes that clients — particularly younger ones — expect to have easy access to their accounts from their phones and computers.
"And that's an investment that's going to cost tens of millions of dollars," Cahn said. "And I think smaller firms are going to struggle to provide that."
The flip side of providing easy access to digital information, of course, is the need to keep confidential data out of the hands of bad actors. Cybersecurity, Cahn said, is something small firms also struggle to provide on their own. Protecting private information is just one of the ever-increasing compliance mandates weighing on RIAs.
"And, again, I think that some smaller firms are in some sort of denial when you talk to them about cybersecurity," Cahn said. "They pay $50 a month for their firewall service. It's not enough anymore."
Why go the WEG way
For Allen Gillespie, the chief investment officer of FinTrust Capital Advisors, his firm's recent decision to join WEG largely came down to the aggregator's trust-planning services. Gillespie said he and his colleagues found during the COVID-19 pandemic that many of their clients had awakened to the need to think about how they might want to hand down wealth to the next generation.
"It's really the demand for trusts and trust-like services and people's focus on estate planning, not just from a tax and planning standpoint, but from a life and family-continuity standpoint," Gillespie said. "COVID most definitely changed the conversation as it relates to trusts and — and I kind of hate to say it — end-of-life planning."
Another priority for Gillespie was to ensure FinTrust advisors who were nearing retirement age would have a fairly seamless way of handing down their business to others. Gillespie said he will now be looking to his new colleagues at WEG for expertise on those transitions.
"We have a couple of advisors who will probably be retiring in the next few years," Gillespie said. "So it becomes, 'Hey, what are the best practices with that? How do we hand that off to a younger advisor and make sure the client experience stays what it should be?"
On an acquisition tear
Wealth Enhancement, whose private equity backing comes from
RIA aggregators were by far the most active acquirers, according to Echelon, driving nearly 70% of the deals seen in the first half of the year. But consolidation is also the rule in other corners of the wealth management industry.
A report released on Wednesday by the research firm Cerulli found that 93% of assets in the independent broker-dealer business are now held by the top 25 brokerage firms. That figure is up from 84% in 2013.
The report also notes that the 10 largest firms can also claim 62% of the industry's total headcount. Asked why they chose to join an independent broker-dealer, the advisors in Cerulli's research cited both technology (55%) and back-office support (53%) ahead of compensation (49%).
Michael Rose, Cerulli director of wealth management and the lead author of the report, said he does not expect to see the influences driving consolidation to abate.
"In fact, we think that scale begets scale, and thus we expect consolidation to continue relatively unabated going forward," he said in an email.
Rose agreed that there will always be a place for small, independent RIAs.
"However, as the RIA channel matures, there are more opportunities for advisors to join an existing RIA firm (aka 'tuck in') as well," he said. "Overall, we're seeing an increase in the range of options available to advisors as it relates to their affiliation choices."
RIAs behind on consolidation?
Cahn said he thinks the RIA industry in many ways is catching up with consolidation trends that had moved through other parts of the financial services business decades ago.
"So you saw that in the bank space in the '80s. You saw it in the accounting space in the '90s, and, more recently, you saw it in the insurance brokerage space," he said. "So when you look at our space 15 years ago, there wasn't much of a difference in terms of what a small RIA that was maybe in a strip mall versus an RIA that had a billion dollars under management could do."
Now, though, the sorts of services RIAs need — particularly firms intent on growth — are increasingly becoming the sorts of things that can only come with the support of a large partner, Cahn said. Besides back-office support, firms like WEG also do a lot to help advisors drum up new business through digital marketing and professional referrals.
Although Cahn is shy of making predictions, he also doesn't necessarily see any limit yet to how far WEG and other aggregators can help RIAs go.
"So think finance, accounting, compliance, technology, HR, facilities management, we're going to lift that off of them, and on average, we think we can give people 20% to 30% of their time back," Cahn said. "And the question is: What do they do with it? Hopefully, what they do is they take leads that we're providing through our marketing and through our referral programs, and they actually build their business."
