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RIAs must grow sustainably in order to achieve the scale needed to deploy the latest technology systems and build out a centralized infrastructure. Relying wholly or primarily on referrals is a foolhardy strategy.

As the independent RIA model continues to grow in prominence, industry forces have been converging to fundamentally transform the way financial advice is delivered, working in the model’s favor. New RIA registrations have doubled since 2000, creating more competition while driving industry innovation. This challenge drives the need for rapid growth among RIAs.

Firms with less than $500 million in AUM may not be able to afford the investment needed to sustain their businesses over the long term. Yet according to the 2017 Fidelity RIA Benchmarking Studies, revenue growth for mid-sized RIA firms has slowed dramatically, and client growth has fallen to the lowest level in the last five years. Over the last several years, the drag on client asset inflows has been masked by asset appreciation and acquisitions.

The challenge for firms relying on acquisitions or asset appreciation for their growth is they relinquish control of their destiny. An increasing number of RIA firms are responding to rising competitive pressures and the need to build scale by jumping on the M&A merry-go-round. Peer-to-peer and roll-up M&A activity is expected to increase significantly in the coming years. While acquisitions can provide a source of asset growth, they come with a high cost and there is no guarantee that legacy clients will follow.

Many advisors attain strong initial growth by bringing on their clients from previous firms, referral sources such as lawyers and accountants willing to send leads, and, of course, their friends and families. They also may qualify to be a preferred partner to a referral program such as Schwab.

Assets pour in, until they slow.