Abstract We examined how peripherally isolated endemic species may have contributed to the biodiversity of the Indo-Australian Archipelago biodiversity hotspot by reconstructing the evolutionary history of the wrasse genus Anampses. We identified three alternate models of diversification: the vicariance-based ‘successive division’ model, and the dispersal-based ‘successive colonisation’ and ‘peripheral budding’ models. The genus was well suited for this study given its relatively high proportion (42%) of endemic species, its reasonably low diversity (12 species), which permitted complete taxon sampling, and its widespread tropical Indo-Pacific distribution. Monophyly of the genus was strongly supported by three phylogenetic analyses: maximum parsimony, maximum likelihood, and Bayesian inference based on mitochondrial CO1 and 12S rRNA and nuclear S7 sequences. Estimates of species divergence times from fossil-calibrated Bayesian inference suggest that Anampses arose in the mid-Eocene and subsequently diversified throughout the Miocene. Evolutionary relationships within the genus, combined with limited spatial and temporal concordance among endemics, offer support for all three alternate models of diversification. Our findings emphasise the importance of peripherally isolated locations in creating and maintaining endemic species and their contribution to the biodiversity of the Indo-Australian Archipelago.