One of the more enduring outcomes of the financial crisis
has been the migration of advisors and assets from the investment sales model
of the Wall Street wirehouses to the fiduciary model of fee-only RIAs. A small
but growing model, these financial professionals believe if an advisor offers
product options to clients, even where appropriate, that advisor may be
conflicted, regardless of disclosures.
At the end of 2013, RIAs and dually registered
advisors—commonly referred to as hybrid advisors—had just under $2.8 trillion
in retail investor assets under management, according to the most recent
industry report from research firm Cerulli Associates. That's a 19.8
percent share of the market, up from 15 percent in 2008.
The average annual growth rate in AUM for RIAs over the last
five years has been 14.5 percent, versus 9.4 percent for the overall industry. There's
no question that RIAs have successfully seized the moral high ground when it
comes to providing financial advice. From humble beginnings in the 1980s, RIAs
have shifted the focus of the wealth-management industry from investment sales
to financial planning and product commissions to fiduciary fees.
The fallout from wirehouse bankruptcies and the embarrassing
conflicts of interest with clients that emerged in the financial crisis only
served to strengthen the trend.
Market share to grow
According to Tim Welsh, president of consulting firm Nexus
Strategy, the crisis was a tipping point. While asset growth has been strong
for all channels of distribution in the advisory industry, thanks to the
booming stock market, the rapid growth of RIAs is expected to continue. Cerulli
predicts that the market share of RIAs, both traditional and hybrid, will climb
to 28 percent of assets by the end of 2018 and that 1 in 4 financial advisors
in the industry will be a fee-only RIA—up from 18.6 percent of industry head
The growth is being driven from both sides of the advisory
relationship. While the mass exodus of brokers from the wirehouses during and
immediately after the financial crisis subsided, the so-called breakaway-broker
trend in the industry continues to play out.
Wirehouse brokers, who typically manage large amounts of
assets, can earn more of the revenue they produce when they go independent. Not
all of them are hanging out their shingles as independent RIAs, but they have
plenty of options in the industry. Large RIA firms, such as Aspiriant LLC or
Creative Planning, that are growing by leaps and bounds are an attractive
destination. RIA partnerships such as HighTower Advisors, Focus Financial
Partners and Dynasty Financial Partners offer a range of different
relationships based on what an advisor wants to focus on in their practices.
Welsh thinks the ranks of brokers heading into the RIA
industry could pick up in the next few years as more of the advisor retention
packages put in place by the wirehouses during and after the financial crisis
expire. The lion's share of the growth is being captured by the biggest firms,
said Welsh. He thinks fewer than 20 percent of the 15,000 RIAs in the U.S. are
generating more than 80 percent of the asset growth. Many of the pioneer firms
in the industry are now managing billions in client assets.
The fee-only wealth management industry is not without its
issues, however. For one thing, RIAs are an old bunch. A large proportion of
the approximately 15,000 RIAs are solo practitioners now more than 60 years
old, and the majority of them manage less than $100 million in assets. While
custodians such as Schwab have been hammering on the succession issue with their
advisors for years, most solo practitioners don't have an heir apparent when it
comes to carrying on their practices.
There's also the emergence of the robo-advisors, Web-based
services that do rudimentary financial planning, generate asset allocation plans
and select investments for investors. Schwab itself launched its own
robo-advisor, Intelligent Portfolios, early this year. As a group,
robo-advisors manage a tiny fraction of the assets that RIAs do, but the
low-cost and improving functionality of the service may undermine the value
proposition of RIAs and put pressure on their fees in the future.
Kurt Schacht, managing director of Standards and Financial
Market Integrity at the CFA Institute, thinks the robo-advisors are an
important new development in the advisory industry, but predominantly for
do-it-yourselfers who don't, in fact, want to invest for themselves. He doesn't
see them as a threat to RIAs.
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