By Cyril Tuohy
The number of registered investment advisors (RIAs) grew at an annualized rate of 8 percent between 2004 and 2012, the only channel among six separate advisor channels to record growth in the period, a new analysis reveals.
The reasons for the growth include brokers leaving their broker-dealer to establish their own shops, the rise of new, nontraditional competitors like law and accounting firms, a predilection among investors for a high-touch service model, and a predilection for advice that is free of perceived conflicts of interest, the analysis by Boston-based Cerulli Associates found.
“The RIA channel has been one of the most buzz-worthy trends in the financial advisors and asset management industry in recent years,” Bing Waldert, director at Cerulli, said in a news release. “RIAs are the sole growth story in a shrinking industry.”
Findings are contained in the December issue of “The Cerulli Edge: U.S. Asset Management” newsletter.
As RIAs surged by an annualized rate of 8 percent from 2004 to 2012, regional broker-dealers shrank by 1.2 percent, insurance broker-dealers by 1.4 percent, independent broker-dealers by 1.4 percent, bank broker-dealers by 1.9 percent and wirehouses by 2.5 percent.
All advisors shrank by an annualized rate of 1.2 percent in the eight-year period, the report found.
The growth in RIAs has vaulted independent RIAs from what a decade ago was a “cottage industry” of small businesses to one populated by multiadvisor firms now governed by different business models offering varying degrees of independence and correspondent financial reward.
One of the most attractive draws of the RIA platform is the independence it provides to brokers which they can then one day sell to a larger company. In the meantime, RIAs are rewarded for their hard work and risk by – eventually – more income.
“However, this decision is not without peril,” the Cerulli Edge report said.
Advisors who opt for the RIA channel become de facto business owners responsible for the daily operation of the practice, from finding office space; to hiring, firing and managing staff; to making decisions about technology infrastructure, and overseeing compliance.
With the robust growth of RIAs in the past decade, Cerulli says many of them can be defined as “boutique” shops in comparison to independent broker-dealers.
Boutique shops generally come in three flavors: “recruiter,” “platform” or “aggregator” models, the Cerulli report said.
Recruiter boutiques – examples of which include U.S. Capital, First Financial Equity, Benjamin F. Edwards & Co. and Washington Wealth Management – are typically built by recruiting other advisors, creating a platform for advisors to use or purchasing a practice, the report said.
“The recruiter segment is probably the most diverse with a wide array of business models,” the report said.
One of the main advantages of recruiters is that they are simple. Advisors, lugging their book of business, can simply walk into an advisor company and start the next day. Advisors remain independent, but lean on the company for administrative help and compliance.
Drawbacks include limited equity opportunities and a lack of “complete independence,” Cerulli said.
Platform-based boutiques -- exemplified by HighTower Advisors, Dynasty Financial Partners and Seacrest Wealth Management -- recruit teams of advisors from broker-dealers and wirehouses. The team does not own its practice outright, but gains an equity stake, Cerulli said.
A platform-based shop makes it easier for advisors to break away to an independent model, the report said, and shared resources help in terms of “pricing power.” Platform-based shops’ business models, however, are still a work in progress and some advisors are not quite sold on the value or the differentiation a platform model brings.