Recent headlines boast of billion-dollar registered investment advisors (RIAs) selling out to bigger investment advisor practices or joining larger marketing platforms. This would lead the casual observer to believe that the founder of an RIA has it made.
File the paperwork, continue advising clients for a fee and then turn around and sell the shop to a larger RIA or to a competitor.
It’s a plan, yes, but for most of RIAs, that’s not what’s happening now. That’s the word from consultant Chip Roame, managing director of Tiburon Strategic Advisors, an advisory research firm in Tiburon, Calif.
In the independent sales channel, which is where RIAs belong, the top 200 to 300 RIAs in the U.S. are growing. However, Roame said, the rest of the industry is stagnant.
“I'm not convinced that the average or the median RIA is growing even though I know the industry is growing a lot,” Roame said in a recent webcast to clients.
The independent channel consists of independent Series 7-registered investment advisor representatives, fee-based RIAs and dually-registered RIAs.
The overall RIA universe is growing, there’s no doubt about that.
With new rules from the Department of Labor around the corner, the fee-based model that underpins RIAs is expected to grow even further as companies recast their business models.
The five-year compound annual growth rate ending in 2014 for dually registered advisors was 9 percent. Meanwhile, the rate for fee-based financial advisors was 1.8 percent, according to Tiburon Research and data from Cerulli Associates.
Every other distribution channel - regional broker/dealers, insurance agencies and producer groups, wirehouses, retail banks, and independent broker/dealers - shrank over the same five-year period, according to Tiburon.
Similarly, Cerulli Associates reported in November that RIAs expanded faster than any other traditional advisory channel in 2014. During that year, RIA headcount grew by 7.9 percent and assets grew by 10.9 percent over the previous year, according to The Cerulli Report RIA Marketplace 2015.
For Most Small RIAs, a Negative Growth Rate
The notion that large swaths of the RIA market aren’t growing may come as a surprise. Roame said he would devote more research this year to explore the growth rates within the different strata of the RIA market.
In 2014, there were about 12,000 fee-based financial advisors registered with the Securities and Exchange Commission among a universe of about 126,000 independent advisors nationwide, according to Tiburon.
Roame has been tracking the advisory marketplace for 18 years. He said that he suspects thousands of RIAs - those with only a handful of advisors with a few million dollars in assets, or even sole proprietorships - are experiencing negative growth rates.
At the top of the spectrum, companies with colossal asset volumes - such as Focus Financial Partners in New York, United Capital Financial Partners in Newport Beach, Calif., and Edelman Financial Services in Fairfax, Va. - are “just getting ginormous,” he said.
Some of these big RIAs are growing through acquisition while others prefer chasing internal, or organic, growth.
Further skewing growth numbers are the so-called breakaway brokers, or the entrants into the RIA market from the wirehouses such as Morgan Stanley and Merrill Lynch. These additions add to the RIA market’s overall growth, but don’t reveal anything about the growth of existing RIAs, or what the retail industry refers to as same store sales.
“That doesn't mean the RIAs that were there last year grew,” Roame said. “That means the new guy came into the market and lifted the growth rate.”
Fee-based financial advisors saw their share of the independent advisor channel rise to 22 percent from 16 percent over a 10-year period ending in 2014. Dually-registered financial advisors saw their share rocket to 15 percent from 4 percent over that same 10-year period, according to the Tiburon Research analysis based on Cerulli Associates’ data.
Fee-based RIAs and dually-registered RIAs are winning market share mostly from independent broker/dealers, or IBDs.
Independent Broker/Dealers Shrinking
While the “quality” of the growth of RIAs warrants further scrutiny, there’s no question that the growth of fee-based advisors has come at the expense of the FINRA-regulated IBDs that make a living generating commission income.
IBDs are firms that hire representatives with Series 7 licenses to sell stocks, bonds, mutual funds and variable contracts. They made up 63 percent of all independent advisors in 2014, a drop of 17 percentage points from 2004.
The compound annual growth rate of independent broker-dealers for the 10-year period ending in 2014 was -6.8 percent, according to Tiburon.
“I think the Series 7 independent rep model is in trouble,” Roame said.
“If I were ranking markets, I think the RIA market is in the best shape given regulatory reform that is coming,” he added. “I think the wirehouses, quite frankly, are in second-best shape and I think the IBDs are in the worst spot right now.”
In the IBD space, LPL Financial leads in terms of the number of independent representatives on the company’s platform with more than 14,000 reps. Ameriprise Financial and Cetera Financial, each with 7,500 or more reps, are the next largest IBDs.
With about 5,000 IBDs operating in the U.S. market, there’s room for mergers and acquisitions. The LPLs and Raymond Jameses will survive, but more traditional IBDs will find their futures challenged, Roame said.
“I don't think you'll have 5,000 independent B/D firms out there two or three years from now,” he said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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