IAA, NRS Report: Number of RIAs and Their AUM Continues to Rise

Switching of advisors under Dodd-Frank will cause a drop in SEC-registered firms next year

The number of advisors registered with the Securities and Exchange Commission (SEC) continued to rise over the past year, as did those advisors’ assets under management (AUM), according to the 10th annual Evolution/Revolution report profiling the investment advisory profession released Wednesday by the Investment Adviser Association (IAA) and National Regulatory Services (NRS).

Going forward, however, while the number of SEC-registered firms will drop as the provision of the Dodd-Frank Act requiring advisors with less than $100 million in assets to switch from federal to state registration kicks in next July, the SEC will pick up oversight of private fund advisors with at least $150 million or more in assets, the report notes.

The IAA and NRS annual report is based on information that RIAs file with the SEC annually. As of April 2010, there were a total of 11,643 investment advisors registered with the SEC, representing a 3.4% growth over the 11,257 firms registered last year, the report found. Total assets under management AUM reported by all firms increased 13.4% to $38.6 trillion up from the more depressed level of  $33.99 trillion in 2009.

“Overall, the investment advisory profession has shown its strength, health and vitality by recovering from a significant setback in the market drop of 2008-2009,” said David Tittsworth, IAA’s executive director, in a statement. “Since 2002, total investment adviser registrations have increased from 7,581 to 11,643, representing an annual average growth of about 500 firms.  Similarly, the growth in total assets under management reported by all SEC-registered investment advisers has grown impressively, from $20.2 trillion in 2002 to more than $38 trillion in 2010. Provisions of the recently enacted Dodd-Frank Act of 2010 will significantly reduce the number of SEC-registered advisers by shifting about 4,000 advisers with AUM of less than $100 million to state oversight.”

John Gebauer, managing director of NRS, noted in the same statement that “despite many changes to the markets, the economy and regulations, the profile of an average investment adviser has remained relatively constant for the last ten years in terms of the clients they serve, the services they provide and the way they are compensated.” There are, however, he continued, “many more advisers, serving more clients and managing more assets. The near doubling of assets managed by SEC advisers is pretty amazing considering that the Dow Jones Industrial Average has remained relatively flat in the same time period.”

The report also notes that as found in prior years, the majority of RIAs are small businesses. Small firms, those with 50 or fewer employees, represent 90.8% of all firms—firms with five or fewer employees represent 50.8% of the total, the report says. In contrast, less than 1% (0.5%) of all SEC-registered advisors report over $100 billion in AUM. Collectively, the report says, that group reports AUM of $18.7 trillion or almost half of total AUM.

Other key highlights from the report include:

  • Asset concentration. A few large investment advisory firms continue to manage a disproportionate share of total assets. 508 advisory firms (4.4% of all SEC-registered investment advisors) reported managing more than $10 billion in assets, yet collectively accounted for approximately 83.3% of all assets ($32.1 trillion).
  • Of these, only 64 reported AUM of $100 billion or more, but these mega-firms accounted for $18.7 trillion total AUM (48.4%). The number of firms with $100 billion AUM or more grew from 61 in 2009 to 64 in 2010 (4.9% increase). Firms with $50-100 billion AUM grew from 65 in 2009 to 81 in 2010 (24.6% increase).
  • Smaller advisors. In 2010, 9,641 investment advisors reported managing less than $1 billion in assets (82.8%). Of these, 4,228 (36.3%) reported managing between $25 million and $100 million in assets. 10,574 advisors (90.8%) reported 50 or fewer employees (not including clerical workers). Of these, 8,054 advisors (69.2%) reported 10 or fewer employees.
  • Hedge fund advisors. The number of advisors that specialized in hedge funds (i.e., those that reported more than 75% of their clientele as hedge funds or other pooled investment vehicles) declined for the fourth straight year to 1,271 or 10.9% of all advisers. By comparison, hedge fund advisors accounted for 16.1% of all advisors in 2006 when they numbered 1,661.
  • Advisors with custody. The number of advisors reporting that they or a related person have custody of client assets fell from 32.3% in 2009 to 30.8% in 2010. This reduction may result from advisors making changes in certain accounts with respect to which they were deemed to have custody in order to avoid surprise audits for such accounts required by new SEC rules.
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