Power of Independent RIAs Causing Asset Management Shake-Up

Fee-only consultants gaining in influence and assets

Vanguard's mutual-fund assets rose to $1.45 trillion at the end of 2010 from $564 billion in 2000.The firm passed Fidelity last year to become the biggest mutual fund manager. The reason, according to Bloomberg, is the growing popularity of independent RIAs.

Assets overseen by registered investment advisers more than tripled in the decade ended Dec. 31, 2009, to $1.7 trillion, according to research from Cerulli Associates. The trend forced mutual fund firms and broker-dealers to change how they sell funds and helped propel the ETF, an index fund offshoot that trades like a stock, into the fastest-growing investment product.

“The single biggest driver of ETF sales through financial intermediaries has been the huge shift to fee-based advice,” Anthony Rochte, a senior managing director at Boston-based State Street Corp.’s money-management unit, told the news service. “The fee-only advisor has an incentive to keep overall costs low and that makes ETFs much more competitive.”

As Bloomberg notes, RIAs emerged to challenge stockbrokers in the first half of the 1990s, when mutual fund assets almost tripled and individual investors sought out affordable and reliable guidance as the number of choices grew.

The advisors, who must register with the U.S. Securities and Exchange Commission or state regulators, carry the legal duty to put clients’ interests first. Brokers need only promise to sell products that are “suitable” for customers, according to SEC rules. All RIAs, except those dually registered as a broker-dealer, are barred from taking sales commissions or other payments from the fund companies whose products they pick for investors. Most charge a fixed annual percentage of the client’s money, typically 1% to 2%, so their incomes rise and fall with the fortunes of their customers, according to the story.

Advisors are the fastest-growing competitor to the four largest broker-dealers, or wirehouses--Morgan Stanley Smith Barney LLC, Bank of America Corp.’s Merrill Lynch, Wells Fargo & Co. and UBS Financial Services Inc. Assets overseen by the brokers declined 17% to $4.75 trillion in the two years through 2009, according to Aite Group LLC in Boston.

“More than five years ago, RIAs were a niche piece at best,” Scott Smith, associate director at Boston-based Cerulli, told Bloomberg.

Broker-dealers took notice in the early to mid-1990s as customers began leaving for fee-only advisers, Ben Phillips, a partner at consulting firm Casey, Quirk & Associates LLC in Darien, Conn., said in an interview with Bloomberg. They encouraged their representatives to switch clients to a fee-based model.

However, competition from RIAs is “grossly overstated,” says Matt Card, a spokesman for Charlotte, North Carolina-based Bank of America. “We continue to read about it but we’re not seeing it in our business.”

 “There has been a very significant move to open architecture,” said Robert Pozen, chairman emeritus at Boston’s Massachusetts Financial Services Co. and a Bloomberg contributing editor.

With brokers less reliant on commissions, performance and cost became more important in determining what funds were sold. That created opportunities for firms with good track records that had refused to charge commissions and relied on direct sales to individual investors. No-load fund families such as Vanguard and Baltimore’s T. Rowe Price Inc. were well-positioned for the shift.

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