January 9, 2014

Survey Reveals Why the Ranks of RIAs Are Growing

As most advisors are well aware, there are a ridiculous—and growing—number of surveys/studies/research reports about the advisory industry published each year. Each one seems to be longer and more complex than the last one.

Just reading and deciphering them all would be a full-time job (I should know; I regularly analyze many of them). So when a new study comes out that is concise and to the point, it stands out from the crowd. When it provides new insight into one of the major trends in the financial services industry, it’s, well, worth writing about.

I’m talking about the “2013 AdvisorBenchmarking All-Channel Study,” which was released last month by WealthManagement.com. The study polled some 2,400 financial advisors “across all channels,” identifying trends among “top performing advisors” (based on growth in AUM and profitability), and more importantly, differences between various advisor channels. Even with only a few data points, those “differences” reveal why the ranks of RIAs are growing, while most other advisor groups are shrinking.

You may recognize AdvisorBenchmarking as the publisher of an annual report on trends in the RIA industry. The 2013 study was expanded to explore trends across all major segments of the advisor world, which break down as follows: 38.2%; Wirehouse/Regional RRs; 27.7% Independent B/D RRs, 16.6% RIAs; 11.2% Insurance RRs; and 6.6%.Bank RRs.

Across all channels, the study showed all advisors fared well in 2012 vs. 2011: with an 11% increase in average AUM from $37 million to $41 million, which is understated by the $20 million AUM in insurance firms. In addition, 87.8% of the advisors surveyed said their compensation increased while “one quarter of the advisors earned compensation of more than $250,000.” What’s more, in aggregate, the advisors said they gained six times as many clients as they lost. 

While that’s certainly good news for advisors in general, I found the difference between RIAs and other advisors even more striking. Roughly one-third of the RIAs earned more than the above mentioned $250,000 a year—which is nearly 50% more than their commission-earning counterparts.

While all the advisory groups recommend some mutual funds, to get those additional earnings RIAs increasingly turned to ETFs to capture market returns and keep expenses down for their clients: RIAs had nearly double the ETF allocation of any other channel. Perhaps more surprisingly, RIA firms and advisors in the wirehouse/regional channel were more “avid advocates: of alternative asset classes. The study’s conclusion: “Overall, it seems that the best advisors are leveraging ETFs more aggressively than other players for a myriad of purposes.”

I was also surprised to see that 40.6% of RIAs “use social media as a marketing tool.” That’s the highest of any group, with the low being 11.5% for bank advisors, and the overall average of 33.3%. But the Advisor Benchmarking folks provided the explanation: “As firms slowly but surely resolve compliance concerns, none of them appear to be insurmountable obstacles to the eventual widespread use of these platforms.”

In case you missed that, let me put another way: The reason that brokers are behind the curve on leading-edge marketing techniques and low-cost indexed investment vehicles is FINRA compliance regulations.

Quite possibly that’s why brokers breaking away to the independent world in droves—and why the securities industry is so hot to put FINRA in charge of RIA regulation: so they can eliminate the advantages of being independent, including that part about RIAs earning 50% more than their FINRA-registered peers. It’s more than ironic that one of SIFMA’s primary arguments against an RIA-like fiduciary standard for brokers is that it would be more costly.

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