Brokers’ move to independence is one of the fastest growing trends in the wealth management industry, and RIA practices are poised for even more growth as commissions give way to asset-based management fees, according to a recent S&P Capital IQ report.
Most registered investment advisors charge a management fee based on client assets that are either under supervision or actively managed, and today’s advisers are more focused on monitoring existing holdings and reviewing suitable investments for purchase, said S&P Capital IQ equity analyst Kenneth Leon in a MarketScope Advisor report published on Aug. 23.
“We think independence would be the best response” for brokers who make the switch to RIA licensed practices,” Leon wrote. “We think management fees are the right approach for client services, rather than commissions or transaction fees, and they give broker-dealer firms a more predictable revenue stream than before.”
Leon cited “positive implications” in the fast-growing RIA trend for large firms that serve advisors, including Morgan Stanley (MS), LPL Financial Holdings (LPLA), Raymond James Financial (RJF), Charles Schwab (SCHW) and TD Ameritrade (AMTD).
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He also criticized the pre-2008 pump-and-dump practices of brokerages, saying that independent RIAs have discretion as to managing client portfolios and making recommendations on asset allocation.
“Transactions fees are also lower, as RIAs are compensated away from brokerage commissions,” Leon wrote. “More than a decade ago, brokerage firms would get their brokers hyped up to dial for dollars and churn client accounts with the stock idea of the day or load mutual funds that enabled the broker to get compensated two ways — trading commissions from client activity, and the wholesale relationship with select mutual funds.”
Cerulli Associates projects the combined RIA and dually registered market share to make up 24.7% of the advisory industry in 2014, up from 18.6% in 2010, Leon said, also noting Cerulli’s finding that hybrid RIAs are the fastest growing segment, at 15% of the advisor industry in 2012 versus 7% in 2004.