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Distrust of Big Banks Driving Clients to Indies: Cerulli

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In findings sure to give comfort to RIA custodians and those broker-dealers who facilitate their reps’ own RIAs (or use of the BD’s corporate RIA), Cerulli Associates predicts that independent and dually registered RIAs will account for 26% of all retail advisory assets by the end of 2016. But the much-vaunted movement of employee brokers to the channel is only part of the story.

Kenton Shirk, associate director at Cerulli, says in the statement accompanying Cerulli’s RIA Marketplace 2013 study that RIA growth “has been so strong that it cannot solely be attributed to advisors choosing the independent business model.” Rather, he suggests that “clients have also increasingly been choosing to hold their assets with an independent advisor” as a consequence of the 2008-2009 financial crisis, which led to a loss of client trust in the “big banks.”

Looking at the data for 2012, Cerulli reports that the dually registered — those with an independent broker-dealer affiliation who either run their own RIA or use the BD’s — had 21.5% asset growth, nearly doubling the 11.5% asset growth rate reported by fully independent RIAs. Despite that heady growth, independent RIAs still had the lead over their dually registered brethren in total assets: $1.6 trillion for RIAs and $1.1 trillion for the dually registered.

Part of the growth in the dually registered segment can be attributed to increased recruiting of brokers into established independent practices. Cerulli notes that from 2007 to 2012, the average number of advisors per dually registered firm has increased from 2.6 to 5.4, while totally independent RIAs’ average advisor count per firm has risen from 2.3 to only 2.5. 

Cerulli predicts that RIAs and the dually registered will continue to gain market share at the expense of the employee brokerage firms as advisors “seek greater independence and the potential for higher long-term remuneration.” While that growth might seem to augur well for independent broker-dealers, Cerulli warns that most of the dually registereds’ “wealth management AUM is generally managed under the firm’s RIA,” which thus “limits revenue for the IBD.” So it recommends that IBDs differentiate themselves through product and service offerings to “solve complex clients’ needs, such as retirement income.” 

Citing its own proprietary research, Cerulli dived deeper into what clients want and expect from their advisors. For example, the report says that when investors were asked if it was “important that their advisor is ‘legally obligated to act in your best interest,’ 76% agreed, 21% were not sure, and just 2% indicated such a requirement was not important to them.” 

As for product usage among RIAs, Cerulli compiled data from multiple sources to conclude that usage of ETFs has grown at a 26.5% rate annually from 2007-2012, accounting for $170 billion, or 7.4%, of the RIA channel’s total assets. In addition, 49% of RIA respondents said they were interested in adding ETFs to client portfolios. Among other product categories, those RIAs surveyed also indicated interest in adding equity products (30%), alternative or commodity (29%) funds and real estate investment trusts (21%).

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