Mark Tibergien Looks to the Future of RIAs

There are nearly 60,000 financial advisors working as part of independent RIA firms and hybrid RIAs, according to Cerulli Associates. That’s roughly double the level of participation about 10 years ago — with client assets at these firms growing nearly 9% per year during the past decade, as of year-end 2016.

A keen observer and facilitator of this growth spurt is Mark Tibergien, who joined Pershing Advisor Solutions (part of BNY Mellon) as its CEO in 2007. Over the past decade and earlier — as principal at Moss Adams and in prior roles — he has interacted with hundreds of independent registered investment advisors, broker-dealers, investment managers and other financial-services groups.

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This June, readers of this publication said Tibergien is the most influential person in the financial services business and the advisory space, with almost half of respondents voting for this magazine’s long-time columnist in the IA 25. (He beat out Warren Buffett.)

The executive is a proud supporter of the Foundation for Financial Planning, the International Association for Financial Planning and the SIFMA Foundation; he was recently named to the Advisory Council for the Center for Financial Planning, which aims to promote diversity in the advisory profession.

As the RIA model continues to charge ahead, Investment Advisor spoke with him about how the business of advice is changing and what lies in store for RIAs and advisors.

Can you describe the growth of the RIA channel both across the industry and for Pershing specifically?

The business of financial advice is going through a significant change, as financial professionals continue to move away from being professional sellers to being professional buyers, from being product advocates to being client advocates, from a commission structure to a fee structure and overall, away from a suitability standard toward a fiduciary standard.

Most of this is the shift from brokerage to advice. The model has been in place since at least the Securities Act of 1940, but it wasn’t until the 1970s and ’80s when the financial-planning movement started to take root that the current model was conceived.

Up until then, most RIAs were pure money managers investing in stocks and bonds on behalf of institutional clients and wealthy people. Typically, these RIAs would trade with the big brokerage firms in return for research, something we call “soft dollar.”

Charles Schwab conceived the idea of offering his discount brokerage platform to retail-oriented RIAs to execute transactions and hold assets. Banks were the primary custodian, but Schwab led the effort to disintermediate them on this service as well.

Now there are about 30 firms that offer custodial and execution services to RIAs from boutique providers such as Shareholders Service Group to the big four that include Schwab, Fidelity, TD Ameritrade and Pershing.

The RIA model now represents almost a quarter of the assets managed by financial professionals in the U.S. According to Cerulli Associates, the independent RIA and hybrid RIA channels grew marketshare of advisor-managed assets from 14.8% in 2006 to 22.7% in 2016. At the end of 2015, there were 17,245 RIA firms registered in the U.S. That’s up from just over 12,000 in 2005. In 2015 alone, 648 new RIA firms were created, mostly breakaway firms from wirehouse brokers and private banks as well as transitions from the IBD channel.

(Related: 5 Big IBD Deals Dwarf RIA Mergers in 2017)

Pershing’s growth has mirrored the industry’s growth, perhaps [moving] even a bit faster. As a company, we serve RIAs in multiple ways. First, through Advisor Solutions we focus on RIA firms who tend to be much larger than those at our competitors. As an example, the average RIA we onboarded last year had assets of $750 million. Our assets under custody in this channel grew from $30 billion six years ago to $200 billion today, and the growth in this business continues to compound at a double-digit rate.

We also have a growing base of corporate RIAs. This is a big untold story but significant for the industry. In order to respond to the movement away from transactional business, broker-dealers invested heavily in the corporate RIA model under which their advisors would register as investment advisor representatives (Series 65). This allowed their advisors to do financial planning and act as fiduciaries when consulting with their clients.

This was a great solution for financial professionals to set up their practice as advisory rather than brokerage. As the largest securities-clearing firm in terms of the number of broker-dealer clients in the U.S., we have seen dramatic growth in corporate RIA assets, growing from 5% of our total in 2008 to 47% of our total assets under custody today. Currently, Pershing custodies just over $650 billion of RIA assets and that trend continues unabated.

Can you comment on what factors have been driving this growth and what has been interesting to you as you have observed this trend over the years?

Several factors are driving this growth. The first catalyst was the creation of financial-planning designations — CFP and ChFC. This helped individuals move away from being investment-forward product salespeople to planning-forward client advocates.

Second, the rapid growth in the independent contractor broker-dealer model away from employee-oriented brokerage firms allowed for a more open approach to doing business and gave way to a more entrepreneurial mindset among financial professionals.

Third, their supervising broker-dealer required the unbundling of services where advisors no longer had to limit themselves to proprietary investment products, technology or even custody. Now, RIAs can shop for the best set of solutions that align with their business model and their clients. There are literally scores of providers eager to serve them, which puts them much in demand.

The fourth catalyst was the overt promotion of the fiduciary standard by organizations such as the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (NAPFA), which caused many in the industry to think more clearly about how they would like to be perceived. This has resulted in more than 100 universities in the U.S. conferring degrees in financial planning, which is introducing thousands of new students into the advisory side of the business every year.

The most recent catalyst was the reputational damage that big investment banks and brokerage firms suffered following the 2008 market collapse. The fastest growth in the RIA segment is coming from very large breakaway teams like 6 Meridian (Wichita), Summit Trail (New York, Chicago, San Francisco) and Halite (Columbus, Ohio), who are setting new firms up with billions of dollars of assets under management.

Has that growth surprised you — why not? And in what ways?

As I said, the RIA movement is not a recent phenomenon. Momentum has been building for 30 years or so. Now that consumers are beginning to appreciate the difference between an advisor and a broker, and that financial professionals want to be seen as client advocates versus product advocates, the growth is continuing to gain momentum.

(Related: Number of RIA Deals Could Reach Triple Digits in 2017: Schwab)

That’s not to say brokers don’t add value or aren’t acting in the client’s best interest. But the shift to a more professional standard of conduct just puts an exclamation point on the way these folks want to practice.

I think what surprises me, and sometimes annoys me, is that the industry and regulators allow for a confusion in terminology between broker and advisor. Consumers have the right to know what type of practitioner they are dealing with.

If I have a sore back, I want to know if I am seeking the help of a massage therapist or an orthopedic specialist. If I’m seeking help with my taxes, I want to know if I’m dealing with an Enrolled Agent or a CPA. If I’m trying to buy a new condominium, I want to know if I’m dealing with an independent real estate agent or a representative of the building I’m interested in.

I don’t mean to diminish those who deliver basic services, but if my expectation is that I’m dealing with a professional who must adhere to certain standards, then I’d like evidence of that in their disclosures and their relationship with me. If the consumer wants to be transactional in their relationship, this should also be clear to them.

You’ve said this trend started way before DOL’s fiduciary rule. Can you elaborate on this view?

The DOL [Conflict of Interest] Rule mandates that anyone advising on retirement plans adhere to a fiduciary standard as defined by [DOL]. This focus is only on a certain type of account and not on the entire relationship. On the other hand, the Securities Act of 1940 stated that those acting as advisors must adhere to a fiduciary standard in all of their dealings.

In the case of the DOL, it’s a rule with the threat of litigation. In the case of the RIA fiduciary standard, it’s a principle or standard of conduct, and is what those who are established as RIAs understand they must adhere to in their total relationship with the client.