RIA channel growth continues to increase, driven by an increased number of advisors breaking away to either open up their own RIA firms or become part of an established one, according to the latest Cerulli Edge report, on U.S. asset and wealth management.
That increased flow into the RIA channel is only expected to grow, according to the report, which showed a majority of advisors at wirehouse, national/regional broker-dealer, insurance BD and retail bank BD advisory firms polled indicated they would prefer to transition to the independent RIA, hybrid RIA or independent BD channels if they leave their current firm. And a majority of them would prefer to start their own new practices.
Among all employee advisors who would prefer independence, 35% favored joining an existing independent practice as a partial owner or principal, 33% favored starting a new independent practice with one or more advisors, 22% favored starting a new practice of their own and 10% favored joining an existing independent firm as an employee. Among that entire group, 55% were interested in starting a new practice vs. joining an existing one.
Cerulli gathered data in partnership with the Investments & Wealth Institute and the Financial Planning Association.
BD advisors are seeking increased autonomy over how they run their firms and are motivated by the perceived economic advantages of the RIA business model, Cerulli said. Specifically, the firm said it found that IBDs who preferred the RIA model reported higher payout (43%) and greater marketing flexibility (35%) as major factors in considering the RIA channel.
“The desire for independence is particularly pronounced among national and regional BDs, many of which may display a stronger entrepreneurial drive compared to their wirehouse peers,” according to Cerulli senior analyst Marina Shtyrkov. “Perhaps given the advisor-centric cultures at some of the largest national and regional BDs, these advisors feel more comfortable fully embracing independence,” she said.
Within the RIA model, advisors use teaming as a strategy to achieve various benefits, including specialization, deeper internal intellectual capital, economies of scale and a broader service set, according to Cerulli. All those outcomes enhance client experience and enable RIAs to provide “more holistic services,” Cerulli said.
Currently, 62% of all RIAs operate in a team structure, and that percentage soars to 93% among firms with $500 million or more in assets under management, according to Cerulli.
Despite the many perceived benefits of breaking away and becoming independent, IBD advisors indicated they had several concerns about making the move. “Compliance-related concerns, including increased compliance responsibilities and regulatory liability as an RIA, are the primary barriers for IBD advisors who are otherwise interested in owning an RIA,” the Cerulli report said.
Advisors also expressed fear that they would lose clients during the transition, the firm noted. Cerulli’s data show, however, that advisors who recently switched firms usually retained most client assets after making the move, it said.
“Above all, breakaway advisors are drawn to the financial upside of independence,” the report said. “However, they are accustomed to end-to-end operational support from a broker-dealer, which is becoming more readily available in the RIA space, too,” it noted, adding: “Consolidator models, such as Steward Partners, capitalize on breakaway advisors’ reluctance to build infrastructure and inclination toward turnkey independence. Their highly integrated model replicates wirehouse infrastructure within an independent framework, giving breakaway advisors the comfort of familiarity.”
Like DeVoe & Co., Echelon Partners and Fidelity, Cerulli predicted that advisor migration will slow due to the uncertain market conditions now, but expected continued strong growth in the RIA channel after the challenging conditions stabilize.