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Trendspotter: Advisor Movement From State to SEC Registration Is Surging

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What You Need to Know

  • The markets have had huge gains, and RIAs' assets under management have grown.
  • There's also been an increase in the number of clients gravitating toward fiduciary advice.
  • The transition to federal regulation means added compliance duties.

The Trend

The number of state-registered advisors moving to SEC registration is surging, according to compliance pros.

The Investment Adviser Association’s 2021 Investment Adviser Industry Snapshot found that the total number of firms registered with the Securities and Exchange Commission in 2021 hit a record high of 13,880 — an increase of 386 firms, or a 2.9% boost, from last year.

“Despite the financial challenges and the business and market disruptions caused by the COVID-19 pandemic, the investment advisor industry continued to experience record-breaking growth in 2020,” according to the report.

Individual investor demand for advice is also on the rise, the report found.

“While all client segments have grown over the past three years, growth in both the number and assets of individual clients has been exceptionally strong, with the number of individual investors growing by 38% over the past two years,” the report states.

Advisors must registered with the SEC when their assets under management hit $110 million.

The Drivers

  • Rising markets
  • Clients gravitating toward fiduciary advice
  • Increase in clients that are reassessing their financial situation since the pandemic
  • Advisors getting more clients
  • Consolidation

The Buzz

Rory O’Connor, director, Bates Compliance:

“The main reason for this trend is that the markets have had such huge gains and RIAs’ assets under management have grown as well. Once an RIA hits $100 million in assets under management the RIA is eligible for SEC registration. After the firm reaches $110 million or more in assets … it must register with the SEC,” O’Connor said.

“Just the change in the value of those [client] accounts has gone up so significantly that it’s pushed a lot of firms to the point where they will need to transition [to SEC registration] next year,” O’Connor said.

More on this topic

“On Dec. 31 is when most firms, if that’s what their fiscal year-end is,” will start the transition to SEC registration.

Over the last few months, Bates has had 15 to 20 firms reach out to begin the process, he said, adding that these firms face “many additional requirements — like Form CRS — that they’ll now need to meet.”

Bates has “been trying to raise the red flag that [RIAs] have a tremendous amount of work ahead” of them when switching to SEC registration.

Marina Shtyrkov, associate director, Cerulli Associates:

“We have seen an increase in firm marketshare controlled by RIAs with at least $100M in AUM. In 2014, retail-focused RIA firms with at least $100M in AUM represented 27% of firm marketshare; by 2019, it increased to 37%.”

This, she said, “could be driven by several factors.”

First: “The growth of existing RIAs who are passing the AUM threshold for SEC registration (i.e., $110M) — in particular, inorganic growth.”

Consolidation “has gained tremendous momentum” in the RIA channels, Shtyrkov said.

“Smaller RIAs are increasingly interested in joining forces with larger RIA firms that can offer operational support, economies of scale, or succession solutions. An acquisition or merger can nearly double a firm’s size overnight; it can be a rapid growth driver for RIAs, oftentimes catapulting them into a higher AUM tier, especially if they’re a serial acquirer or consolidator.”

Second, advisor migration to the RIA channels “continues unabated,” she said.

“The RIA channels continue to draw advisors — including those operating on large teams — away from employee models as the options for independence proliferate. The path to independence is now well-worn and there are myriad options available to advisors who want more autonomy or flexibility in how they run their business.

“As breakaway teams enter the RIA channels, they may be tucking into an existing RIA firm or establishing their own. Either way, they’re likely large enough to warrant SEC registration and are tipping the scales in that direction,” Shtyrkov said.

Karen Barr, president and CEO, Investment Adviser Association:

“We are seeing the trend of state registered advisors transitioning to SEC registration,” said Karen Barr, IAA’s president and CEO.

“Definitely the rise in markets is playing a role,” she said.

“The increase in the number of clients gravitating toward fiduciary advice” is playing a big part, as well as “the need for clients to seek advice since the pandemic. During the pandemic, clients are really reassessing their financial situation.”

Also, “not only are their clients’ assets growing, but they’re getting more clients.”