Financial planning activities are playing a growing role in the service offerings of registered investment advisors. An annual survey of the RIA industry by the Investment Adviser Association and National Regulatory Services shows that 41.4 percent of the industry’s 11,500 RIAs offered some form of financial planning service this year, up from 34 percent in 2006. It isn’t just that RIA numbers are up 12 percent over that period (although this year they fell nearly 9 percent from 2010, the first annual drop over the past decade). Advisors have found greater demand for financial planning help in recent years, industry observers say.
“It’s more than just handling investment decisions,” said David Tittsworth, executive director of the IAA. “It could be tax planning, estate planning, debt reduction…looking at clients’ overall condition rather than just where you’re going to put your investments.” In the past five years, investors struggling with retirement planning issues have been rocked by global financial crises and volatile markets. “That anxiety has grown significantly over that same period,” said John Gebauer, managing director at NRS. “People that traditionally would not worry about that are now being driven to seek specific advice.” And advisors are happy to oblige; consulting on an estate planning issue or a retirement program can often help grow the advisor’s share of wallet later on in the relationship, he added.
The annual report, “Evolution/Revolution,” is based on data from RIA ADV filings with the Securities and Exchange Commission. Other information in the report suggests that financial planning interest is growing within the industry. Take compensation. While nearly 96 percent of RIAs report receiving comp as a percentage of assets under management, there were increases in other forms of payment that are related to how advisors charge for financial planning services. The share of RIAs who charge hourly fees reached 36.5 percent this year, up from 31 percent in 2006. Those who charge fixed fees also have grown—46.1 percent this year, up from 39 percent.
The report depicts a market that continues to grow vigorously. RIAs reported a record $43.8 trillion in AUM in May, a number that has more than doubled since 2003. The median advisor manages $136.3 million and has 133 accounts, up from $100.6 million and 118 accounts in 2010. And the big keep getting bigger. Just 78 advisors reported AUM of $100 billion or more, up from 61 in 2009, and they managed nearly 51 percent of all AUM. “It’s pretty striking,” Tittsworth said. The report found 565 advisors with AUM of $10 billion or more managed 84.4 percent of all assets this year. RIAs continue to be a small-business industry, the report maintains; more than 41 percent manage less than $100 million in assets.
“Certainly compared to 2009 after the crash, assets fell; that clearly took a hit on the profession,” Tittsworth said. “But it looks to me like the advisory profession is thriving. It’s shown significant growth and resiliency in a variety of markets.”
And the move toward a “pure” RIA model continues to grow modestly. The report found 67 percent of RIAs had no employees with broker-dealer affiliations, up from 64 percent in 2006.
Hedge funds appear to have less allure within the industry, although that is expected to change in coming years. Just 1,200 investment advisors reported specializing in hedge funds, or 10.4 percent of the total this year, down from 16.1 percent in 2006. But as private fund advisors will be required to register as part of Dodd-Frank Act, the number is expected to rise starting next year. The SEC expects another 700 such advisors to sign up.
The reason for the nearly 9 percent drop in total RIAs in the past year is somewhat less clear. The share of advisors managing assets of less than $100 million is down six percentage points from a year earlier. Researchers suggest some smaller advisors already are transitioning to state registration ahead of implementation deadlines for new Dodd-Frank rules, and smaller practices may be consolidating.
Ron Rhoades, who chairs the financial planning program at SUNY College at Alfred and is the owner of ScholarFi Inc., an RIA he formed this summer, said the data on financial planning from the SEC may not offer a precise picture of how extensively the service is offered within the industry. The SEC, he notes, doesn’t define financial planning on its ADV form. But complexities in tax codes and insurance issues have investors seeking more comprehensive advice, Rhoades adds, and he sees financial planning coming into its own over the past two decades. The question is to what extent financial planning will become an advice-only profession, or just another method of selling products to clients, he says. Fiduciary rulemaking now under way in Washington will play a big part in that.
“I call it the battle for the soul of financial planning. Is financial planning itself a product, or is it advice?” Rhoades says. “Is financial planning a product or service that leads to the sell of other products or services? Obviously there’s a lot of economic interest at work here, on both sides, trying to define what is the future of financial planning.”