Financial advisors like to peddle performance, and Talon Asset Management in Chicago is no exception. Senior Principal Terry Diamond says the practice, with about $1.1 billion in assets under management, has seen only three losing years over the past three and a half decades. But three years ago Diamond and his partners decided that the exclusive pursuit of alpha wasn't a good long-term strategy, and they began looking for a partner to help them fill out the firm's offering. In April of this year, Talon announced it was selling about two-thirds of its business to global investment manager BNY Mellon. Diamond, who is staying on with two other principals on his management team, said his clients needed more than just asset management, and BNY Mellon was bringing new abilities to the table, including private banking, wealth planning, and better reporting capabilities.

Related: Top 50 Asset Management RIAs

“It's a very complex world today, and your typical registered investment advisor that started out on its own and grew its business cannot have the breadth of capability, even as an asset manager, that my affiliation with Bank of New York Mellon provides me,” Diamond says. “So it's both wealth management and asset management Mellon is providing me. With my clients, we have many more things we can offer you in making the decisions you have to think about. ‘What's your cash flow, how old are your kids, how much money do they need? What about your foundation?’”

Related: Top 50 Wealth Management RIAs

Is a focus on client asset growth, and nothing but asset growth, the best business model? Industry observers are skeptical. Wealth managers, who generally offer a broader array of financial services than their asset manager cousins, appear to have a greater share of client wallets, as data from Registered Rep.'s annual survey of top RIAs this month shows. For the first time, Rep.'s survey breaks out RIAs into separate wealth management and asset management categories. One difference is striking: The average assets managed by the biggest wealth managers on our list is significantly higher than the average assets managed by the asset managers; the average AUM for the 50 companies on the wealth management list is nearly triple the size of the comparable figure for asset managers. (See out top RIA lists on pages pages 33 and 37.)

For asset managers who are just running money for clients, there are few places to hide when markets head south and their investors' portfolios tank. “If I'm an active manager, I'm competing on performance,” says Timothy Welsh, president and founder of Nexus Strategy in Larkspur, Calif. “I'm not helping you understand whether you should convert your Roth IRA to a regular IRA. What I'm doing is saying, ‘Hey, I can manage your money and I can give you a return.’ That's my value-add. In 2008, what did I do for you? I lost you 40 percent of your portfolio, and you paid me to do it. That's the problem with competing on performance.”

“If your model doesn't work out, your model doesn't work out,” adds Alois Pirker, analyst for Aite Group, the Boston-based research firm. “That's the risk the asset manager runs, clearly. If you remove yourself one step from the client relationship, your alpha that you generate is really the only differentiator you have on the table. That becomes a sticky point because markets are merciless. If you can rely on the client relationship being a strong one, you can explain and reallocate.”

The idea that asset managers are more exposed when markets plummet is one that resonates with Peter Demirali, managing director and portfolio manager at Cumberland Advisors in Sarasota, Fla. Cumberland was able to avoid that problem in the financial crisis partly due to its focus on fixed income, he says. And while Cumberland has “shied away” from the wealth management model — “I think they're really two separate businesses,” he says — Cumberland is looking at other projects that can broaden the firm's offerings. One area the firm is more involved in is 401(k) plans. The company senses an opportunity as the U.S. Department of Labor prepares new rules to improve the transparency of fees in the retirement offerings; Cumberland is offering strategic advice to plan sponsors on how to set up plans; in some cases, Cumberland will manage the assets as well.

Michael McNiven, senior vice president and portfolio manager at Cumberland, says it's a perfect fit. “We're an RIA firm that has a mandate to be transparent, to be fee-only,” McNiven says. Supplying 401(k) advice is “certainly one more arrow in the quiver. It's not going to define us. It's not going to change us. What it will likely do is enhance us, because it's one more channel for our model portfolio and our overall market views.”

Asset managers have evolved over the years, some researchers say. “The pure money manager, they've all but disappeared from our surveys,” Cerulli Associates analyst Bing Waldert says. “I think if you went into the vast majority of these shops, you would see them doing, at the very least, some very basic planning services. And that discussion of investment performance — and how much investment risk is going on — isn't necessarily just about investments. There's at least some discussion of what the investor's goals are, what they need to reach those goals, and what that progress actually is toward those goals.”

Keeping It Simple

Not every advisor sees a broad service offering as an attractive business model, however. Some asset managers prefer to stick to their knitting, as it were, rather than get into other lines of business. “My dream was to build a world class asset management firm when I started this,” says Nitin Kumbhani, president and chief executive of Apex Capital Management, an RIA in Dayton, Ohio with more than $1 billion in assets. About 35 percent of the firm's assets correspond to individual high-net-worth clients; the rest are institutional assets. “I did not have any interest in financial planning or the wealth management side. My interest was in equity research and building the best asset management organization.”

Kumbhani agrees that asset management is more performance-driven, but he's okay with that. Getting into wealth management services would essentially put him in competition with his client-advisors, as he sees it. And there's also the possibility of self-dealing when advisors straddle both channels, to the detriment of the investor, Kumbhani adds. “If you are a wealth manager, your job is to find the best (asset) managers for your clients. If you're one of the managers, there is temptation to put yourself in there,” he says. “There's a conflict. You have to choose. You can't be both the wealth manager and the asset manager.”

At Veritable LLP, one of the largest RIAs in the nation with $10 billion in AUM, the focus is on wealth management for ultra-high-net-worth clients with an eye toward the tax implications of investment decisions, says founder and general partner Michael Stolper. The firm has 20 chartered financial analysts on its staff of 85, but it never was interested in adding services such as tax planning to its repertoire. “It wouldn't make any sense for us to do taxes,” Stolper says. “There are people who are much better at that and who do it all the time. We just coordinate with expert tax advisors, and that could be with respect to estate planning or tax return preparation. There are great firms doing that. We're an investment firm.”

Asset managers have one business advantage that wealth managers do not, says Philip Palaveev, president of Fusion Advisor Network in Elmsford, N.Y. They can scale their services easier, enabling them accumulate more assets than wealth managers. (For this reason, Palaveev disagrees with the views of other industry analysts that wealth managers as a group manage more assets. In fact, he argues that some of the asset management firms on our list belong in the wealth management column and vice versa, which would explain his view that our asset averages are off.) “The research that goes into constructing one portfolio is the same, no matter what the size of the portfolio is. You're going to research 10 stocks, whether you're investing a million bucks or whether you're investing a billion bucks,” he says. “The research is very scalable, portfolio management is very scalable, and that's the core of the asset management business.”

The downside, of course, is that a good asset manager needs a good-sized research team, plus a sales force, Palaveev says. Those fixed costs are high, yet they're needed very early in the operation. “If you want to be a pure asset manager, you really have to create a pretty sizable infrastructure before you can appear in front of advisors and tell them they should give you their clients' money,” he says. In comparison, wealth managers need only scale up the services they offer as they add clients, so adding professionals and back-office staff can be done incrementally.

Manufacturing in general tends to favor size, Palaveev says, and he sees asset managers as a closer fit to that model. Wealth managers are closer to the service sector, which provides them with certain attractions to some investors that asset managers don't possess.

“Service tends to give a chance to the small guy. No one wants to go to the largest dental practice in town, or wants to go to the largest restaurant in town,” he says. “Personal relationships always give the chance to the small guy. That's why independents are so focused on financial planning, investment advice and wealth management. It gives a lot of chances to the small competitors. If you focus on manufacturing and distribution, creating mutual funds and investment strategies, asset management for third parties, that's the game of the large boys. I don't want to compete with Wal-Mart on price or selection. It's very similar here. If you're making shoes, you probably want to focus on custom manufacturing rather than compete with Nike.”