The Race For Assets

The RIA industry gets all the glory: These publications, and others like it, have been writing about how fast the space has been growing. Indeed, much has been made of the possibility that the trickle of wirehouse advisors leaving to start their own RIAs would turn into a flood. It hasn’t. Yet while the RIAs’ assets grew by about 47 percent in the second quarter over the same period two years ago, the national brokerage firms’ assets grew by about 29 percent during that time—that’s impressive given their size.

According to a recent research report from Cerulli Associates, the RIA industry has grown from approximately 11,745 firms with $950 billion in client assets in 2005, to 14,451 firms with $1.4 trillion in client assets at the start of 2007. That represents asset growth of 47 percent in the past two years (2Q’05 to 2Q’07). Of course, only a handful of firms control a majority of those assets: Schwab Institutional holds a commanding market-share lead in both firms (5,000-plus) and assets ($581 billion or 42 percent of the total) as of the third quarter; Fidelity’s Registered Investment Advisory Group has $324 billion (23 percent). The remainder is controlled by TD Ameritrade, which has $70 billion (5 percent) within its Institutional Services unit, and Pershing, which has $73 billion (5 percent) within its Advisory Services division.

Interestingly, dually registered advisors grew the fastest in terms of assets and number of firms among RIAs, according to the report. Advisors who maintained their Series 7 license after becoming RIAs grew assets by 24 percent between 2005 and 2006, and 16 percent from 2006 to 2007. By comparison, RIAs without a Series 7 license grew only by 6 percent in both years. Why the disparity? Cerulli analyst Bing Waldert says some advisors do hold onto their Series 7 after becoming an RIA, “usually in order to sell products like variable annuities that aren’t widely priced in the fee world.” But that’s a small percentage, he says. In fact, he adds, the findings aren’t particularly surprising since many new entrants to the RIA world tend to keep their brokerage license for a time while they transition to a fee model; incidentally, these early years are typically high growth because assets are relatively small at first. (Indeed, Waldert says the average assets under management for dually registered advisors are $87 million, whereas pure RIAs average assets of $113 million.) Another reason to jettison the Series 7 is the hassle of serving “two compliance masters,” says Waldert.

As for the RIA custodians’ efforts to attract larger wirehouse brokers, Waldert and other consultants like Tiburon Strategic Advisors’ Chip Roame, and Moss Adams’ Philip Palaveev, call perceived success in this area “overblown.” Sure, some multi-million producers have joined the custodians, but according to Cerulli, the pedigree of most RIAs tells the story: Only 25 percent of RIAs were Series 7 holders before becoming RIAs, and only 25 percent of those had ever worked at a wirehouse. “The vast majority of the broker-turned-RIAs are from the independent and insurance space,” he says.

However, more interesting than which channel advisors are going to, is where the assets are going. The RIAs may have grown their client-asset base faster in the last couple years than the seven largest national brokerage firms, but keeping apace is hard to do when your asset base is several times larger. According to SEC filings, between the second quarter of 2005 and the second quarter of 2007, combined client assets at the seven largest national brokerage firms grew 29 percent from $5.1 trillion to $6.6 trillion, a sum more than six times that of the RIA industry. Not too bad.

Brokerage Client Assets