Independent Advisors Squeezed in DownturnIndependent Advisors Squeezed in Downturn

David A. Gaffen

Times are tough for independent RIA firms, as retail RIAs are dealing with a bear market slowdown, but compared with large independent broker/dealers, regional firms or wirehouses, the independent RIA is dealing with specific issues relating to competition and capacity. The number of retail RIAs declined in 2001, the first time the total number of independent RIAs has dropped in ten years, according to a report by Boston-based Cerulli Associates.

Cerulli identifies independent RIAs as independent fee-based advisors who register with the SEC and are not affiliated with an independent broker/dealer. According to Cerulli, there were 11,468 such firms in 2001, down from 11,728 in 1999. The primary constraint on growing their business is marketing, according to the Cerulli report, which was recently published.

"Part of it is due to competitive pressures, but the bulk of problems they're experiencing are really due to what I call the price of independence, which doesn't show during a ten-year bull market," says Matt McGinness, Cerulli analyst who authored the study. McGinness says staffing constraints, back-office services and marketing issues are ones that are "masked" during a bull market--but not during this grinding bear the market is experiencing currently. "There's so many issues to deal with running a small business," McGinness says.

As a result, what's occurring now is an increase in M&A activity in the area, with smaller firms banding together to increase their array of services, including getting together with accounting firms and law firms to provide a larger number of services. In addition, outsourcing is becoming more popular, with regard to back office processing in particular.

Assets at retail RIA firms declined to $1.54 trillion in 2001, down from a peak of $1.87 trillion in 2000. Cerulli surveyed 400 independent firms for the study.