The
Price of
Independence
Bank and Broker-dealer affiliations help rias Bear the technology
and compliance costs of growth, But can chip away at oBjectivity.
By Ann Marsh
Two questions lie at
the heart of the rapidly evolving registered investment advisory space: Which of the country’s
15,016 RIA firms can legitimately call themselves
independent? And what, precisely, does independence mean anyway?
There’s no consensus answer to either among
the players in the profession, which emerged
several decades ago in response to increasing
calls for objective financial advice.
Most dually registered firms have obvious
conflicts in balancing the demands of their broker-dealers against those of their clients. But
what about those firms that derive only a small
fraction of revenues from the B-D side in order
to offer clients access to products like long-term-care insurance?
Fully independent RIAs would seem to be
the least conflicted. But are advisors, who must
operate in a controlled and consensus environment, truly free to think for themselves?
As the largest RIAs continue their seemingly inevitable evolution into
huge institutions — many see themselves having $50 billion to $100 billion in assets under management in the next 10 to 20 years — the way
they answer these questions will determine how they grow and, ultimately, the quality of service they will provide.
“Anywhere there are institutions that are unconflicted and exist
solely to represent the interests to their clients, there’s an enormous
advantage,” says David Shepherd, co-founder of Boston-based Shepherd Kaplan, No. 2 on Financial Planning’s annual list of the country’s
largest RIAs.
Rob Francais, CEO of No. 3 firm Aspiriant, of Los Angeles, says, “We get
25% to 35% of our new business from people calling us up and saying, ‘I
want an independent and I want to learn more about you.’”
In FP’s annual listing of the top RIAs, we track the top 50 firms by assets
under management. We also list the 50 fastest-growing RIAs and the top
50 emerging RIAs. We left off firms with B-D affiliations or large stakes
held by banks or other outside institutions, given the conflicts these
arrangements often present. The result is a substantial alteration in the
list’s makeup to solely include fee-only wealth managers.
When research firm Cerulli & Associates measures this space, it looks
at all RIA firms, including those with B-D affiliations. Its data shows that
this more broadly defined RIA sector surpassed a cumulative $2 trillion in
AUM for the first time in 2011 — and drastically outpaced the growth rate of
the rest of the financial services industry in the past year, growing at 13%
versus 1.3%.
Some observers were surprised to find that in the latest year more advisors
entered the dually registered channel, despite the risk of conflicts, than the
independent RIA channel. Over all, there are 10,357 independent RIAs and
4,659 dually registered firms; among the new entrants, only 783 joined the
former, compared with 1,187 in the latter.
