Asset managers could reap rewards by targeting RIAs with between $100 million and $500 million in assets under management, according to a new report from Cerulli Associates.

The research firm expects RIAs, including dually-registered advisors, to expand their share of advisor-held assets to 14 per cent by the end of this year.

Furthermore, the RIA channel is rated as the most profitable for asset managers due to lower sales and service costs than broker-dealer channels, says Cerulli. Additional benefits can be gained from product managers in the mid-sized RIA sector, the white paper lays out, due to the predicted growth trajectory in this sub-sector, as well as the landscape of sales support and product preference.

Asset managers invested around 16 per cent of resources to the RIA channel in 2011, but most are focused on the largest firms, while mid-sized firms have been “an enigma” to the industry, Cerulli says.

“Primary sales challenges of access and organizational influence are removed when dealing with mid-sized RIAs,” said Tyler Cloherty, senior analyst at Cerulli Associates. “Since the average advisor within the RIA channel managed $63.7 million in 2010, they are attractive targets for asset managers.”

According to Cloherty, mid-sized RIAs receive a severe lack of support on servicing from external wholesalers, with 56 per cent of RIAs reporting never having received in-person contact, according to Cerulli’s research. Particularly, many of these advisors will have transitioned from the B-D channel, where they likely received better service support as well as home office resources such as market commentary, individual security research and asset allocation guidance.

After the transition, with depleted resources, mid-sized RIAs are trying to “bridge the gap with a patchwork of resources,” says Cerulli. These include third-party software, publications and asset manager support. The firm believes this provides an opening for asset managers to step in and provide resources to this segment.  

Product preferences separate mid-sized firms from their larger counterparts, says Cloherty, driven by scale, client demographics and portfolio construction philosophy. Mid-sized RIAs are big consumers of mutual funds, which make up nearly half of their portfolios – higher than for large RIAs. They also, generally, lack the time and expertise to manage client relationships alongside well-diversified portfolios built upon individual securities, the report says.

Mid-sized firms tend to be cost conscious, the study says, and use passive exposure to capture cheap beta. Cost-conscious advisors are likely to try and save money in market segments that are perceived to be commoditized.

Meanwhile, the largest firms have been quicker to adopt alternatives into their portfolios, while mid-sized firms have held back – perhaps justifiably so, based on their client demographics. However, “numerous executives” have mentioned demand among advisors to bring alternatives “down market,” says Cerulli, and particularly liquid alternatives.