Report says fiduciary advisory model is proving its attraction to investors. Independent RIAs expect to see a surge in client assets from an annual increase of about 10% since the market downturn of 2001 through the end of 2006 to a yearly gain of 21.1% through the end of 2008.

That's the main finding from a report on the indie RIA space by Aite Group, a Boston-based research and consulting firm. The study, Registered Investment Advisor Survey 2007: A Successful Business Model in Wealth Management, is based on an in-depth survey of 78 investment advisories registered as RIAs with the Securities and Exchange Commission and governed by the Investment Advisers Act of 1940.

Appreciation

This astonishing optimism is fueled by a growing sense among investors that working with professionals to build financial strategies that are -- to some extent anyway -- aligned with their "life goals" is a better bet than merely trying to pick hot stocks. Many of these investors are affluent baby boomers who have learned this lesson the hard way over the past seven or eight years. With their post-work comfort in the balance, some of these investors have turned to RIAs whose fiduciary responsibilities and fee-based business models supposedly align their interests with those of their clients.

In the six years between 2001 and 2007, RIAs saw a 62% increase in assets under management from $1.3 trillion to $2.1 trillion, according to San Francisco-based RIA custodian Schwab Institutional.

"The growth experienced in the RIA market clearly shows that clients appreciate this approach," says report author and Aite senior analyst Alois Pirker."Setting up an RIA firm allows advisors not only to become independent, but to implement the type of firm that allows them to serve their clients best."

And though much of this growth is viewed as predicated on RIAs' adherence to a fee-based payment structure, the mantra of "best service" to clients -- mixed, as ever, with enlightened self interest -- is prompting a significant number of RIAs to include commission-based capabilities. Of the RIAs Aite surveyed, 44% were also broker-dealers.

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These "hybrid" RIAs are also more optimistic about their prospects for increasing assets under management through 2008 than other RIAs. Dual registrants see a 31.2% compound annual growth rate in store as against the increase of 15.3% seen by the pure-play RIAs surveyed.

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Pirker isn't quite sure what's behind the dual registrants' optimism. "I have to say it surprised me," he says. "Perhaps they see more assets coming their way because of their flexibility; maybe too they want to see [more growth] in return for the additional compliance work they have to do."

Steven Graubart, CEO of Houston-based wealth-management platform provider US Fiduciary, says the ability to work as an RIA-based advisor with ready access to a broker-dealer is particularly attractive to former wirehouse brokers like the ones his firm supports. "Our advisors all come out of fee-based environments, but they want to be able to provide some services to some of their clients on a commission basis; it just makes more sense. It's not a large part of our business, but it's an important part."

In fact though, the RIAs Aite surveyed indicated that, overall, 36% of revenue comes from commission-based business compared with 55% from recurring fee based on assets under management and 9% from one-time consulting fees.

Richard Gill, head of broker recruiting at New York-based RIA holding company Focus Financial Partners, says that, in addition to meeting ad hoc client requirements, the ability to extend commission-based services can also be a boon to advisors who want to be able to work -- and forge relationships -- with younger and (for the moment) less moneyed relatives of large private clients.

Mass-retail and mass-affluent investors of bring the lion's share of assets to RIAs with high-net-worth investors coming in a close second. (Mass retail investors have less than $250,000 in investable assets; mass affluent investors have between $250,000 and $1 million; high-net-worth investors have between $1 million and $10 million.)

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In terms of investment products, mutual funds rule the roost for RIAs. The 66 RIAs that shared their client-asset allocations put a quarter of these assets into mutual funds. Annuities came next with a 16% allocation. Separately managed accounts (SMAs) and mutual-fund wraps got only 5% and 4% respectively. Retirement-income products -- as distinct from retirement savings products -- garnered just 2%.

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With all 78 RIAs chiming in this time, annuities emerged as the investment product likeliest to gather the most assets through the end of 2009, followed by ETFs, fixed income, mutual funds and hedge funds. SMA didn't rate as anyone's first pick for strong growth, though as a third choice they did as well as any save mutual funds, and, by a hair, retirement-savings products.

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The report also looks into time allocation among RIAs, showing that -- working with clients and portfolios aside -- administration, marketing and compliance-related tasks chew through about 41% of their time.

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Though visions of all this busywork makes service and technology vendors salivate, Pirker says that "the fragmentation and inherent diversity of" the RIA makes it hard for them "to address the needs of these advisors in a scalable manner."

Pirker in fact plans to take a closer look RIAs technology and service requirements -- and their views on the products they use now -- in an upcoming study. -FWR

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