Registered investment advisors' assets are expected to account for a quarter of industry asset market share by the end of 2014 - although this sector will need to “prove its sustainability” in the long term, according to new research from Cerulli Associates.

In 2010, RIAs and dually-registered channels claimed 18.6 per cent of combined asset market share, a figure which in 2011 rose to 20.1 per cent and again to 21.6 per cent in 2012. Cerulli anticipates that market share will increase further to 23.2 per cent this year and hit 24.7 per cent in 2014. 

In its State of the RIA Marketplace 2012 report, the Boston, MA-based research firm said growth has been “contingent upon successful advisor recruitment into the channel,” as well as break-away advisors creating their own independent firms and clients opting for RIAs over existing providers.

“While the rising tide is raising all boats, the largest firms by assets are expanding their market share, extending their offerings, and building scale,” it said.  

The firm added: “Opportunities may arise for asset managers across the spectrum; however, product selection preferences, gatekeepers, and client relationships differ from traditional broker-dealer relationships.”

Opportunities

According to the report, the appeal of the RIA channel has attracted some 1,500 advisors from across the industry, managing on average $48 million each. Meanwhile, in other surveys, Cerulli has found that just 17 per cent of dually-registered advisors indicated a willingness to drop their broker-dealer affiliation.

The firm believes these asset flows will continue to support growth of the channel and bring “swelling assets” into multi-advisor practices, in addition to providing new entrants into the space. Broker-dealers and asset managers must embrace the permanence of dual registration as a business model and align their service model accordingly, it said.

The firm also highlighted that, for advisors moving into the RIA channel, breaking away from a larger firm may result in reduced wholesaler coverage. But this can present the opportunity to “draw a greater percentage of the advisor’s assets,” it said. “Asset managers should standardize transition efforts between channelized wholesalers to ensure relationship continuity for breakaway advisors.”

Risks

The continued expansion of the RIA channel is “undeniable,” and there are many opportunities to be had from this, the report says. However, it also raises a number of challenges to take into account.

One aspect to consider is that the RIA channel can’t always rely on advisor transition to generate growth and thus it must “prove its sustainability” by bringing in new advisors to the industry. Furthermore, these “incremental additions” must outpace that of firing and advisor retirement.

“As growing organizations within the channel add structure, new hiring will rise as a priority, due to its cost effectiveness compared to the capital required for advisor recruitment,” Cerulli said.

Another challenge is that while scale brings benefits to RIA practices - such as reduced overhead costs, shared compliance and operations - limited access to capital can result in restricted merger and acquisition activity.  

Lastly, it is worth looking at what RIAs are charging their clients. Cerulli highlighted that RIAs charge, on average, a 1 per cent fee for assets under management. A few are able to maintain pricing power as assets increase to high levels (above $1.5 million from a client, for example) but these are in the minority, the firm said.

“Asset managers must be similarly fee-conscious when dealing with advisors who service high net worth clients,” it added. “Advisors whose fee consciousness extends into their own revenue should be additionally cautious regarding manager fees.”

Source of RIA growth

According to the report, industry asset growth “crept along” at a 1.3 per cent growth rate in 2011 and was far-outpaced by RIA asset growth, which was around 13 per cent. One of the biggest factors contributing to this growth was the 2,351 advisors who transitioned to the RIA and dually-registered channels, bringing with them $90 billion in assets.

Meanwhile, existing RIAs were able to post $141 billion in organic growth due to new hires, advisor recruitment and client development, Cerulli said.

It added that RIAs have also been growing their client lists by “taking clients away from other advisors,” as well as attracting new money from existing clients and bagging investors as they “evolve out of direct platforms."