US Advisors Switch To State Regulators As Dodd-Frank Act Starts To Bite - Study

Eliane Chavagnon

6 November 2012

The number of SEC-registered investment advisors dropped slightly from 11,539 in 2011 to 10,511 this year, as numerous adviors switched to state registration and regulation - reflecting changes brought about by provisions of the Dodd-Frank Act, according to a new study.

Findings from the Investment Adviser Association and National Regulatory Services, in a report called Evolution/Revolution, said the "so-called switch" in the Dodd-Frank Act (increasing the dividing line between SEC and state-registered advisors from $25 million to $100 million in assets under management) has resulted in some 2,400 SEC-registered advisors switching to state registration and regulation.

However, provisions of the act requiring the registration of certain private fund advisors under the Investment Advisers Act have triggered the addition of over 1,500 newly-registered investment advisory firms.

Meanwhile, total regulatory assets under management reported by all investment advisors on July 16 - the point from which the report is based - came to $49.4 trillion, up from the $43.8 trillion logged last year.

"The Dodd-Frank Act has had a profound effect on the composition of the investment advisory profession," said David Tittsworth, executive director of the IAA. "The law has shifted regulatory responsibility for hundreds of smaller firms to the states, while requiring larger private fund advisors to register with the SEC."

"Seismic shifts"

These "seismic shifts" have caused a net decrease in the number of SEC-registered investment advisory firms, he said. "However, many of the core characteristics of the advisory profession remain fairly constant."

Tittsworth explained that a "relatively small number" of large investment advisory firms manage a high percentage of total regulatory AuM, whilst most SEC-registered investment advisors are small businesses, as indicated by the 74 per cent of advisors who said they manage less than $1 billion in regulatory AuM. "It is clear that the US investment advisory profession is an engine of small business creation and growth," he said.

John Gebauer, managing director of NRS, said the findings indicate that the investment advisory profession is "alive and well," employing over 759,000 professionals and serving over 23 million individual and institutional clients.

"Private funds have become a mainstream component of the investment advisory profession," he added, highlighting that over a third of all SEC-registered advisors (37.9 per cent) manage at least one private fund. In addition, 2,333 advisory firms reported that over 75 per cent of their regulatory AuM derive from assets of private funds, 1,346 of which were registered as investment advisors with the SEC this year.

"The SEC has announced that it intends to implement new examinations tailored to these types of firms and they are in the process of collecting much more extensive information via Form PF," Gebauer said.

Click here to view an article about how the Dodd-Frank financial regulations came under withering attack from the financial services industry at SIFMA's annual meeting in New York last month.