Em­brac­ing the Robo Model

The in­crease in RIA head count and as­sets un­der man­age­ment is be­ing fu­eled by the rise of dig­i­tal ad­vice plat­forms.

Financial Planning - - CONTENT - By Ken­neth Corbin

The in­crease in RIA head count and AUM is be­ing fu­eled by the rise of dig­i­tal ad­vice plat­forms.

THE RIA SEC­TOR IS EN­JOY­ING BRISK GROWTH IN both per­son­nel and as­sets un­der man­age­ment, but re­mains dom­i­nated by small busi­nesses that cater to spe­cial­ized sets of clients, in­clud­ing a grow­ing num­ber of firms that are rolling out in­ter­ac­tive dig­i­tal ad­vice ser­vices.

Those are among the find­ings from a new re­port by the In­vest­ment Ad­viser As­so­ci­a­tion in the group’s an­nual in­dus­try snap­shot. In part­ner­ship with the com­pli­ance con­sul­tancy Na­tional Reg­u­la­tory Ser­vices, the IAA combed through more than 12,000 Form ADVS on file with the SEC to de­velop a sketch of an in­dus­try evolv­ing to keep pace with a grow­ing and in­creas­ingly tech-savvy client base.

In a state­ment, IAA CEO

Karen Barr touted the in­dus­try’s flex­i­bil­ity, not­ing the con­tin­ued growth amid the

“rapid pace of change in the fi­nan­cial ser­vices ecosys­tem.”

John Geibauer, pres­i­dent of Na­tional Reg­u­la­tory

Ser­vices, a con­sult­ing firm, says the in­dus­try’s em­brace of tech­nol­ogy is “both a re­sponse to client needs and ex­pec­ta­tions and a driver that is ex­pand­ing the client base for fi­nan­cial ad­vice.”


By the num­bers, the RIA sec­tor hit an all-time high with 12,172 Sec-regis­tered ad­vi­sors as of April, up 2.7% from a year ago. Those ad­vis­ers serve 35.6 mil­lion clients and man­age $70.7 tril­lion in as­sets, ac­cord­ing to the IAA’S anal­y­sis.

The to­tal num­ber of clients served, while down a tick from 2016 (which the In­vest­ment Ad­viser As­so­ci­a­tion at­tributes in part to changes in method­ol­ogy and a re­port­ing er­ror, say­ing that the slight de­cline is “not mean­ing­ful”), con­tin­ues a run­ning trend of in­creases. In 2012, Sec-regis­tered ad­vi­sors re­ported serv­ing 23.2 mil­lion clients, more than 13 mil­lion fewer than to­day.

By firm count, the growth of the RIA sec­tor stands in sharp con­trast to the di­min­ish­ing num­ber of bro­ker­age houses, though in­dus­try con­sol­i­da­tion in the bro­ker-dealer world is a mit­i­gat­ing fac­tor. Still, the num­ber of RIA firms eclipsed Finra-regis­tered bro­kers in 2014, and the trend lines have been di­verg­ing since. The IAA posits that still more bro­kers might move to­ward the ad­vi­sor model in re­sponse to the Depart­ment of La­bor’s fidu­ciary reg­u­la­tion.


But the as­so­ci­a­tion sug­gests that much of the client growth has been fu­eled by the rise of dig­i­tal ad­vice plat­forms, both those that serve re­tire­ment plan par­tic­i­pants and the on­line robo ser­vices and ap­pli­ca­tions that cater to re­tail clients with lower ac­count bal­ances.

“The past cou­ple of years we’ve been look­ing at the trend to­ward au­to­mated in­vest­ment ad­vice,” says Laura Gross­man, the IAA’S as­sis­tant gen­eral coun­sel who led the team that as­sem­bled this year’s re­port. “The form (ADV) is not de­signed to pull out that in­for­ma­tion so it’s a lit­tle hard to tell, but it seems like that’s in­creas­ing.”

But Form ADV does have a box for firms to check to indi-

cate that they are an “in­ter­net ad­vi­sor,” a more than 10-year-old des­ig­na­tion that cov­ers firms that pro­vide ad­vice al­most ex­clu­sively through an on­line plat­form. (Firms can still be el­i­gi­ble for that des­ig­na­tion if they pro­vide ad­di­tional ad­vice beyond their web­site to fewer than 15 clients in a year.)

The num­ber of firms that checked that box has been on the rise in re­cent years, up 16% this year and just un­der 60% from 2015 to 2016.


That’s still a tiny frac­tion of the over­all RIA uni­verse, how­ever, with only 146 firms self-iden­ti­fy­ing as in­ter­net-only this year. What’s more, 61 of those firms are regis­tered with the SEC but do not re­port any clients or as­sets un­der man­age­ment, amount­ing to what the IAA calls shelf reg­is­tra­tions, ac­cord­ing to Gross­man.

“They’re prob­a­bly ex­pect­ing to get the as­sets or get the clients in the fu­ture,” Gross­man says.

She cau­tions against al­low­ing the in­ter­net-only chan­nel to ob­scure the far larger shift to­ward some hy­brid form of ser­vice model that blends au­to­mated ad­vice with hu­man el­e­ments.

“I wouldn’t just look at the in­ter­ne­tonly ad­vi­sor — the 146. That does not even en­com­pass what we see as the ma­jor robo play­ers,” Gross­man says.

“That’s not rep­re­sen­ta­tive of what we con­sider au­to­mated in­vest­ment ad­vice,” she says, not­ing that ma­jor robo play­ers like Bet­ter­ment or Van­guard wouldn’t iden­tify as strictly au­to­mated firms on their Form ADV. “They don’t check the box for in­ter­net-only.”


The data show that there are only a hand­ful of mega-ad­vi­sors serv­ing a vast port­fo­lio of clients, sug­gest­ing a heavy reliance on an au­to­mated ad­vice plat­form. Just eight reg­is­trants re­port that they have more than 1 mil­lion clients.

Far more com­mon are firms that have fewer than 100 clients, the anal­y­sis finds. In part, though, that num­ber is weighed down by the ad­vi­sors who serve a rel­a­tively small num­ber of pooled ve­hi­cles such as mu­tual funds or pri­vate funds.

It is also re­flec­tive of the fact that most RIAS are small-scale op­er­a­tions, with rel­a­tively few em­ploy­ees serv­ing a pro­por­tion­ate num­ber of clients.

By far, the largest seg­ment of firms are those with AUMS be­tween $100 mil­lion and $1 bil­lion (56% of all reg­is­trants), and 87% of all reg­is­trants count fewer than 50 em­ploy­ees. Slightly more than half of all firms hire 10 or fewer non­cler­i­cal em­ploy­ees.

“We still see that the in­vest­ment ad­vi­sor in­dus­try is re­ally driven by small busi­nesses,” Gross­man says.


Then again, while the smaller firms hold the lion’s share of clients, there is a strik­ing im­bal­ance in the dis­tri­bu­tion of as­sets, an ef­fect the IAA calls the “in­dus­try bar­bell.” Just 1% of regis­tered ad­vi­sors — only 124 — boast an AUM of $100 bil­lion or more, yet those shops man­age 54% of the to­tal as­sets in the in­dus­try.

Many ad­vi­sors also demon­strate a sin­gu­lar mind­ed­ness in their ADV fil­ing, both in busi­ness model and in the types of client they pre­fer to work with.

On one side, the num­bers of ad­vi­sors who are ei­ther du­ally regis­tered as a bro­ker-dealer or who work as a regis­tered rep­re­sen­ta­tive for a bro­ker are dwin­dling, down 1% and 5%, re­spec­tively.

Then, more than 87% of ad­vi­sors say that one type of client com­prises the ma­jor­ity of their busi­ness. Fifty-one per­cent say that they pri­mar­ily serve in­di­vid­ual clients, while 29% mostly work with some va­ri­ety of pooled ve­hi­cles.

Nearly 2,200 reg­is­trants say that they work ex­clu­sively with pri­vate funds, and another nearly 300 re­port that they solely pro­vide ad­vice for regis­tered funds.

“A lot of ad­vi­sors spe­cial­ize in a sin­gle type of client,” Gross­man says. “If you’re an ad­vi­sor, you tend to spe­cial­ize.”

“We still see that the in­vest­ment ad­vi­sor in­dus­try is re­ally driven by small busi­nesses,” says Laura Gross­man of the In­vest­ment Ad­viser As­so­ci­a­tion.

Ken­neth Corbin is a Fi­nan­cial Plan­ning con­tribut­ing writer in Bos­ton and Wash­ing­ton. Fol­low him on Twit­ter at @kecorb.

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