Fee-based advising victim of success: U.S. study

U.S. fee-based advisors will face challenges as more set up shop and larger competitors find ways to emulate their success, according to a study by Moss Adams.

While only 14% of U.S. advisors surveyed are registered independent advisors (RIAs), their numbers have increased by more than 30% over the past five years. And it’s expected that over the next five years, they will grow by another third, according to the 65-page report commissioned by New Jersey–based Pershing Advisors Solutions.

RIA is a loosely used name that refers to firms that charge a fee to create a financial plan and manage wealth, generally 1% of clients’ investable assets. RIAs tend to have the highest proportion of affluent clients, and as a result, attract a higher-calibre adivsor.

The typical RIA firm’s size doubled between 2000 and 2005, and Moss Adams projects that the average assets under management of RIAs will grow from $179 million to over $1 billion by 2010, and almost $1.6 billion in 2012. At the local level, RIAs are taking market share as large if not larger than local branch offices of national competitors.

This success has not gone unnoticed. Moss Adams notes that corporate and bank firms have started adopting widespread use of the fee-based model. Also, their marketing material has become quite similar to that of RIAs, with emphasis on expertise in financial planning and independence. This approach is already successful with vast numbers of down-market clients who are too expensive for RIAs to serve.

If corporations can’t beat the RIAs in the up-market, though, they’ll buy them. Of the top 50 RIA firms in 2003, 16% have been acquired. Moss Adams estimates the top independent advisor firms have collectively earmarked about $2 billion for acquisitions, which could purchase about 22% or $400 billion of the AUM of the RIA market.

That number likely pales in comparison to the amount of money banks and large insurance companies, which are also aggressively acquiring RIAs, have at their disposal.

Ironically, the fee-based market in Canada, which is only now starting to come into its own, has been driven by the large bank-owned brokerages, rather than independents, says Bob Dorrell, senior vice-president of business development for Assante Wealth Management.

“In Canada, bank-owned firms would probably be the biggest purveyors of fee-based platforms,” Dorrell says. “Many of our competitors have fee-based platforms, and a lot of our advisors are starting to ask for it. A number of the advisors we’ve been recruiting have assets in fee-based platforms.”

Joe Canavan, CEO of Assante, says his firm has responded to this demand, launching fee-based platforms to its advisors at the beginning of September, where clients have the option of paying a management fee ranging from 40 to 100 basis points of their portfolio, depending on the size of their account. Overall, Canavan says the interest from both Assante’s advisors and clients has been minimal, but he feels it’s important to offer the option.

“Generally the take-up is about 5% to 10% of our advisors. I don’t think there is an overwhelming demand for fee-based advising other than versus what we already have in place,” Canavan says. “The option is for the clients that say they’re in a fee-based platform at RBC and want to have that same fee-based relationship, even though they weren’t particularly fond of their advisor there. We also do have a number of advisors who believe that this is the way of the future for their practice.”

Sue Dabarno, CEO of Richardson Partners Financial Limited, says her firm has been championing the fee-based advising model since 2003. Richardson’s fee-based model is serviced by small advisor teams who together can meet the economy of scale needed to serve the firm’s predominantly high-net-worth clients. Fee-based assets now represent 62% of the firm’s total managed assets.

“I found it interesting that the study predicts that the average RIA will exceed a billion dollars under management by 2012. We certainly believe that our advisors will exceed that target as well. Three or four of our teams are at half a billion today or above it,” Dabarno says.

She doesn’t worry if the fee-based platform attracts bigger competitors because the ability to achieve such a valuable client book is directly related to staying relatively small and independent.

“Some of the evidence of your success is that people start to copy you. That means of course that you have to refine your service model. So, it’s up to us to continue to refine it and remain leading edge,” Dabarno says. “Because of our size — we are keeping our firm around 150 advisor teams — we can move very quickly. We’re very fleet of foot, and we don’t have a big infrastructure, so we can adapt quickly to market conditions.”

Dabarno also stresses that having a system where each advisor is a part owner of the firm ensures independent firms retain their talent, making it difficult for banks and large firms to poach top advisors and the affluent clients they attract.

“It’s a win for the advisors because they’re owners in the business, so that they have a say in the business, and they construct their client solutions,” she says. “As owners, they want to make sure at all times they are doing the right things, their service is quality, and that it’s very much fee-based.”

Moss Adams derived its data from a survey of more than 1,000 RIAs in the U.S. It then interviewed a selected group of well-known industry people and top-performing advisors to comment on the data.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(09/27/07)

Mark Noble