The world of financial advisory is growing and expanding due to new technology and the way that people invest their assets.
Generally, financial advisors fall into several categories that include broker-dealer, money manager, financial planner, and registered investment advisor (RIA). Each of these categories may be further broken down into subcategories. Broker-agents serve as intermediaries between the buyer and seller of assets while RIAs work directly for the investor in managing assets. Some planners and money managers may only manage assets without making recommendations.
Keeping tabs on registered investment advisors
RIAs are specialized investment managers that typically work with high-net-worth individuals to create diverse investment portfolios designed to meet specific needs, such as growing assets, optimizing earnings, or reducing taxes. The interests of RIAs are different from those of stock brokers, who typically earn commissions based on the sales of specific investments.
This may cause a broker to suggest an investment that is more fee-laden than a cheaper alternative, as they may make more in commissions. RIAs, on the other hand, work for the investor and negotiate their fees based on the client’s portfolio, not on the investments within that portfolio.
The RIA ecosystem is constantly changing. The top firms have over $1 billion assets under management (AUM). According to InvestmentNews, Financial Engines Advisors is the largest RIA by AUM with $138 billion assets under management. Comprehensive Financial Management LLC, while significantly smaller, is the largest RIA by average account AUM at $332.7 million. As of July, Statista reports there were 12,172 RIAs in the United States.
Other counts are as high as 30,000. The difficulty in numbering RIAs stems a great deal from differences in how RIAs are defined. The three states with the highest concentrations of RIAs are California, New York, and Texas with more than 10,000 RIAs combined in 2015.
New business models and rapid technological changes are challenging how this fiduciary role is perceived and practised. Every day, new RIAs enter the market, making it further difficult to track how many are currently in practice.
Regulating registered investment advisors
While companies seeking to sell securities must register with the Securities and Exchange Commission (SEC), stockbrokers and investment firms that broker those securities are regulated by the Financial Industry Regulatory Authority (FINRA). The agency issues broker licenses and ensures that firms are in compliance with securities regulations. However, they have no authority over Registered Investment Advisors.
RIAs are regulated strictly by the SEC and the states in which they operate. While many RIAs are corporations, an individual can register as an RIA and manage the assets of others as a single entity. Many local and regional RIA firms operate this way.
For that reason, small RIAs are difficult to track, and many of the smaller advisory firms go out of business as quickly as they raise their flags.
While there may be exceptions, RIAs with $100 million AUM or more are required to register with the SEC. RIAs with less than $100 million AUM and five or more clients in any state must register in each state where they meet those conditions. Whether regulated by the state or the SEC, RIAs have a fiduciary duty to look out for their clients’ best interests.
An ethical RIA will self-regulate to ensure strict compliance with all federal and state laws as well as to manage client assets optimally.
What kinds of assets do RIAs manage?
A registered investment advisor may find himself managing a variety of asset classes for clients. With so many investment options to choose from, it can be a difficult task to research all available opportunities in every asset class and manage a diverse portfolio so that the investor’s money earns the best returns.
Unless an individual is a full-time investor, they may not have the time to do all the legwork that is necessary to ensure the best return on investment (ROI) for each investment class. That increases the value of the RIA for the investor.
RIAs can manage virtually any type of investment. That includes stocks and bonds, money markets and cash equivalents, and even alternative asset classes. Many RIAs specialize in one or more type of asset class, and many find themselves managing mutual funds due to their popularity among investors. However, few RIAs allocate their clients’ money into real estate.
Additionally, RIAs may offer complementary services. Some firms offer financial planning services. Some simply manage their clients’ assets and do nothing more. Some RIAs use active portfolio management while others use a more passive approach. An RIA firm may specialize in institutional clients like banks and other investment firms while others may specialize in high-net-worth or ultra-high-net-worth individuals. Some do both.
To top it off, many RIAs specialize in a particular niche or professional area; for instance, an RIA may seek professional athletes as clients, specialize only in stocks and bonds, or only manage portfolios of a minimum size.
The future of financial advice
The wealth management field is in transition, not only in the U.S. but around the world. Baby Boomers, the second largest living generation, are beginning to transfer their wealth to their children and grandchildren. Millennials, now the largest living adult generation, are beginning to acquire much of that wealth.
There are now more high-net-worth individuals in the Asia-Pacific than in the U.S. Due to technology and greater access to financial services, wealth is growing fast in China, Japan, India, and other countries of that region, and will likely continue to do so for some time.
Technology is changing the financial advice industry everywhere. The rise of machine learning and algorithmic portfolio management has created a whole new class of financial advisory called robo-advice, such as Betterment, bloom, and WealthFront. Even some registered investment advisors rely on digital advice firms, or their technology, to deliver returns for their clients. Personal Capital is such a firm that focuses on retirement accounts, college savings plans, and tax management services for mid-range investors.
AlphaFlow specializes in optimized debt-based real estate portfolios helping investors maximize earnings and reduce costs through 21st-century automation technology. WorthFM is a relatively new RIA whose focus is helping women manage their investment portfolios.
In some parts of the world—Africa, Indonesia, and Latin America—access to financial services through smartphone devices is driving the need for more financial advice.
These trends mean there is a growing demand for registered investment advisors, so we’ll likely see more firms entering this field in the coming years. More people are transitioning away from brokers to financial advisors, and this shift will likely continue as people discover that fee-based financial services mean keeping more money in their retirement accounts.
Registered investment advisors offer high-net-worth individuals greater returns on their investments, lower fees for managing assets, and better planning models than previous financial advisory services due to their flexibility, independence, and greater incentive to research and find the best investments.