As surprising as it may sound, registered investment advisory (RIA) firms are bringing in more assets these days than are wirehouse brokerage firms. The report of the Registered Investment Advisor Survey, by Citi Investment Research, states that RIAs who use Schwab Institutional, Fidelity Institutional Wealth Services and TD Ameritrade Institutional as custodians collectively brought in $215 billion in new assets during the 18-month period ended June 30.

This sum dramatically exceeds the $168 billion gathered during the same period by stockbrokers at Smith Barney, Merrill Lynch, UBS and Morgan Stanley. The report calls RIAs the "most powerful asset-gathering force in the industry."

Schwab Sweep

Regarding custodian performance, the survey found Schwab to be the most popular, sweeping all six evaluation criteria in responses from the 100 RIA respondents, who had, collectively, 25,000 clients and $60 billion in assets under management. The criteria were: technology, service, brand, cost, mutual fund offerings and referral programs.

The RIAs identified service and technology as the most important criteria for determining the quality of a custodian's service. Schwab was rated best in technology by 68% of the advisors, and best in service by 77%.

Skewed?

Heads of custodial platforms at Fidelity Institutional Wealth Services, Pershing Advisor Solutions and TD Ameritrade Institutional have expressed concern about how the Citi study drew general conclusions about Schwab's primacy based upon such a small sample of advisors. The study "had the potential to be phenomenal, but it was so skewed," says J. Thomas Bradley Jr., president of TD Ameritrade Institutional in Jersey City, N.J.

Mark Tibergien, president of Pershing Advisor Solutions, says the report's superlative findings regarding RIAs are highly significant, considering that they come from Citi, a sister division of wirehouse Smith Barney. "When an organization like that says of RIAs, 'This is interesting,' that's a profound statement," Tibergien says, noting the irony of the report's being issued by a wirehouse-linked entity.

Ben Valore-Caplan, managing partner of Syntrinsic Investment Counsel in Denver, Colo. believes that widespread acknowledgment of the trend toward RIA dominance is overdue. He says that RIAs' market position, with nearly $2.5 trillion in total assets under management, has become too big and aggressive for Wall Street to ignore. "Citi is certainly losing advisors [to the RIA model]," Valore-Caplan says. "It's a major trend." Valore-Caplan and his partners broke away from UBS in June to start an RIA firm with $750 million in client assets, which they custody through Pershing.

YEAR OF INDEPENDENTS

Despite the Citi report's dynamic assessment of RIAs, it likely understates
current opportunities for RIAs and their custodians to gain market share, according to Jack Callahan, president of Fidelity Institutional Wealth Services in Boston.

The Citi survey was completed in June, when the Dow Jones Industrial Average still hovered at around 12,000. "With everything that has happened recently, we have a once-ina-century opportunity for RIAs and dually registered advisors," Callahan
says. He adds that 2009 "could be the year of the independent advisor."

The broader category of independent advisors, which includes independent broker-dealers, is positioned to rake in market share, says Mike DiGirolamo, managing
director of the investment advisor division of Raymond James in St.
Petersburg, Fla.

Even captive brokers beyond Wall Street are well positioned for gains at wirehouses' expense, DiGirolamo says. The last three years were "phenomenal" ones for recruiting full-service brokers to Raymond James, he says. "Is the employee model [for rendering financial advice] doomed? No. Are the wirehouses broken? Yes."

The Citi report states that 66% of the new assets gathered by RIAs in the period measured came from accounts held by brokers at wirehouse firms. The second most-cited source of new assets for RIAs mentioned in the study (8%) is new client income.

Backlash

Though the Citi study extols the power of RIAs and their custodians, its dire assessment of the Wall Street model might end up countering the trend. One effect might be to "wake a sleeping giant" to muster resources to grab back market share, notes Steve Winks, managing principal of Senior Consultant in Richmond, Va. With the right impetus, Winks adds, the wirehouses could marshal their resources to fortify themselves against the RIA onslaught.

There are signs a backlash is already occurring at wirehouses, according to Tibergien. "They're absolutely making the transition," he says. "Many are morphing into custodians." Pershing has a clear view of this progression toward fee business because it can see how broker-dealers earn fees by examining trading activity
through Pershing's clearing business, Tibergien adds.