There's no consensus answer to either among the players in the profession, which emerged several decades ago in response to increasing calls for objective financial advice.
Most dually registered firms have obvious conflicts in balancing the demands of their broker-dealers against those of their clients. But what about those firms that derive only a small fraction of revenues from the B-D side in order to offer clients access to products like long-term-care insurance?
Fully independent RIAs would seem to be the least conflicted. But are advisors, who must operate in a controlled and consensus environment, truly free to think for themselves?
- See the lists:†Top 50 Fee-Only RIA Firms
As the largest RIAs continue their seemingly inevitable evolution into huge institutions - many see themselves having $50 billion to $100 billion in assets under management in the next 10 to 20 years - the way they answer these questions will determine how they grow and, ultimately, the quality of service they will provide.
"Anywhere there are institutions that are unconflicted and exist solely to represent the interests to their clients, there's an enormous advantage," says David Shepherd, co-founder of Boston-based Shepherd Kaplan, No. 2 on Financial Planning's annual list of the country's largest RIAs.
Rob Francais, CEO of No. 3 firm Aspiriant, of Los Angeles, says, "We get 25% to 35% of our new business from people calling us up and saying, 'I want an independent and I want to learn more about you.'"
In FP's annual listing of the top RIAs, we track the top 50 firms by assets under management. We also list the 50 fastest-growing RIAs and the top 50 emerging RIAs. We left off firms with B-D affiliations or large stakes held by banks or other outside institutions, given the conflicts these arrangements often present. The result is a substantial alteration in the list's makeup to solely include fee-only wealth managers.
When research firm Cerulli & Associates measures this space, it looks at all RIA firms, including those with B-D affiliations. Its data shows that this more broadly defined RIA sector surpassed a cumulative $2 trillion in AUM for the first time in 2011 - and drastically outpaced the growth rate of the rest of the financial services industry in the past year, growing at 13% versus 1.3%.
Some observers were surprised to find that in the latest year more advisors entered the dually registered channel, despite the risk of conflicts, than the independent RIA channel. Over all, there are 10,357 independent RIAs and 4,659 dually registered firms; among the new entrants, only 783 joined the former, compared with 1,187 in the latter.
Firms affiliate with B-Ds and banks for a multitude of reasons. Many want a mix of fee-only and commission income. They also like the advantages that a deep-pocketed provider can confer, from integrated technological platforms to compliance tools to marketing and research resources.
"People who have not spent money on technology will get eaten alive by the SEC over compliance issues," says Jeffrey Thomasson, founder of this year's No. 1 firm, Carmel, Ind.-based Oxford Financial Group. But strictly independent RIA firms like Oxford, Shepherd Kaplan and Aspiriant view associations with B-Ds as deals with the devil. "So many firms create a conflicted structure internally," Shepherd says. "It's [re-creating] the sins of the industry out of which the RIA industry grew."
As it happens, the four firms that sit at the top of FP's list of the largest RIAs have made long-term commitments to a strict model of independence. Each has chosen an ownership structure that many other RIAs would find both exotic and burdensome to institute and maintain: complex internal succession plans that pass ownership to younger partners.
These plans limit the upside that founders and early partners are likely to reach in selling all or a portion of their firms to outsiders. And while offering a lucrative opportunity to younger partners, the plans also place a steep burden on them. Newer partners must typically borrow substantial sums to incrementally purchase equity ownership stakes over the years.
In stark contrast, two top firms from last year's list went through much more abrupt leadership changes in 2012. SunTrust Bank fired the management of last year's No. 1 firm, GenSpring Family Offices, and took control of the RIA, reportedly because of low profitability. The firm's former CEO, Maria Elena "Mel" Lagomasino, a vocal advocate for a fiduciary standard of client care, was replaced. Meanwhile, last year's No. 3, Veritable, sold a controlling stake to a consolidator of money management firms, Affiliated Managers Group, in order to solve succession issues.