In truth, planners in RIAs and wirehouses earn roughly the same income when they are in firms of equivalent size, according to a new report by Boston-based consulting firm Aité Group.
One simple reason: Although wirehouses take a large percentage of their advisors' income, RIAs have bigger overhead challenges. “In general, the RIA [practice] is going to have to support internally more of their operation -- whereas in the wirehouse world, there may be shared resources,” explained study author and Aité research analyst Bill Butterfield.
The new study, Wirehouses and Registered Investment Advisors: So Alike and Yet So Different, surveyed 68 wirehouse advisors and 184 RIAs. In both channels advisors with client assets under management of $30 million to $99 million were classified as “small” and advisors with AUM of $100 million to $1 billion were deemed "large."
The study also found that commission income is an important revenue stream for both channels. Across the board, revenue from commissions makes up 40% to 47% of total revenue for RIA practices and large wirehouse practices, according to the survey -- indicating that the business models are not as different as many believe. (It's a larger percentage of revenue for small wirehouse practices.)
“Historically the wirehouse channel has been characterized by sales and commissions,” Butterfield said. The survey found that the current model is more nuanced, though: “Certainly there’s a fair amount of fee-based service being done in wirehouse practices and, likewise, commissions are an important income stream in the RIA channel.”
Another finding: Because RIA practices need more people to support their business than do similarly sized wirehouse practices, growth can be more challenging. RIA practices of all sizes have an average of 50% more team members than do comparable wirehouse practices.
For all RIAs, this staffing issue acts as a constraint on the growth and efficiency, Butterfield says. “And that’s a consideration for folks pondering a move to the RIA channel,” he said, “or for existing small-practice RIAs. As they grow their practice, they are going to be faced with growing headcount.”
Other survey findings include the following:
- Size matters more at RIA firms: Advisors at large RIA practices earn approximately 25% more in take-home pay than advisors at small RIA practices. In the wirehouse world, however, advisors at large practices earn only 5% more in income than peers at small practices.
- Among small practices, wirehouse advisors are bringing in more money overall: Only 16% of small RIA practices generate more than $600,000 in revenues annually, compared with 37% of small wirehouse practices.
- RIA-affiliated advisors exhibit fewer efficiency gains as the size of their practice grows than wirehouse advisors. Large practice wirehouse advisors dedicate an average of 19% of their time towards client acquisition and prospecting compared to 9% of time for small practice wirehouse advisors. RIA-affiliated advisors at both small and large practices allocate roughly the same amount of time on client acquisition and prospecting (14%).
- RIA affiliated advisors are embracing products beyond the staples of stocks, bonds, mutual funds and variable annuities. Small- and large-practice RIA-affiliated advisors allocate an average of 19% and 27%, respectively, of client assets toward non-core products such as fixed annuities, hedge funds, real estate, options and foreign currencies.