The regulatory overhaul put in place by the Dodd-Frank Act of 2010 has dramatically reshaped the compliance landscape for investment advisors, with more small firms moving to oversight at the state level, while many large, private fund advisors now find themselves under the purview of the SEC, according to a new survey of advisors jointly conducted by the trade group Investment Advisers Association and the National Regulatory Service, a provider of compliance and registration products for financial professionals.
The 12th annual "Evolution/Revolution" study, for which the two groups culled data from advisors' filings with the SEC, identified a substantial net drop in the number of firms the agency is overseeing, primarily attributed to provisions included in the financial reform law.
For instance, the Dodd-Frank Act upped the maximum threshold for regulation at the state level from $25 million in assets under management to $100 million, resulting in roughly 2,400 firms that had been overseen by the SEC registering with the relevant state authorities.
At the same time, the law expanded the SEC's authority to include certain types of private fund advisors, a change that resulted in more than 1,500 advisory firms registering for the first time with the SEC, according to the study.
"The Dodd-Frank Act has had a profound effect on the composition of the investment advisory profession," IAA Executive Director David Tittsworth said in a statement.
"These seismic shifts have resulted in a net decrease in the number of SEC-registered investment advisory firms. However, many of the core characteristics of the advisory profession remain fairly constant," he added.
He pointed out that the composition of the industry, measured by regulatory assets under management (RAUM), has been generally consistent, with the largest practices holding the lion's share of the total volume of assets under management.
Parsing advisors' SEC filings, the study authors found that the 90 largest advisory firms, or those with at least $100 billion in total RAUM, account for just under 49% of all assets managed by advisors regulated at the federal level. The report identified 664 advisory practices with RAUM of $10 billion or more, accounting for 82.7% of the total volume of federally regulated assets.
But the smaller firms, or those with less than $1 billion in RAUM, greatly outnumber their larger counterparts, accounting for 74% of all practices registered in 2012.
Overall, RAUM totaled $49.4 trillion as of July 16, according to SEC filings, up from $43.8 trillion reported in 2011. The authors of the report noted that that increase of nearly 13% is not as significant as it appears, owing both to a new, more expansive method for calculating RAUM and the addition of private fund holdings to the overall pool of assets overseen by the SEC.
Nearly 60% of SEC-registered firms reported that they employed no more than 10 non-clerical workers, while nearly 90% had headcounts of 50 employees or fewer.
"Despite the shift of 'mid-size' advisors to state registration, small businesses continue to comprise the largest category of SEC-registered investment advisors," the authors of the report wrote.
All told, the analysis tallied 759,000 professionals working at practices registered with the SEC. Those advisors serve more than 23 million individual and institutional clients.
The report also highlighted the dramatic increase in the SEC's oversight of advisors of private funds owing to the Dodd-Frank Act. In 2012, 3,856 registered advisors, or nearly 37% of the total, reported that they advise at least one private fund. Meantime, the number of advisors that reported that at least three-quarters of their clients were hedge funds or other pooled investment structures spiked 87.8% to 2,254, up from 1,200 in 2011.
And 2,333 of advisors said that hedge funds and pooled investment vehicles accounted for at least 75% of their RAUM. Of those, 1,346 were new registrants.
"This enormous increase in the number of advisors specializing in hedge funds is attributable to the Dodd-Frank Act's elimination of the private fund exemption upon which hedge fund advisors had previously relied," the authors of the report explained.