There has been plenty of industry buzz over the past few years around the breakaway advisor movement, a long-term industry trend that is likely to continue. However, little attention has been paid to an equally powerful industry trend: the breakaway client movement.
According to Cerulli Associates, more than $1 trillion in high-net-worth client assets left the wirehouses between 2007 and 2010. The wirehouses’ share of the high-net-worth market, clients with more than $5 million in investable assets, fell from 56% in 2007 to 45% at the end of 2010. Meanwhile large portions of these assets have found their way to more independent coverage models with registered investment advisors and independent registered representatives.
Cleary, advisors have been making the move to the independent business model and taking their clients with them, which has added to this asset migration.
Cerulli also sites that between 2005 and 2010, the number of independent advisors increased by approximately 10,000 versus a decrease of more than 13,000 total wirehouse advisors.
This combined long-term organic growth for independent advisors – with more advisors choosing the independent business model – has caused many industry changes that add fuel to the independent movement fire. Larger asset and revenue bases have driven increased investment in technology, research, and service platforms for independent advisors. Suddenly, the resources available to RIAs and their clients are, in many cases, better than what they left behind at larger firms.
The financial crisis over the past several years has turned this evolution into a revolution – both for independent advisors and for breakaway clients. High-net-worth clients are more sophisticated now than ever before, and they want a wide selection of investment offerings, including hedge funds, private equity, real estate, and club deal opportunities. High-net-worth clients also want transparency. They want full disclosure on fees, performance, reporting, and risk assessment.
Clearly these clients also want their assets to be safe. At some level, retail high-net-worth clients today expect the coverage model that one could only have received via a family office ten years ago. More directly, an independent advisor who sits on the “same side of the table” as the client offers advice separate from where assets are custodied and separate from where products are manufactured and sold is well-positioned as this triangulation of the wealth management model is resonating with more and more clients.
In the investment arena, independent advisors have fewer restrictions on their ability to find the best solutions at the best prices across providers, which lends itself to a fully open-architecture platform. Not bound to favor the propriety products and services of their employer firm, independent advisors are able to offer clients a much wider selection of traditional and alternative investment products. Moreover, many larger RIAs now have access to the kind of research that is usually only available to institutional players.
Not tied to legacy technology and software, RIAs are using a best-in-class combination of technology to source products, research investments, and provide reporting to their clients. RIAs can now offer complete transparency around all transactions, portfolio activities, and risk management practices.
Clients understand the benefits of open architecture and leading-edge technology, but they worry about the security of their assets. When large banks were exposed during massive government bailouts, clients began to shift their assets away. The reputations of traditional RIA custodians – such as Fidelity, Schwab and Pershing – have weathered the storm well, allowing clients and advisors to get comfortable transferring custody of their assets.
The RIA space will continue to evolve – bigger teams are choosing to go independent and large RIAs are growing through acquisitions, building significant scale in their own right. This RIA movement is a national trend, not specific to certain geographies across the country. The broader independent movement is a global one, with private bankers in Europe and Asia leaving legacy banks behind to start new firms with a more fiduciary-focused coverage model.
The confluence of events in the financial services industry has led to a “perfect storm” in the private client advisory space. The industry will continue to evolve, and for the foreseeable future, both clients and independent advisors will benefit from the shifting paradigm. In short, there has never been a better time to say, "I am an Independent Advisor."
Shirl Penney founded Dynasty Financial Partners and is its president and CEO. He is formerly director of business development for global wealth advisory services at Citi Smith Barney and previously was head of executive financial services and director of private wealth management at Smith Barney.