Study of RIA growth finds correlation with fees, services and compliance

The close relationship between financial advisors and their clients accounts for most of the growth among registered investment advisory firms, one of the authors of a new study said.

That conclusion could sound self-evident to wealth management professionals who have grown familiar with the way that the reliable revenue of an advisory relationship is driving a continuous flow of investment into the industry. However, it reads differently when considering that Harry Mamaysky and Yuqi Zhang of Columbia Business School compiled their working academic paper by reviewing the Securities and Exchange Commission disclosures of 7,370 retail client-serving RIAs managing a combined $16.9 trillion in assets. They successfully assessed about 12% of the variation in assets under management among those firms, which means that 88% comes from "the thing that we left out of our analysis," Mamaysky said in an interview.

"I think people just trust their RIA. Even if they underperform a little bit, people just trust them. They've shared their whole life story with them," said Mamaysky, who is also the chief investment officer of asset management firm Quant Street Capital and the researcher behind another recent study on tax-loss harvesting. "At the end of the day, we cannot explain what drives AUM all that well," he added. "That's a very special relationship, and that probably explains a lot of stuff we cannot explain with all of our measures."

READ MORE: Advisor figures up in 2022 even as AUM and client totals fall

RIAs derive "at least a third, maybe even half" their value from their enduring and comprehensive ties to clients, according to John Furey, the managing partner of consulting and transaction advisory firm Advisor Growth Strategies. The combination of investment management with other areas of need such as estate planning and trusts adds up to the reasons why clients are willing to pay their advisor 80 basis points or 1% of their AUM, he said.

"This is part of the reason that I have an advisor, too, is just accountability to a plan," Furey said. "You build something and we're all human — you just get off track."

In an analysis using Form ADV filings from roughly the past two decades, Mamaysky and Zhang's study focuses on advisory firms that get at least 90% of their AUM from individuals, high net worth households, charities and pensions, which they call "vanilla" RIAs. 

"I started learning about the RIA space several years ago. I'm basically a hedge fund guy, not an RIA guy," Mamaysky said. "We just wanted to understand how that business looks and how the industry has evolved over time."

READ MORE: These are the 20 largest fee-only RIAs, ranked by AUM

Here are some of the study's main quantifiable findings:

• As of the end of last year, the 20 largest "vanilla" RIAs are: Morgan Stanley Smith Barney ($1.31 trillion); Merrill Lynch, Pierce, Fenner & Smith ($1.28 trillion); Fidelity Personal and Workplace Advisors ($727 billion); Managed Account Advisors ($662 billion); Capfinancial Partners ($655 billion); Edward D. Jones & Company ($654 billion); Wells Fargo Clearing Services ($648 billion); Ameriprise Financial Services ($458 billion); LPL Financial ($404 billion); Vanguard Advisers ($339 billion): Envestnet Asset Management ($313 billion); Cambridge Associates ($294 billion); Raymond James Financial Services Advisors ($245 billion); J.P. Morgan Securities ($230 billion); RBC Capital Markets ($201 billion); Sageview Advisory Group ($176 billion); Commonwealth Equity Services ($162 billion); Stifel, Nicolaus & Company ($149 billion); Creative Planning ($134 billion); and Global Retirement Partners ($107 billion).

• Financial planning and pension consulting services "are associated with faster AUM growth," according to the study. Between 2001 and 2022, the share of retail-facing RIAs providing financial planning jumped to 75% from 50%, while the portion offering pension consulting surged to 35% from less than 20%.

• Fixed fees are "associated with faster AUM growth" and commissions are "associated with slower AUM growth," according to the study. Between 2001 and 2022, the percentage of retail-facing RIAs that collect fixed fees climbed to more than 65% from 45%, and the amount charging commissions has fallen to less than 5% from 18%.

• More than 90% of retail-facing RIAs had websites last year, compared to just 50% in 2001. "If you don't have a website, your AUM grows more slowly," Mamaysky said. 

• The proportion with social media accounts reached almost 60% in 2022, which was up from nearly 40% in 2018, the first full year they reported on social networks to the SEC. 

• A regulatory violation slashes a retail-facing RIAs growth rate by 2%, and each further compliance snafu pushes the expansion down by 30 basis points. "Past misconduct, proxied for with the number of regulatory violations, has a negative impact on future RIA growth," according to the study. "This may be either due to clients shunning RIAs who report regulatory violations, or because those violations reflect poor operating performance, which is what drives away clients."

• Retail-facing RIAs that compensate so-called solicitors for leads and referrals often grow faster than their peers, according to the study. "Having more solicitors is strongly associated with faster AUM growth," the paper stated.

• In general, the study found "some sensitivity" for AUM based on investment performance by measuring the asset allocation disclosures added to Form ADV in recent years against benchmarks, Mamaysky said. "People that are more skilled tend to grow their AUM faster than people who are less skilled," he said. "There's a big amount of variation that we cannot explain."

READ MORE: These are the 10 largest fee-only RIAs, ranked by advisor headcount

The latter question had loomed as "a complete mystery" about retail-facing RIAs to the co-authors prior to the study, because earlier research has shown "a pretty steep" relationship between AUM and performance for hedge funds and other specific investment vehicles, according to Mamaysky. With the study going live online in late September, he plans to gather feedback from other academics as part of the revision and potential publication process and from practitioners in the field by presenting the data at industry conferences. 

In the end, retail-facing RIAs simply "find that they do what works," Mamaysky said. 

"These things lead to more business for RIAs, so it's what their clients want," he said. "They're not happening by accident, they're happening because doing these things helps people grow their business."