Over the past decade, RIAs have emerged as formidable competitors in the wealth management marketplace and have grown faster than any other type of wealth management firm. Yet because there are so many RIAs (more than 5,000 compete in the wealth market), it can be challenging to understand the different business models employed by RIAs and how the business model chosen in turn affects a firm’s ability to compete in different segments of the wealth market.

Within the wealth management industry, the term RIA typically refers to small firms and individual proprietors that provide investment management services to individuals and families, especially those considered to be affluent. In keeping with the evolution of the wealth management market in the past two decades, many RIAs have expanded beyond investment advice and now also provide their clients with comprehensive financial planning and other advice.

While ‘investment advisor’ is often used as a general term, and is sometimes conflated with ‘financial advisor,’ it also has a specific legal meaning. In US law, an investment advisor (which is always spelled ‘adviser’ in US legal practice) is defined as ‘any person or firm that, for compensation, is engaged in the business of providing advice to others or issuing reports or analyses regarding securities.’ The Investment Advisers Act of 1940 requires all firms that meet the legal definition of investment advisor and do not qualify for an exclusion to register with the SEC.

Because the requirements for SEC registration are so broad, all advisors with more than US$110 million of regulatory AUM must register, as must advisors to investment companies, advisors to business development companies, pension consultants, and internet advisors. To do so, a firm must complete and file Form ADV.

The big picture
The investment advisor registrations found in the Form ADV database for year-end 2020 represent filings from 13,634 firms with US$102.8 trillion of regulatory AUM. The investment advisors registered with the SEC are almost evenly split between firms with an institutional focus and those with a retail focus. Aite-Novarica Group categorizes investment advisors with an institutional focus into three types of firm: institutional money managers (40% of registrants), non-US investment advisors (5% of registrants), and specialist asset managers (4% of registrants). We categorize investment advisors with a retail focus as either broker-dealers (5% of registrants) or independent RIAs (41% of registrants). Within the independent RIAs, we further distinguish between fee-only RIAs (32% of registrants) and hybrid RIAs (9% of registrants).

In the classification system that Aite-Novarica Group has developed, these categories are defined as follows:
• Institutional money managers are firms that manage 50% or more of their regulatory AUM for institutional clients.
• Specialist and other asset managers is a broad category that includes firms with a special focus (such as foundations and endowments) as well as turnkey asset management programs and wrap program sponsors.
• Broker-dealers are firms that have a retail focus (that is, 60% or more of their regulatory AUM is for individuals), that operate as a broker-dealer, and that have more than half of their employees as registered representatives.
• Hybrid RIAs are firms that have a retail focus, that do not qualify as broker-dealers, but that otherwise either conduct some business as a broker-dealer or have some employees who are registered representatives.
• Fee-only RIAs are firms that have a retail focus, that do not conduct business as a broker-dealer, and that do not have any employees who are registered representatives.

RIA market structure: firm size
Independent RIAs range in size from the very large (Fisher Investments is the largest, with US$160 billion AUM and more than 2,300 employees) to the very small (32 RIAs operate as single-proprietor businesses and have less than US$25 million in AUM). Because of the sheer diversity and number of RIAs, Aite-Novarica Group has found it useful when examining firms’ operating models to distinguish between large firms (those with AUM of US$750 million or more), midsize firms (those with AUM of US$150 million to US$749 million), and small firms (those with AUM of less than US$150 million).

In terms of market size, at year-end 2020, there were over 1,000 large RIAs that collectively managed US$3.2 trillion AUM, nearly 3,200 midsize RIAs with just over US$1 trillion of AUM, and approximately 1,300 small RIAs managing only US$127 billion (Figure 1).

Figure 1: Size breakdown of the RIA marketplace

Unsurprisingly, thanks to their greater scale, large firms offer a wider range of services than their midsize and small competitors. For example, 82% of large firms provide clients with financial planning, compared to 78% of midsize firms and 69% of small firms (Figure 2). Large RIAs are also more likely to offer portfolio management to businesses and other institutions (64% of firms), selection of third-party advisors (59% of firms), pension consulting (36% of firms), and portfolio management for pooled investment vehicles (23% of firms).

Figure 2: Services offered by RIAs, by firm size

Conclusion
• The RIA market is exceptionally diverse. There are more than 5,000 firms ranging in size from gigantic (more than US$150 billion in AUM) to very small (less than US$25 million in AUM). Their technology and infrastructure needs and their ability to address those needs through investments are as varied as they are. Accordingly, vendors should design their strategies with these differences in mind, approaching large RIAs with ‘a la carte’ solutions that allow them to fit vended solutions seamlessly into their in-house capabilities and approach small and midsize RIAs with pre-integrated platforms that bundle a broad suite of capabilities at a relatively low price point.

• Given RIAs’ success with—and dependence on—the high-net-worth segment, vendors targeting the RIA market are well-advised to tailor their solutions to address the key challenges that RIAs experience in selling to and serving their high-net-worth clients. Indeed, solutions that do not improve RIAs’ ability to serve this important segment are unlikely to meet with success.

• Large RIAs enjoy significant operating leverage thanks to their large average client relationships. Based on data on average account loadings, midsize RIAs also enjoy meaningful economies of scale (though not to the same extent as large RIAs). By contrast, there are no scale benefits apparent at small RIAs. Consequently, these firms operate at a significant disadvantage relative to larger RIAs; the most attractive strategy for many small RIAs will be to merge with another firm to achieve the scale necessary to remain competitive.

This article is from The Wealth Mosaic's US RIA WealthTech Landscape Report 2022. Access the full report here