Skip navigation

RIAs Still Wooing Full-Service Clients

It has been a cruel year for a lot of wirehouse advisors, with the sub-prime and ARS messes eroding client confidence in their firms. But times are good for registered investment adviser (RIA) firms. In fact, there is new evidence out there that RIAs may be taking clients from the wirehouses.

It has been a cruel year for a lot of wirehouse advisors, with the sub-prime and ARS messes eroding client confidence in their firms. But times are good for registered investment adviser (RIA) firms. In fact, there is some new evidence out there that RIAs may be taking clients from the wirehouses.

According to Charles Schwab’s semi-annual "Independent Advisor Outlook Study" for 2008, affluent investors are continuing to turn to independent advisors and away from full-service firms. Granted, Schwab is not exactly an impartial observer in this apparent tug-of-war over clients. Still, according to their survey results, 85 percent of RIA advisor respondents to the survey, conducted in early July, say they won clients during the past six months from full-service brokerage firms because clients either wanted more personal advice (66 percent), or lost faith in their previous firm (57 percent). Not to mention 84 percent of “do-it-yourselfers” threw in the towel.

And that’s on top of a great year in 2007 for RIA growth. In fact, average RIA assets, revenues and net profits hit all-time highs in 2007, according to Rydex’s Advisor Benchmarking survey of 1,020 RIA firms. Not to mention Rydex found the average RIA increased their client base by 7 percent.

Take Atlanta-based RIA Smith & Howard Wealth Management, which caters to clients with average investable assets of just under $2 million. Frederick Wright, the firm’s chief investment officer, says his seven-member team has added 12 new clients so far this year, bringing total client assets to $250 million. Last year, the firm added 20 new clients (a 12 percent increase) and recorded revenue growth of 20 percent.

“I would attribute our growth to clients being unhappy in terms of the broker they’re dealing with,” Wright says. “Maybe they were invested too aggressively or they’re not getting the level of service they want and there is turnover.”

There is one downside to the RIA industry’s growth. To keep up with the growth, many firms are spending more on personnel and technology, so their expenses are going up. In fact, the Rydex survey found expenses surged in 2007, rising 12 percent—choking net profit margins, which decreased from 28 percent in 2006 to 24 percent in 2007. Chip Roame, managing principal of Tiburon Strategic Advisors, says RIAs can expect more profit margin erosion as they get bigger, but he adds, “They will be making more profits so who cares what one’s profit margin percentage is.”

Marty Resnick, managing director of RIA Resnick Investment Advisors LLC in Westport, Conn., says he was shocked by his firm’s growth last year: His RIA brought in $100 million of new assets. Resnick’s 20-member team, which includes eight advisors and 11 support staffers, manages about $650 million client assets. “Suddenly you have all this new money and you become slightly understaffed, so you go out and hire people, and during the year you do the hiring, your margins usually drop a little bit,” he says.

Resnick says he hired an additional staff person last year to help manage the new assets. Even though his margins came down a little bit, Resnick says they will start to expand again now because the firm will be able to starting taking in additional assets again, calculating that each staff member can manage from $50 million to$70 million in assets. Resnick says a good firm should be running at profits margins (after compensation) anywhere from 32 percent to 36 percent, and should expect margins to drop to 32 percent on a new hire, before they climb back to 36 percent.

Kenneth Sleeper, managing director of Sierra Investment Management, an RIA in Santa Monica, says he views his firm’s growth as cyclical. “You try and gather assets when you have a favorable market, and when things get tighter, you acknowledge that is the course of action and it might take a while for things to come back.”

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish