RIAs Winning Asset Game, Says Citi Report

Are the Wall Street wirehouses ready to concede defeat at the hands of the RIA industry? A survey conducted by Citigroup and released on October 7 could be interpreted as such.

Are the Wall Street wirehouses ready to concede defeat at the hands of the RIA industry? A survey conducted by Citigroup and released on October 7 could be interpreted as such.

In his introduction to the report, analyst Prashant Bhatia writes, “We have found that collectively, RIAs are the most powerful asset-gathering force in the industry.” The report, benignly titled, “Registered Investment Advisor Survey,” is an analysis of the results of a survey of 100-plus RIA firms that collectively manage more than $60 billion in client assets. Average assets managed by the surveyed firms totaled $200 million to $250 million, with 15 firms managing more than $1 billion. Additionally, firms averaged 10 to 12 years in the business, and 100 to 200 clients. (Click here to view the entire survey.)

“The purpose of our report is to better understand this industry, the clients it services, the products it uses, and the custodians that they utilize,” Bhatia continues, in the introduction to his report. “We also shed light on how this rapidly growing industry is competitively positioned to compete with large advisory forces … ”

No doubt. Both Schwab and Fidelity, the number one and two RIA custodian platforms, recently released their results for the first six months of the year, including the results of their efforts at attracting advisors and assets from the wirehouse firms. Schwab Institutional, the firm’s RIA custodian, reported $34 billion in net new client assets for the first two quarters of 2008, $9.4 billion of which came from wirehouse advisors. (In all of 2007, only $9.2 billion in net new client assets came from wirehouse FAs.) Fidelity’s Institutional Wealth Services division, Fidelity’s RIA custodian business, brought in $31.3 billion in net new client assets through the first two quarters of 2008. Of that, $7 billion came from wirehouse FAs.

With the exception of Morgan Stanley, which brought in $24.7 billion in net new client assets in the first six months of 2008, the other wirehouse firms have had a markedly different experience this year: Merrill Lynch lost a net $1 billion in client assets in the first half of 2008; Citigroup’s Smith Barney lost a net $12 billion in client assets during that period; and UBS’ U.S. Wealth Management unit lost a net CHF 3.9 billion in the period.

These numbers along with the surveys’ findings—suggest RIAs aren’t just “competing” with their wirehouse brethren, they’re winning.

Among the survey’s findings:

• RIA net new client assets are overwhelmingly coming from full-service brokers. Two-thirds of respondents said full-service brokers were their primary source of new assets, eight times more than the next largest source: “new client income.”

• Most RIAs expect annual growth in client assets of 15 percent or more over the next three to five years. Eighty percent of respondents expect at least 10 percent annualized growth of assets in that time period; none expect their asset base to shrink; and only one expected growth of less than 5 percent.

• A surprisingly high number of RIAs are looking to acquire another RIA firm. Over one-third of respondents are looking to buy another RIA and less than 2 percent want to sell, resulting in an 18:1 disparity of buyers to sellers, in Bhatia’s estimation.

• Schwab is #1. Schwab’s RIA custodian platform was voted best by a landslide. Schwab ranked #1 across all six criteria RIAs use when considering which custodian to use, including service, technology, cost, mutual fund offering, brand and custodian referral program. Schwab earned more #1 votes in each category than all other competitors combined.

• When choosing a custodian, Bhatia estimates 50 percent of an RIA’s decision is based on service and technology followed by costs (17 percent), mutual fund offerings (12 percent), brand (11 percent) and whether the custodian provides referrals (8 percent).

• Respondents said they are 15 times more likely to direct new client assets to their primary custodian than a secondary or new custodian.

• Almost 20 percent of surveyed RIAs had previously worked at a major full-service broker. Nearly 40 percent of those—or 8 percent of the total respondents—used to work for Merrill Lynch. (No other firm is mentioned as a previous employer.)

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