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The increased appetite for independent advice has been a boon for registered investment advisers in the US, who are paid flat fees by investors. This has allowed them to steal market share from traditional Wall Street brokerages, which have customarily made money from commissions that clients paid for each transaction.
This growth is evident in the third annual Financial Times 300 Top Registered Investment Advisers ranking, which is based on data supplied by RIAs at the end of 2014 and 2015. The average FT 300 company has 25 staff who provide investment advice, up from 21 last year, as elite RIAs have attracted brokerage professionals.
Momentum has swung behind the “fiduciary standard”, announced by the US Department of Labor in April, which RIAs have adhered to since the 1940s. This demands that financial advisers act in clients’ best interests when handling retirement accounts. The new rules apply to anyone supplying advice on retirement plans and individual retirement accounts. The Securities and Exchange Commission, meanwhile, is considering applying it to all advisers and brokers and all products, not just retirement plans, which would override the traditional situation where many brokers merely have to recommend “suitable” investments.
Among the FT 300 companies this year, 83 per cent of assets are in accounts that allow the adviser complete discretion in how to invest, with no need for client approval to make buy or sell decisions. The portion of assets in such accounts is up from 79 per cent in 2015’s FT 300.
Technology is another area where RIAs’ growing influence is shown. The RIA market was the birthplace of the robo adviser, the online automation of portfolios for investors using computer algorithms. Betterment is the sole robo adviser to appear in this year’s list.
Traditional brokerages are taking note. UBS’s US brokerage last month announced a partnership with robo adviser SigFig and other big players are considering developing similar online offerings or working with an existing robo adviser. The idea is to serve older, wealthy investors more easily, as well as the millennials who until now have been the core recipients of robo advice. For all the hype about robo advisers, computerised apps have not yet made much progress in replacing humans. Personal interaction still lies at the heart of the FT 300, which provides a snapshot of the very best US RIAs.
The competition for just 300 spots was close. The unpredictable markets of 2015 took their toll, as just 60 per cent of last year’s FT 300 returned to this year’s list. The turnover rate of 40 per cent was an increase from the 30 per cent in 2015. Meanwhile, the average FT 300 practice saw its assets under management rise 11 per cent in 2015, a decline from 17 per cent growth in 2014.
The FT 300 is an elite cohort. The average business has been going for 22 years and manages $2.6bn. Three out of five have at least $1bn in assets under management.
The FT 300 is listed state by state, and the more populous states — with more centres of wealth — tend to have more advisers on the list.
Advisers from a total of 34 states plus Washington DC are included. California, with 17 per cent of FT 300 constituents, and New York, with 9 per cent, lead all other states by a wide margin in terms of absolute numbers. New York City is home to far more FT 300 companies than any other, with 19 constituents, while Boston and Los Angeles are tied in second place with eight each.
Managing wealth is central to the FT 300 companies. Nearly three-quarters offer wealth management services as a speciality. Clients with $1m-$10m to invest account for 42 per cent of the assets managed by the FT 300. Investors with more than $10m account for another 22 per cent of FT 300 assets.
This shows that advisers are often more focused on serving wealthy clients rather than those who will become wealthy. While 80 per cent of FT 300 companies say they specialise in serving baby boomers — those born between 1946 and 1964 — only 57 per cent say they specialise in catering for Generation X, born between 1965 and 1980. Just 29 per cent of the FT 300 say they specialise in serving millennials, those born between 1981 and 1995, though this is up from 24 per cent last year.
Wealth managers are taking a keener interest in millennials as this generation’s potential becomes clearer. In order to attract such clients, RIAs will have to develop new specialisms. Millennials, in particular, have been shown to care more about socially responsible investing. For example, according to a Morgan Stanley survey of 800 individual investors in late 2014, millennials are twice as likely as investors overall to invest in companies or funds that aim to provide some social or environmental benefit.
However, only 4 per cent of the FT 300 say socially responsible investing is one of their specialities. While that is up from 3 per cent last year, it is still a niche offering compared to the 60 per cent that offer financial planning, or even the 10 per cent that specialise in estate planning.