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Please click the image above to view the table of contents for Tiburon's Fee-Based Financial Advisors Research Report

New Tiburon Research Report - An Initial Overview of the Fee-Based Financial Advisors (RIAs) Market

Tiburon Strategic Advisors, a market research & strategy consulting firm serving a wide variety of financial institutions and investment managers, is pleased to announce the release of its newly updated research report on Fee-Based Financial Advisors. This research release summarizes some of the report's key findings.

The purpose of this report is to provide readers with an initial overview of the fee-based financial advisors (RIAs) market, the fastest growing financial services distribution channel. The report goes to painstaking efforts to define this market, which is often improperly defined and measured by others. This is Tiburon's second draft of this report.

Tiburon’s first draft of this report was published in 2007; that version was developed by summarizing existing Tiburon research.

This is Tiburon’s second draft of this report. The objective here was to flesh out the market history chapter, develop a framework for properly measuring the industry, incorporate some recent Tiburon research on fee-based financial advisors’ use of technology, and enhanced the profiles of the three leading custodians - The Charles Schwab Corporation, Fidelity Investments, & TD Ameritrade - as well as several smaller custodians, including Orion Advisor Services, Shareholder Services Group, & Trust Company of America.

Key Findings
This report has a long list of interesting facts to share:

Market History

  • The Charles Schwab Corporation’s Schwab Institutional was launched as Financial Advisor Services in 1987
  • TD Bank Financial Group’s TD Ameritrade’s predecessor First Trust began offering custody services to fee-based financial advisors in 1991 as Datalynx
  • Fidelity Investments launched its Fidelity Institutional Wealth Services in 1992, then known as Fidelity Registered Investment Advisor Group
  • The Merrill Lynch Rule was established in 1999 upon the introduction of its Unlimited Advantage fee-based brokerage account to allow brokers that previously relied solely on commissions to accept fee business without registering as investment advisers
  • The Financial Planning Association challenged the Merrill Lynch Rule for the first time in 2004 through a lawsuit
  • The Securities & Exchange Commission voted to require hedge funds with more than $30 million assets under management to register as investment advisors in 2004
  • The Securities & Exchange Commission unanimously approved the Merrill Lynch Rule in 2005, clearing the way for broker/dealers to offer fee-based accounts without registering as investment advisers
  • The Financial Planning Association brought a lawsuit against the Securities & Exchange Commission over the Merrill Lynch Rule in 2007

Market Definition

  • Two methods exist for sizing the fee-based financial advisor market, including counting the underlying firms and counting the custodians
  • Defining the fee-based financial advisor market is difficult for many reasons, including overlapping federal & state registration processes, the fact that the registered investment advisor definition includes non-fee-based financial advisors, & the double counting of IBD reps
  • To accurately count fee-based financial advisors one must add up Securities & Exchange Commission and state registered investment advisors, and subtract segments like mutual fund companies; one may or may not want to add back segments like family offices
  • The number of fee-based financial advisors ranges from 7,518 to 18,159 depending on which segments are included, with 18,159 possibly being the most useful estimate
  • Fee-based financial advisors have between $1.1 trillion and $2.0 trillion assets under management depending on which segments are included, with $2.0 trillion possibly being the most useful estimate

Market Growth

  • There are 18,159 fee-based financial advisors, up nearly 40% since 2005
  • Fee-based financial advisors generate $14.1 billion revenues, up nearly 40% since 2005
  • Fee-based financial advisors earn $4.2 billion profits, up nearly 40% since 2005

Leading Fee-Based Financial Advisors

  • The Charles Schwab Corporation is the largest custodian for fee-based financial advisors
  • The top three custodians may control only one-third of fee-based financial advisor assets
  • Almost three-quarters of fee-based financial advisors say that The Charles Schwab Corporation is the best overall custodian platform

Market Segmentation

  • Over one-third of fee-based financial advisors are registered with the Securities & Exchange Commission
  • There are 10,900 Securities & Exchange Commission registered investment advisors & 9,600 state registered investment advisors that comprise the registered investment advisor industry
  • To correctly measure fee-based financial advisor data, some segments need to be removed, including mutual fund companies, institutional separate account managers, hedge funds, and captive channels
  • There are 641 mutual fund companies, an increase of 41 since 2005
  • Over 88 million consumers own mutual funds, up from 87.9 million in 2006, down 4% since 2004, and flat since 2000
  • Second, institutional separate account managers must be removed from ria data to correctly measure fee-based financial advisor data
  • Third, hedge funds must be removed from RIA data to correctly measure fee-based financial advisor data
  • Fourth, captive channels must be removed from registered investment advisor data to correctly measure fee-based financial advisor data
  • To correctly measure fee-based financial advisor data, some segments need to be removed, including IBD fee-account departments and IBD reps that have their own RIA
  • To get an even more accurate representation of the fee-based financial advisors market, portions of previously removed sections need to be added back, including institutional separate account managers private client businesses, family offices, private trust companies, & bank trust departments
  • The average fee-based financial advisor is 45 years old, started or joined his/her current business 13 years ago, became an RIA two years later, and joined his/her current custodian 7 years ago

Key Vendors to Fee-Based Financial Advisors

  • Fee-based financial advisors administer a client process which includes client profiling, asset allocation, investment research & selection, vendor participation, portfolio management & reporting, and client billing
  • Smaller firms are more likely to outsource services while larger firms generally do not outsource their access to securities, separate account management, or asset allocation

Custodians, Independent Broker/Dealers, & Clearing Brokers

  • Most fee-based financial advisors utilize one or more custodians to help manage their back offices
  • Document management, customer relationship management, & portfolio management rank as the most troublesome custodian services
  • Nearly half of fee-based financial advisors say that getting custodian referrals is the least important criteria in selecting a custodian
  • Two-thirds of fee-based financial advisors utilize a secondary custodian
  • Break-away brokers account for an extremely small portion of the total broker population of 68,000

Mutual Fund Companies & Other Traditional Product Companies

  • Only 10% of fee-based financial advisors utilize exchange traded funds in any capacity
  • Fee-based financial advisors seem to encourage clients to be fully invested with less than 5% of client assets allocated to cash
  • Fee-based financial advisors with over 30% of their client assets invested in mutual funds really value their custodians’ mutual fund platform
  • Fee-based financial advisors invest 20% to 100% of their client assets in mutual funds & other packaged products

Fee-Accounts, TAMPs, Separately Managed Accounts, & Outsourcing Trends

  • Many financial advisors are using the rapidly-growing TAMP model
  • Larger fee-based financial advisors utilize separately managed accounts

Wealth Management & Family Office Service Product Companies

  • Fee-based financial advisors have turned the tables on banks that got into the financial advice business by offering banking services
  • One fee-based financial advisor said his firm increased CD business from $6 million per month to $12 million per month by offering Everbank CDs

Technology Companies & Other Key Vendors to Fee-Based Financial Advisors

  • There are ten types of financial advisor technology, including advisor workstations which consolidate the other nine tools into one package
  • At last count, the number of financial planning software products on the market is just shy of 60, an astronomical figure
  • Many advisors are not fond of using optimizers to construct portfolios
  • One source estimated that the news, data, and communications industry is worth $6.8 billion in revenues
  • Real-time data sales are led by the aforementioned big three: Bloomberg, Reuters, and Dow Jones
  • The investment research web site universe consists of several modules such as news & analysis and stock research & quotes wrapped into comprehensive sites, and a few ancillary categories such as message boards
  • A third of fee-based financial advisors believe more than one-fifth of advisors will move to an ASP model within five years
  • Fee-based financial advisors are willing to pay an average of over $110,000 per year for a superior ASP model, with a median of $100,000

Break-Away Brokers & Rapid Growth in Industry Assets Under Management

  • Over three-quarters of fee-based financial advisors expect to grow their client assets 10% or greater per annum over the coming three-to-five years
  • Larger fee-based financial advisors expect to defy the law of large numbers by growing at a faster rate than small fee-based financial advisors
  • Almost two-third of registered fee-based financial advisors have under 100 clients

Continuing Central Role of Custodians & Difficulty in Penetrating Custody Market

  • There will be a continuing central role for custodians & difficulty in penetrating the custody market
  • The number of fee-based financial advisors served by custodians will increase at a slower rate to 27,000 by 2012
  • Fee-based financial advisor custodians’ revenues will increase to $28 billion in 2012
  • The three largest fee-based financial advisor custodians serve over 67% of fee-based financial advisor accounts

Continuing Use of Mutual Funds & Individual Securities and Growing Use of Exchange Traded Funds, Alternative Investments, & Wealth Management Products

  • Fee-based financial advisors will continue to use mutual funds, but also increase their utilization of exchange traded funds, alternative investments, & wealth management products
  • Custodians & other vendors seeking to serve fee-based financial advisors will need to increase their utilization of telephone & virtual wholesaling strategies
  • Fee-only financial advisors & fee-based independent financial advisors are far less likely to want in-person visits than fee-based wirehouse financial advisors

Continuing Search for the Technology Holy Grail & Opportunities in Outsourcing

  • Outsourcing operations may include investment selection, performance reporting, and TAMPs
  • Fee-based financial advisors will increase their use of TAMPs

Long-Awaited Consolidation in the Industry & the Potential of Producer Groups

  • Fee-based financial advisor mergers & acquisitions are up over 600% since 1999, with 81 deals taking place in 2007
  • Fee-based financial advisor mergers & acquisitions will increase to 163 per year by 2012

To better understand the developments for Fee-Based Financial Advisors, executives can purchase Tiburon's An Initial Overview of the Fee-Based Financial Advisors (RIAs) Market research report where the key findings highlighted above are covered in greater detail. Please contact Sarah Sage at SSage@TiburonAdvisors.Com or 415-789-2540.

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