NEW YORK — Assets under management for the average SEC-registered investment adviser are expected to leap 256% to $1.6 billion by the end of 2012, from $449.6 million at the end of 2006, according to a study that will be released tomorrow.
The growth is being driven by an expected increase of $5 trillion of investible assets that the
Federal Reserve Survey of Consumer Finance predicts will accrue to individuals by 2012, according to the study by Seattle-based Moss Adams LLP.
The $5 trillion is significant in that it represents a $35 billion revenue opportunity for RIAs, presuming that they charge an average fee of 0.7% on those assets, concludes the study — titled “Uncharted Waters: Navigating the Forces Shaping the Advisory Industry.”
‘Eye-opening’ growth
The expected growth of the average RIA practice “is eye-opening,” said Danny Sarch, principal with Leitner Sarch Consultants Ltd., a recruiting firm in White Plains, N.Y.
Other industry observers and analysts were also taken aback by how much the average firm’s assets are expected to balloon. However, financial advisers say the predicted growth is in keeping with the acceleration of client interest they are experiencing in their own practices.
“The numbers don’t surprise me when you look at the sheer volume of dollars out there looking for some help,” said Dean Barber, president of Lenexa, Kan.-based Barber Financial Group Inc., which manages $500 million. “We’re seeing $150 million of new assets [each year] and the peak year for baby boomers retiring isn’t until 2023.”
Meanwhile, the asset bonanza is expected to push up the number of RIA firms regulated by the Securities and Exchange Commission by 22.6% — to 19,000, from 15,500, the study concludes. And the number of investment advisers practicing inside such firms will rise 20.9% by 2012, to 52,000 from 43,000, according to the study.
“It’s clear that this is a great business to be in,” said Mark Tibergien, managing partner with Moss Adams and the author of the study. “There’s an oversupply of clients and an undersupply of talent.”
But these favorable market conditions also necessitate caution, he added.
“The question is whether this is a tsunami or a wave for surfing. It could be joyous or it could be disturbing,” Mr. Tibergien said.
“It’s a great opportunity but how do you manage it?” Mr. Sarch asked.
“Here’s a study where they’re putting a real stake in the ground and saying, ‘This is what will occur definitively,’” said John Iachello, chief operating officer of Pershing Advisor Solutions LLC of Jersey City, N.J., which sponsored the study. “You can devise a road map to handle the growth in the business.”
Advisers are just beginning to seek answers to this question, said David Welling, vice president of marketing and adviser business management at San Francisco-based Schwab Institutional.
“Advisers see the opportunity and they’re just beginning to crystallize what it means and the challenge the organization has to face if assets are three to four times the size they are today,” he said. “It probably means two times the size in revenues and four to five times more operational activity.”
There are 65 RIA firms that have more than $1 billion in custody with Schwab Institutional.
One key is to streamline methods of asset management and specialize on a certain clientele, said Jeffery Scharf of Santa Cruz, Calif.-based Scharf Investments, which manages $650 million.
“If you’re providing customized portfolios to a heterogeneous client base, your business isn’t scalable,” he said. “If you provide standard portfolios to a homogeneous client base, it’s easy to do.”
Mr. Scharf tries to strike a balance between customization and standardization, he said.
But standardizing too much could erode the strategic advantage enjoyed by RIA firms, according to the study.
‘Melee of advisers’
“The risk for independent advisers is that [their] capacity for strategic differentiation will fade to be replaced with a tactical melee of [captive] advisers rushing to establish rapport and credibility with potential clients,” the study says. “In essence, the RIA may face a tactical battle under rules determined by others.”
Schwab is working hard with its advisers to forestall this possibility by concentrating on implementing systems that work in the most successful firms, Mr. Welling said.
For instance, it encourages hiring more support personnel to handle all the tasks within the firm that don’t require an adviser’s expertise, he added.
