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Independent Advisors Win Favor With Wealthy
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Geneva, July 26, 2004: Independent registered investment advisors (RIAs) are capturing a growing share of the high-net-worth wallet from wirehouse brokerage platforms. Though they make up a small channel compared with big-name brokerage consulting programs, private banks and trusts, RIAs are moving closer to the fore as wealthy investors search for the appearance as well as the substance of objectivity. Observers say the rising prominence of RIAs calls for new responses from wirehouse competitors and would-be vendors alike.

Independent RIAs accounted for about $2 trillion in assets, or 9% of the private-client market, in 2003, according to a new report by Celent Communications. That's up from a 7% market share in 2001. By 2007 they will have captured 14%, says Adam Josephson, an analyst with Boston-based research consultancy Celent, and author of the report The Independent RIA Industry: The Objective Alternative. "Most of those gains will come at the expense of broker-dealers," says Josephson.

Independent RIAs owe their growing popularity to several factors, he adds. One is a general sense of disenchantment with incumbent advice providers. High-net-worth investors are turning to alternative sources of advice in the wake of the recent market downturn. In addition, as well-off baby boomers get closer to retirement, they're looking for more comprehensive approaches to their investment and planning needs. Investors in either of those boats are more likely to abandon brokerage platforms and retail banks than advice-and-planning specialists such as private banks and trusts. That's because private banks and trusts have long track records as high-touch wealth consultants. Brokerages and retail banks still run into the perception that they're more interested in pushing products than in offering unbiased advice, says Josephson.

Independent RIAs also benefit from their ability to bend fee structures to suit their clients' needs. Instead of charging flat fees on assets under management, some of them - specifically those whose offerings run beyond investment advisory and into life-event consulting - can customize billing to include retainers charged for one-off tasks such as estate planning. A growing number - though still only a few thousand in a total field of 19,000 independent advisors - offer investors mixed fee schedules as they combine retainers with reduced fees on assets. "Some investors are attracted to that because it lets them know what they're paying for," says Josephson. "Transparency is a big part of the perceived benefit."

And perceptions play a big role in the rising fortunes of the independent RIA. That shows up in defections from brokerage advice channels to independent RIAs and in a comparatively lower rate of existing-client referrals to brokerages. "High-net-worth investors are more likely to recommend friends and family members to RIAs than to brokers," says Josephson.

That apparent wariness on the part of investors means that big brokerages have to take deliberate action to stay ahead in the business of advising private clients, according to Frank Campanale, former head of Smith Barney's Consulting Group. "[Independent] RIAs are truly objective," he says. "They typically don't have any proprietary product at all." To compete with that, brokerage houses - which definitely have proprietary products - "must be clear about who gets what."

As an example of a recent move by a big brokerage to increase the perception of transparency in its consulting program, Campanale points to Morgan Stanley. "They've put out a 30-page, plain-English breakdown of fees."

Another way to instill objectivity and its appearance is build "product-neutral" platforms that offer clients and advisors views of proprietary and non-proprietary assets. "To work properly the financial advisor has to be able to look at a broad database," says Campanale. In that vein, he adds, Smith Barney's IIS unified managed account is a step in the right direction.

But the extent to which a growing independent RIA channel is making wirehouse brokerages and others change their business practices is uncertain. It's easier to sense that technology and service vendors are increasingly keen to tap into the independent channel, says Josephson. To do that successfully, however, vendors had better prepare themselves for conditions and attitudes at a remove from corporate norms, says Richard Sincere of Holliston, Mass.-based Sincere & Co., a vendor of investment technologies and services to high-end advisors.

"Independent advisors are more entrepreneurial and more concerned with the bottom line than corporate types," says Sincere. "That makes it a challenge for some vendors to relate to them." In fact, he adds, he had a hard transition himself 10 years ago after leaving Fidelity Investments and setting up his own business. "I couldn't relate at first," he says.

Even when the adjustment is made, it can still be tough switching between making pitches to big companies and trying to work in the scatter-shot world of RIAs. "It's a fragmented market with people spread out all over the place," says Sincere. "It's not like taking a box of donuts to Merrill Lynch and talking to 50 brokers at once." In addition to being dispersed geographically, simply scheduling meetings with independents can be a challenge. "They're very often too busy," says Sincere. "They're working with clients."

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