Strong equity markets have provided a nice tailwind for all financial advisors, but none more so than the fee-only registered investment advisors.
One of the more enduring outcomes of the financial crisis has been the migration of advisors and assets from the investment sales model of the Wall Street wirehouses to the fiduciary model of fee-only RIAs. A small but growing model, these financial professionals believe if an advisor offers product options to clients, even where appropriate, that advisor may be conflicted, regardless of disclosures.
At the end of 2013, RIAs and dually registered advisors—commonly referred to as hybrid advisors—had just under $2.8 trillion in retail investor assets under management, according to the most recent industry report from research firm Cerulli Associates. That's a 19.8 percent share of the market, up from 15 percent in 2008.
The average annual growth rate in AUM for RIAs over the last five years has been 14.5 percent, versus 9.4 percent for the overall industry.
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"The financial crisis helped drive the next wave of growth in the RIA industry," said Bernard Clark, president of Schwab Advisor Services. His firm serves as custodian for more than 7,000 RIAs managing $1.1 trillion in assets.
"People needed help, and they wanted a trusted advisor to provide it," he said.
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There's no question that RIAs have successfully seized the moral high ground when it comes to providing financial advice. From humble beginnings in the 1980s, RIAs have shifted the focus of the wealth-management industry from investment sales to financial planning and product commissions to fiduciary fees.
The fallout from wirehouse bankruptcies and the embarrassing conflicts of interest with clients that emerged in the financial crisis only served to strengthen the trend.
"The crisis was a tipping point," said Tim Welsh, president of consulting firm Nexus Strategy. "Consumers woke up to the fact that independence matters."
He added, "Transparency without conflicts of interest is a better way to do business."
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While asset growth has been strong for all channels of distribution in the advisory industry, thanks to the booming stock market, the rapid growth of RIAs is expected to continue. Cerulli predicts that the market share of RIAs, both traditional and hybrid, will climb to 28 percent of assets by the end of 2018 and that 1 in 4 financial advisors in the industry will be a fee-only RIA—up from 18.6 percent of industry head count currently.
The growth is being driven from both sides of the advisory relationship. While the mass exodus of brokers from the wirehouses during and immediately after the financial crisis subsided, the so-called breakaway-broker trend in the industry continues to play out.
Wirehouse brokers, who typically manage large amounts of assets, can earn more of the revenue they produce when they go independent. Not all of them are hanging out their shingles as independent RIAs, but they have plenty of options in the industry.
Large RIA firms, such as Aspiriant LLC or Creative Planning, that are growing by leaps and bounds are an attractive destination. RIA partnerships such as HighTower Advisors, Focus Financial Partners and Dynasty Financial Partners offer a range of different relationships based on what an advisor wants to focus on in their practices.
Brokers have also been gravitating to the hybrid model, where advisors work predominantly on an asset-fee basis but keep some commission-based business, like annuity and insurance sales. About 33 percent of Schwab's advisor clients are hybrid RIAs, and the market segment is the fastest-growing channel in the industry.
"There are so many choices now for brokers to make the move," Welsh said.
He thinks the ranks of brokers heading into the RIA industry could pick up in the next few years as more of the advisor retention packages put in place by the wirehouses during and after the financial crisis expire.
"I expect a bigger wave of breakaway brokers to come out in the next several years," he said.
The bigger source of growth for the RIA industry, however, has been organic, Clark said.
"About 80 percent of our growth comes from our financial advisors winning new business," he said. "With the bull run in the stock market, clients are becoming a sales force for their advisors."
The lion's share of the growth is being captured by the biggest firms, said Welsh. He thinks fewer than 20 percent of the 15,000 RIAs in the U.S. are generating more than 80 percent of the asset growth. Many of the pioneer firms in the industry are now managing billions in client assets.
"This used to be a cottage industry, and now some firms are bringing in business equivalent to a wirehouse branch office every year," Welsh said. "The top firms have figured out their processes and procedures, and clients are attracted to that."
The fee-only wealth management industry is not without its issues, however.
For one thing, RIAs are an old bunch. A large proportion of the approximately 15,000 RIAs are solo practitioners now more than 60 years old, and the majority of them manage less than $100 million in assets. While custodians such as Schwab have been hammering on the succession issue with their advisors for years, most solo practitioners don't have an heir apparent when it comes to carrying on their practices.
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"It's still a looming problem in the industry," said Alois Pirker, a senior analyst with Aite Group. Those smaller RIAs are also not investing in the technology and systems they need to remain competitive in the future, he said. "The technology is there, but it comes at a price, and a lot of small RIAs are not making the investments."
There's also the emergence of the robo-advisors, Web-based services that do rudimentary financial planning, generate asset allocation plans and select investments for investors. Schwab itself launched its own robo-advisor, Intelligent Portfolios, early this year.
As a group, robo-advisors manage a tiny fraction of the assets that RIAs do, but the low-cost and improving functionality of the service may undermine the value proposition of RIAs and put pressure on their fees in the future.
Kurt Schacht, managing director of Standards and Financial Market Integrity at the CFA Institute, thinks the robo-advisors are an important new development in the advisory industry, but predominantly for do-it-yourselfers who don't, in fact, want to invest for themselves. He doesn't see them as a threat to RIAs.
"The value proposition of a live advisor involves much more than asset allocation and security selection," Schacht said. "It's about understanding people's goals and helping them achieve desired outcomes."
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Schacht also believes that the fee-only fiduciary model of the RIA industry will continue to be the favored choice of investors looking for that deeper relationship with their advisors. "That's what I would be looking for as opposed to a salesperson," he said.
A growing number of investors seem to feel the same way.
—By Andrew Osterland, special to CNBC.com