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The future still belongs to registered investment advisors.
Over the past three decades, fee-based financial advice has grown from a cottage industry of early pioneers to the preeminent business model in the advisory landscape.
The assets under management of RIAs and dually registered advisors (RIAs also registered as brokers) have grown from almost nothing in the mid-1980s to just under $2.8 trillion at the end of 2013, according to data from research firm Cerulli Associates. In the last five years, AUM growth has averaged 14.5 percent vs. 9.4 percent for the entire industry.
"I think the growth will continue and possibly accelerate," said Mark Tibergien, CEO of Pershing Advisor Solutions, which serves as the custodian of client assets for 550 RIA firms. "There's been a shift in the way people do business," he said, adding, "It's moving from professional sellers to professional buyers, and it's about clients now, not products."
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The shift is away from commission-based service models to fee-based fiduciary relationships.
Not only are more consumers moving to the RIA model but growing numbers of commissioned brokers from the large wire-house firms and independent broker-dealers are doing so, as well. There is little doubt that the trend will continue, regardless of what happens from a regulatory perspective.
"The growth in the RIA space is about as certain as the sun rising in the East," said Larry Swedroe, director of research for Buckingham Asset Management, a St. Louis-based RIA firm with $6.6 billion in assets under management. "The brokers are dead men walking—they just don't know it yet."
Many apparently do.
To that point, brokers continue to migrate from large and small brokerage firms to independent RIA models supported by increasingly sophisticated custodian platforms and a variety of service firms that can help them run their practices.
Some industry observers expect the flow of breakaway brokers from the wire houses—typically managing large amounts of assets—to grow over the next several years as compensation deals put in place after the financial crisis wind down.
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"Our business is booming," said Shirl Penney, CEO of Dynasty Financial Partners, which provides a range of services, including investment management, for existing RIAs as well as independent broker-dealers and so-called breakaway brokers from the big wire-house firms.
Last month, Dynasty signed up a team of Deutsche Bank advisors managing more than $3 billion in assets—the largest deal the firm has struck since launching at the end of 2010. Dynasty now has 29 firms on its platform, managing a total of $23 billion in assets. "We're still getting inquiries from all kinds of advisors, but the size of clients joining us is getting arger," said Penney.
Size will become increasingly important in the industry. While the underlying growth prospects for fee-based financial advice look very good, costs are rising and giving larger firms with more capital an advantage.
Industry experts say that already the largest 10 percent of RIA firms likely account for the bulk of growth in the industry. The thousands of solo practitioners and mom-and-pop advisors will find it hard to make the investments needed to compete.
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"You need scale for things like technology, marketing, training and bond-buying capability," said Buckingham's Swedroe, whose firm has acquired multiple other RIAs over the last three years. "Boutique firms may still do well, but big firms will likely continue to grow faster."
They will also likely face less of a threat from the automated portfolio management systems, informally called robo-advisors. The Web-based platforms offer some rudimentary financial planning, asset allocation and automated portfolio management for a fraction of the cost of traditional RIAs. Some, including industry heavyweight Vanguard, also offer clients some access to certified financial planners.
Most firms providing comprehensive wealth management don't feel threatened, but the fast-growing services could undermine the economics of many advisors' practices. "Those advisors only focused on investment management will find it hard to differentiate themselves," said Grant Rawdin, CEO of Wescott Financial Advisory Group. "They're going to be washed over by this wave of digital investment solutions."
Rawdin believes that advisors offering the full range of financial planning and investment management services have to demonstrate the value of what they do for clients. "A firm like ours needs to put the premium on providing outstanding, comprehensive financial advice and delivering the message that that's what we do," he said. To that end, he's spending much more money on marketing—particularly of the digital variety—than he did in the past.
While RIAs face challenges in virtually every aspect of their operations, the biggest one they will have to deal with is the changing demographic profile of the country, Tibergien said. "This is an industry built by baby boomers for baby boomers," he said. "The greatest catalyst for transformation in the RIA industry is not technology or regulation. It's demographics."
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Tibergien of Pershing Advisor Solutions noted that the boomers are entering the withdrawal phase of their financial lives and that Americans under the age of 45 now own almost as much wealth as those over 45. If RIAs can't successfully navigate the huge wealth transfer under way to the next generation, they won't survive.
"It affects everything from how to attract employees, how to serve clients and how to manage their expectations," said Tibergien. The advantage again goes to larger firms with greater resources and more ability to adapt. "There are a few emerging small-firm stars who get the idea, but many won't survive to the next generation of business."
For those who do, however, the future looks bright, industry experts say.
—By Andrew Osterland, special to CNBC.com