Data & Research November 10, 2008

RIAs Don’t Regret Going Independent

Advisers cite independence, personalization, and financial success as their reasons for leaving established firms to go independent, according to Schwab Institutional research.
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Schwab Institutional—which provides support for independent, fee-based registered investment advisers (RIAs)—surveyed newly independent RIAs. Although the survey sample was only 55 advisers, 98% say that they would make the decision to go independent again, according to a press release of the results. Three-quarters of those surveyed cite a preference to work for themselves and 62% cite the desire to provide more personalized client service as very important reasons for starting their own independent fee-based firms. Sixty-two percent of respondents also say the opportunity for greater long-term financial success was a very important reason to go independent.

Eighty-six percent of advisers surveyed say that going independent brought them more income than expected. Nearly half (49%) of advisers surveyed say their annual asset growth rate is higher than before they went independent. Once independent, advisers gain more control over their practice and are able to provide more personalized service, according to almost all of those interviewed. Most are also more confident in their ability to retain clients.

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After the top three reasons listed above, other key motivators for going independent are dissatisfaction with their prior employers’ business model (60%) and the desire to provide a broader set of products and services to clients (53%).

“While the number of advisers moving to independence has grown steadily for several years, we’ve seen the trend accelerate in recent months as more advisers face inevitable change at their existing employer and begin to think about what step they want to take next,’ said Bernie Clark, senior vice president of Schwab Institutional, in the release. “We heard through this survey and in the conversations we have with advisers every day that the desire for independence is as much about wanting to provide clients with a more personalized experience as it is to secure a brighter future for themselves.’

Challenges, Gains

More than half (56%) of advisers note that setting up an independent fee-based RIA was more challenging than expected, but 98% say they would do it again. The top three challenges advisers say they experienced in the first year are: evaluating and choosing technology, obtaining legal and compliance advice, and finding and retaining quality employees.

Ninety-six percent say they are happier now in their new role; in fact, 75% wish they had made the decision to go independent sooner. Seventy-eight percent agree that they now have more control over their personal lives, according to the results.

The survey was conducted by independent research firm Koski Research from September 16 through October 3, using telephone interviews with 55 advisers who recently started, or went to work for, an independent RIA firm. The advisers surveyed manage approximately $7.2 billion in client assets. Forty-four percent of survey participants previously worked for a full service firm before going independent, but others worked for an independent broker/dealer or a bank and trust institution.

Data & Research November 10, 2008

Asset Managers, Advisers Agree on Retail Portfolio Outlook

Actively managed funds will see increased competition for assets in retail portfolios, including the retirement income space, according to research from the Financial Research Corporation.
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The FRC had heard anecdotally that other types of products are encroaching on actively managed mutual funds, and so recent research examined this—as well as to compare the views of advisers and asset managers, said Kristin Adamonis, senior editor at FRC. Both asset managers and advisers seemed to be on the same page.

The extent to which they agreed was interesting, Adamonis told PLANADVISER.com. Both advisers and asset managers view actively managed funds as still having opportunity in the core of lineups, particularly in the international/global equity and alternative strategy categories. “Asset managers of actively managed funds recognize where their opportunity among advisers is,’ she said.

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A place where there is some disagreement between advisers and asset managers is around 130/30 funds. Asset managers are more optimistic in their outlook, with 65% of surveyed managers saying they make sense for investors with high risk tolerances and will likely catch on over time. Comparatively, advisers are more apprehensive, with 30% of surveyed advisers saying they will catch on. Adamonis said this shows asset managers are more focused on product development with these funds but need to educate advisers more on how they can be used in the retail market.

New Retirement Income Players

Although advisers don’t see actively managed funds going away, new products are definitely having an impact, including within the retirement income space.

For instance, when advisers were asked to rate the suitability of actively managed funds as a core of holding for different wealth segments, advisers rated actively managed funds as alright for retirees seeking reliable income, but not the best option. Most of the FRC data show that advisers don’t see actively managed funds as the most suitable option for any wealth segment.

The segment rated most suitable for actively managed funds was in the mass retail market (less than $100,000 in assets), in which advisers said actively managed funds are “suitable, but other options work.’ The segment of retirees seeking reliable income scored the same rating as high-net-worth investors: “not unsuitable, but likely better options.’ That finding demonstrates that new products are having an impact on retirement income and taking away shares from actively managed funds that serve as a core for retiree clients, Adamonis noted.

Adomonis said structured products are creeping up quietly in this space. About 27% of advisers are using structured products, and she said there is particularly a growth in their use for principal protection with retired and Baby Boomer clients. Separately managed accounts are also growing, but much more gradually because of their limitation of use with certain clients.

Exchange-traded funds (ETFs) have also been continually analyzed for their rise to stardom. Adamonis labels ETFs as the most promising in terms of growth among alternative products (see The Rising Fame of ETFs) “I think ETFS have come a very long way in a very short time,’ Adamonis said. “They have really made their position in the retail market. I think both advisers and asset managers agree they will be the fastest growing product going forward.’

More information about the report, Caught Between Alpha & Beta: The Future of Retail Portfolio Construction, is availalbe at www.frcnet.com.

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