(Bloomberg News) David O'Brien, a 46-year-old financial advisor in the Richmond, Virginia, suburb of Midlothian, has made Vanguard Group Inc. the world's largest mutual-fund manager. Just not by himself.
O'Brien visits clients at their homes and, at kitchen tables and on front porches, counsels them on how best to invest their savings. Almost half of the $17 million he oversees has landed in mutual funds and exchange-traded funds sold by Valley Forge, Pa.-based Vanguard, the company that pioneered low-cost index investing for individuals in the mid-1970s.
While O'Brien is a drop in Vanguard's $1.6 trillion bucket of assets, he is part of a surge in fee-only consultants who have changed the way Americans invest. Assets overseen by registered investment advisors such as O'Brien more than tripled in the decade ended Dec. 31, 2009, to $1.7 trillion, according to researcher Cerulli Associates. The trend forced mutual-fund firms and broker-dealers to change how they sell funds and helped propel the ETF, an index-fund offshoot that trades like a stock, into the fastest-growing investment product.
"The single biggest driver of ETF sales through financial intermediaries has been the huge shift to fee-based advice," said Anthony Rochte, a senior managing director at Boston-based State Street Corp.'s money-management unit, the world's second-largest provider of ETFs, after New York's BlackRock Inc. "The fee-only advisor has an incentive to keep overall costs low and that makes ETFs much more competitive."
The RIAs emerged to challenge stockbrokers in the first half of the 1990s, when mutual-fund assets almost tripled and individual investors sought out affordable and reliable guidance as the number of choices grew.
The advisors, who must register with the U.S. Securities and Exchange Commission or state regulators, carry the legal duty to put clients' interests first. Brokers need only promise to sell products that are "suitable" for customers, according to SEC rules. All RIAs, except those dually registered as a broker-dealer, are barred from taking sales commissions or other payments from the fund companies whose products they pick for investors. Most charge a fixed annual percentage of the client's money, typically 1% to 2%, so their incomes rise and fall with the fortunes of their customers.
"I have no incentive to sell someone's product," O'Brien said in a telephone interview. "From a consumer-protection standpoint, that's a sea change."
The advisors are the fastest-growing competitor to the four largest broker-dealers, or wire houses-Morgan Stanley Smith Barney LLC, Bank of America Corp.'s Merrill Lynch, Wells Fargo & Co. and UBS Financial Services Inc. Assets overseen by the brokers declined 17% to $4.75 trillion in the two years through 2009, according to Aite Group LLC in Boston.