The SEC is funded through annual appropriations from Congress. Critics contend that funding-and staffing-hasn't kept pace with the agency's workload that currently comprises oversight of roughly 5,500 broker-dealers and 11,000 RIAs.
The SEC's budget for fiscal 2009 is $960 million. Some people want to raise the asset level that puts investment advisors under SEC regulation from $25 million to $100 million. Under this plan being floated by state regulators and supported by various investment advisor trade groups, advisors with assets under $100 million would be regulated by the states. This would enable the SEC to focus on larger advisor firms.
RIA Assets Drop, But Number Of RIAs Rise
Total assets managed by SEC-registered investment advisors shrank 20% last year because of the financial crisis, but the number of advisors surprisingly increased during that time frame.
Total assets under management reported by all firms dropped to $34 trillion from an all-time high of $42.3 trillion the previous year, according to the ninth annual report, Evolution/Revolution, a profile of the investment advisory profession put together by the Investment Adviser Association and the National Regulatory Services (NRS), a compliance consulting firm. Last year was the first time RIA assets shrank since 2003.
"Given that the primary form of compensation for advisors is a percent of AUM, many small businesses have been faced with revenue declines of 20% in the fourth quarter 2008 and another 20% in the first quarter of 2009," says John Gebauer, managing director at NRS.
Despite the hefty haircut to assets, the number of RIAs increased by 2% to 11,257. "The growth in the number of SEC-registered advisors in the current economic climate is particularly remarkable when considering these advisors typically must have at least $25 million in AUM to qualify for SEC registration," said Robert Stirling, an NRS senior consultant.
Stirling added that new SEC-registered advisors arrive with substantial books of business, suggesting that the long-term trend to shift from a transactional to an asset management client service model may have been bolstered by displaced broker-dealer representatives forming new investment advisory businesses. That helped existing advisors reach the $25 million threshold.
The report is based on information on Form ADV, Part 1, data filed by RIAs as of April 10, 2009, which covers the 2008 fiscal year.
As is the case with wealth distribution in society as a whole, assets under management are highly concentrated with a small number of very large firms. Roughly 4% of SEC-registered investment advisors managed 82% of the total assets. Those upper-tier firms have AUM between $10 billion and $100 billion. Firms with between $25 million and $1 billion in assets, which combined represent 71% of the RIA market, controlled just 4.28% of overall AUM.
For firms with assets between $25 million and $100 million, the average AUM per account was $237,249. For firms between $100 million and $1 billion, the average was $600,001. RIA firms with assets between $50 billion and $100 billion held the largest average accounts, with $3.53 million.