Our inaugural ranking of leading RIA firms.
The origins of the advisory business go back decades, but the boom in the modern-day profession can be traced to a change in the tax code implemented back in 1981 known as section 401(k).
Over the last five years, a handful of industries have enjoyed
remarkable growth, including housing, defense and financial services.
With a few exceptions like hedge funds and mortgage lending, the
independent financial advisory business' growth has outpaced most of
the financial services business by a wide margin.
The slow but inexorable transfer of financial responsibility to individuals created a compelling raison d'etre for a profession that emerged in the 1980s. If the experience of the last 15 years is at all indicative of the next 15 years, the advisory business is likely to demonstrate its staying power.
Independent registered investment advisers showed strong gains in assets last year despite the tepid market returns of 2005, according to new research by Financial Advisor magazine. Assets of independent RIAs participating in this survey climbed 18.70%, compared with a gain of just 4.91% by the Standard & Poor's 500 Index. The growth in assets over and above market returns reflects strong flows of new client money to independent advisors. For the sake of comparison, they managed to grow at twice the rate of the mutual fund industry, which reported an overall gain of 9.85% in assets for 2005.
The largest independent firms, those reporting $1 billion or more in assets, expanded by 18.79%, while those with less than $100 million showed a gain of 24.27%. The laggards, if they could be called that, were firms in the $500-million-to-$1-billion asset range, which still managed to bulk up in size by 15.14%.
Those were among the findings of Financial Advisor's inaugural leading RIA survey, an annual feature ranking the fastest-growing independent registered investment advisors. This year's survey lists more than 400 firms ranked by growth rates within five asset-size categories. Growth at the top-ranked firms was sizzling.
Among the largest advisors, Symmetry Partners LLC of Glastonbury,
Conn., more than doubled in size to $1.53 billion. Inlign Wealth
Management LLC of Phoenix grew by 82.59%, also to $1.53 billion, while
Tolleson Wealth Management of Dallas expanded assets by 59.74% to $1.59
billion. The latter two firms are both multiclient family offices.
Other top growers in their asset categories were Massey Quick & Co. of Morristown, N.J., gaining 75.42% to $621 million in assets; Glen Woody Financial Consultants Inc. of Costa Mesa, Calif., up by 148.96% to $318.41 million; and Centara Capital of San Diego, ahead by 400% to $125 million.
The average firm responding to the survey had about 250 clients and between 11 and 12 employees. But a close examination of the rankings reveals huge variances in almost every measurement benchmark that exists, indicating just how diverse this profession is.
A combination of organic growth and strategic acquisitions helped many firms generate outsized growth in 2005. In fact, responses to the survey highlighted increased merger activity among independents. Overall, 10.54% of firms reported some merger and acquisition activity in the past three years. Bigger firms were more likely to have been involved in M&A, with 14.29% of firms with more than $1 billion in assets and 20.59% of those with $500 million to $1 billion reporting they were involved in a deal.
The survey's results confirm the anecdotal evidence that there is more talk about mergers than actual completed deals. Exploratory merger talks were held by 25.71% of firms within the past three years, and 17.99% rejected a merger proposal within that time.
Still, while getting two advisory firms to merge may indeed be more
difficult that putting Exxon together with Mobil, the results can be
impressive. In June 2001, Balasa & Hoffman and Dinverno &
Foltz, two firms in the Chicago suburbs, each with about $225 million
in assets, merged. Last year, the merged firm crossed the $1 billion in
assets threshold, growing at a 24.29% clip.
Dan Roe, principal of Budros Ruhlin and Roe in Columbus, Ohio, says "2005 was a magical year for us." The firm's assets under management were up 30.64%. "Client acquisition came relatively easily for us," Roe continues. "A few years ago, we took the time to build the infrastructure for going to the next level of growth. Our staff had grown so much professionally that we still have the capacity to continue doing that today."
Figuring how to manage this kind of growth often requires the expertise of someone who isn't immersed in a firm's day-to-day operations. Some 29.31% of the firms in this survey hired a strategy consultant in the past three years, and 26.48% said they were very likely or somewhat likely to do so within the next 12 months.
Growth frequently creates a need for rebranding (see related article on page 78). The share of firms changing their names was 13.62% in the last three years, and 15.42% had added one or more offices within that period.
As firms keep adding partners, the practicality of adding a new name to the door every other year becomes problematic. Moreover, merger consultants often counsel advisors that when an entity is too closely attached to one or several partners, it tends to reduce the firm's value. Even those firms that have no interest in a merger are eager to maximize their value.
The three most frequently offered services were asset allocation (96.40%), financial planning (93.57%) and mutual fund selection and oversight (91.26%). They also were cited as the most frequently used services by clients. Services most likely to be outsourced were tax preparation (21.08%), tax planning (14.91%), estate planning (13.88%) and insurance planning (13.37%).
Advisors in general tend to be wary about adding new services because of worries about cost and profitability. Of new offerings being considered, advisors cited these most frequently as services likely to be added in the next 12 months: fund of hedge fund selection and oversight (5.40%), hedge fund selection and oversight (4.37%), lifestyle management and concierge services (3.08%) and bill paying (2.83%). In the case of hedge funds and funds of hedge funds, many advisors are dubious about their value, leery of their risks and downright displeased with their high costs.
Even before the hedge fund craze began to cool, many advisors viewed this asset class through a different lens than the public and the press. In the 2000-2003 bear market, Kochis Fitz of San Francisco treated hedge funds as investments that lie somewhere on the risk/return spectrum between bonds and long-only equities with little correlation to either.
"We used to use a low-volatility fund of funds but we've pulled back
from them because they had a higher correlation to other investments
than we expected," says Jason Thomas, chief investment officer at
Kochis Fitz. "The market is constantly providing us with new
opportunities in areas like ETFs so we are being even more selective
[with hedge funds] today."
Most firms don't go that far. Budros Ruhlin and Roe principals believe they are fully capable of helping a client interested in a particular hedge fund or fund of hedge funds evaluate it, but they haven't yet hired a professional to make individual selections and or recommendations. Kochis Fitz hired Thomas, who has Ph.D. in economics, from Wilshire Associates. Prior to that, he worked at Goldman Sachs.
Other alternative investments are sexier these days. "Maybe it's the Midwest, but our clients are far more interested in private equity and real estate," Roe says, adding his firm has partnered with a local private equity firm with a strong track record.
Growth is, of course, a double-edged sword. That explains why many firms periodically stop taking on new clients, or at least stop seeking them, so they can consolidate their operations and make sure they are maintaining service levels for existing clients.
And many of the growth rates and figures in this article don't explain structural changes going on within various firms. For example in 2005, Massey, Quick & Co. grew its client base from 5 to 19 clients, while its asset base rose 75.42% to $621 million. However, assets per client relationship fell about 53% to $32.68 million, implying that it started with a few very large clients and added several new ones last year.
Many advisors probably will be inclined to look at firms with more than $1 billion in assets and client relationships well into the seven- or eight-figure areas and wonder where they went wrong. But like everything else in life, some people start out with huge advantages.
A quick scan of the billion-dollar firms reveals, among other things,
that the partners of Inlign Wealth Management of Phoenix came out of
the late Arthur Andersen's private wealth management unit. Many of the
principals at BBR Partners got their start at Goldman Sachs & Co.,
the little New York-based investment bank that sometimes asks clients
to take their $40 million accounts elsewhere because they weren't
Quintile Investment Advisors in Los Angeles counts among its principals many alumni of myCFO.com, the firm started in the late 1990s by high-tech genius and Netscape founder Jim Clark to manage money for Silicon Valley's burgeoning class of billionaires. The principals at Kochis Fitz caught their big break in the late Eighties when their employer, Bank Of America, decided it wanted out of the personal financial planning business and essentially dumped it in their lap.
Some of these billion-dollar firms are creating new entities and branching into new arenas outside the RIA business. Indianapolis-based Oxford Financial is now offering private trust services, while Tolleson Wealth Management in Dallas offers private banking. Suffice it to say that both firms find the ability to maintain client anonymity and commingle accounts attractive. And it's an option more large firms are likely to consider over the next five years.
One charge outsiders occasionally level at the advisory profession is that it focuses on the people who are relatively financially secure. However, not all of the biggest firms specialize in the high-net-worth market. For example, Ronald Blue & Co., an Atlanta-based firm that focuses on a religious clientele and tries to help align their values with their finances, has about 5,000 clients with average assets of $670,000. Interestingly, the 21 firms in this survey with more than $1 billion in assets had just under 15,000 clients, with Ronald Blue accounting for one-third of total clients in the group.
As one can see from the assets per client relationship figures, most advisors across all brackets target the millionaires next door. But one can find more than a few firms that are working with middle-class Americans. Some are providing advice to 401(k) or 403(b) plans, while others are helping retirees make their money last.
Indeed, the fastest horses aren't always those targeting the
high-net-worth market. Centara Capital grew fourfold in 2005 despite
average account sizes that many advisors wouldn't accept. And they were
hardly alone in that regard.
Above all, however, the most remarkable characteristic of the advisory business that emerges from the portrait produced in this survey is its sheer diversity. One can find firms like S4 Capital, Quintile Investment Advisors and BBR Partners, with more than $1 billion in assets and less than 100 clients. Conversely, one can also identity firms like Essential Advisers of Denver and Palace Capital Management of Santa Fe, N.M., with less than $100 million in managed assets whose clients have eight-figure amounts under management at the firms but with similar characteristics to the giant firms .
As the profession continues to grow and mature, it will be interesting to see if it retains its heterogeneous, inclusive character or evolves into a more homogenous business, as so many industries do over time.