Despite a worldwide pandemic, the investment advisor industry experienced record-breaking growth in 2020, growing to 14,000 Securities and Exchange Commission (SEC) registered investment advisers (RIAs) who manage $110 trillion in assets for nearly 61 million clients, according to a new report.

The number of SEC-registered advisors, clients, assets and employees all reached record highs in 2020, according to “Investment Adviser Industry Snapshot 2021,” published annually by the Investment Adviser Association (IAA) and National Regulatory Services (NRS) for the past two decades.
 
“We are proud of the responsiveness and resilience shown by the investment adviser community as they guided clients through unprecedented challenges,” IAA President and CEO Karen Barr said in a release. 

As the number of RIA firms soared, the number of broker-dealers continued to decline—down 2.3% in 2020 to 3,435 firms, the study found.

“The data in this year’s report confirmed what we’ve known all along: Demand for services provided by advisors continues to increase, even as supply rises,” NRS President John Gebauer said. 

While the industry is largely made up of smaller advisors, growth has been strongest for the largest firms, the study found. Advisors with over $100 billion in assets experienced gains in assets of more than 14% annually over the past five years, far ahead of smaller advisors. While 88.5% of investment advisors have less than $5 billion in assets under management, 92.0% of industry assets are managed by firms with assets under management above $5 billion. 

“Most growth by larger firms resulted from market-driven appreciation in the value of assets under management, organic growth (from increased investor demand for products and services offered by these advisers) and merger and acquisition activity,” IAA and NRS reported.

Most investment advisors, however, are small businesses, with 50 or fewer employees and one or two offices. Relative to their assets under management, small advisors account for “a disproportionately high percentage of industry employment,” the study found. For example, 18.8% of advisors have $1 billion to $5 billion in assets under management, and while they manage 5.4% of total industry assets they account for 12.7% of employment.

In total, some 87.9% of all RIA firms are small businesses employing 50 or fewer people, the report said. Only 1.6% of RIA firms had a workforce of over 500 people. In fact, the median RIA firm employed eight people.

Advisors with $100 million to $5 billion in assets under management also experienced growth over the three-year period ending in 2020, but at a more moderate pace, averaging about 5% annualized. By contrast, assets of firms with less than $100 million in assets under management generally declined. However, successful firms in this size range may have grown sufficiently to move into the next larger AUM category, the study said.

Individual investor demand for advice also surged, driving RIA growth. In 2020, the number of clients served by SEC-registered investment advisor firms increased by 17.2%, reaching a record high of 60.8 million. The number of individual investors in total grew by 38% over the past two years, the study found.

“If this pattern continues to hold, the industry will experience continued and robust growth, further demonstrating its crucial role in the lives of investors. It’s an exciting time to be an investment advisor,” Gebauer added.
 
At the same time, compensation structures have become more flexible. Advisors have become more likely to offer fixed fees and hourly fees, in addition to asset-based fees over the past two decades, the study found. Still, 95.5% of SEC-registered investment advisors offer clients a fee based on a client AUM, while 44.9% of advisors also or alternately offer clients a fixed fee. Some 36.3% of RIAs offer performance-based fee arrangements, the study found.

Meanwhile, RIAs’ conflicted compensation arrangements are decreasing, in some areas more than others, the study found. Advisors recommending securities underwritten by a related broker-dealer declined by 8.3% from 2011 to 2020, reflecting the fact that only 16.8% of firms have affiliated brokers, down from 22.5% in 2011.

Advisors are also less likely to recommend proprietary products. Advisors offering these products fell to 21.0% in 2020 from 27.4% in 2011. Similarly, advisors using client commissions to purchase soft dollar research fell to a new low of 38.8% in 2020.

In contrast, the percentage of firms buying or selling securities recommended to clients increased to a new high of 77.1%. This practice creates the risk of conflicts of interest, the report said. Still “these investments can align advisor interests with client interests, especially if portfolio managers are investing alongside their clients,” the study said.

Discretionary authority by advisors also increased in 2020, with 93.3% of RIAs (up from 91.8%) having the authority to determine which securities and dollar amounts to trade.