Analyst Sean Daly of Cerulli Associates Inc. covers the financial advice industry as part of Cerulli's intermediary-analyst team. He tracks wirehouses, regional firms, independent broker-dealers, RIAs, dually registered investment advisers, banks and insurance companies. His work includes discussions with custodians and clearing firms, in addition to consulting with asset managers that distribute products through advisers.
With interviews and surveys to all of these industry entities, Mr. Daly provides content for Cerulli's widely followed Intermediary Distribution and Advisor Metrics reports, as well as the Cerulli Edge publications.
InvestmentNews: It seems like independent broker-dealers are looking more and more like RIA custodians, offering more options to advisers who want their own RIA firm.
Mr. Daly: We see that trend as part of a two-pronged strategy. First, it's a bit of a defense mechanism. The firms see the numbers and see where they're losing advisers. The B-Ds realize that for their advisers, going RIA is a very real possibility. So they're building out these RIA platforms on a defensive level rather than lose advisers completely. And all these independent-B-D firms are offering the hybrid option. If they don't have it, they won't be seen as a real viable opportunity for more productive advisers.
Then there's an added benefit, from a recruiting standpoint, in being channel-agnostic. Raymond James is an example where an adviser can become an employee, and once you've got the hang of it, you can be an independent contractor — or at some point, you can go RIA and keep your assets at Raymond James. Having multiple channels can be a strong recruiting tool, and we'll see more of it in the future.
InvestmentNews: How do you define hybrid advisers, and what's driving the growth in that channel?
Mr. Daly: At Cerulli, we call hybrids dually registered firms. That means someone who does business under their own RIA but maintains an affiliation with a broker-dealer and does some business under the B-D's corporate RIA, as well.
Dually registered is the hot story right now. A few things are driving this trend. A couple years back, the hybrid space was looked at as a transition period for an adviser wanting to go pure RIA. It was a stepping stone. Now it's blossomed into a full-blown channel. RIAs want to be affiliated with a B-D for a number of reasons. No. 1 is the commission-based products. There are times when commissioned products are more available, especially with annuities, or maybe the adviser has trail fees. There's also access to research. For the pure RIA, that is a need they have to figure out. If they came from a traditional brokerage firm, that loss can be overwhelming. As a hybrid, they can keep that access to research through the broker-dealer. With some of these dually registered platforms, you might have just a handful of accounts at the broker-dealer, but you have access to all the resources.
InvestmentNews: How are clearing firms responding to the changing channels?
Mr. Daly: A really good example of a clearing firm changing to work better with hybrids and other clients is the Fidelity reorganization. [In July, Fidelity Investments realigned its institutional businesses to streamline coverage of its RIA, broker-dealer and other channels.] It aligns their institutional wealth business and the clearing firm for better technology integration and a better sharing of resources. As these segments all converge and melt, Fidelity is looking to say, “We can serve you in any way you want.” It's more of that channel-agnostic approach.
InvestmentNews: The demand by advisers for more resources and support from custodians and B-Ds seems to be growing. What's driving that?
Mr. Daly: What we're seeing across the industry is a shrinking adviser force. In fact, our newest data show that it shrank 1.5% last year, which is consistent with what we've been seeing in the last few years. The biggest reason is that lower producers have not been able to sustain a practice, and there's been a culling of the lower quartile at some wirehouse and regional firms.
One thing to think about is that investor assets are increasing as the number of advisers declines. Assets need to go somewhere. Just because an adviser bails out of the industry doesn't mean the investor doesn't need advice. So we're seeing higher assets per adviser. The average adviser had $35-ish million in 2011, but that jumped to $40 million for 2012.
That means advisers need to be more efficient, handle more relationships and more money. They need to figure their service offering and whether to team up and get specialization. So that emphasis on practice management is a very important part for the custodians and broker-dealers.
InvestmentNews: How are the aggregator firms affecting the independent space?
Mr. Daly: It's definitely a growing segment. We're a little surprised there are not more of these firms popping up. They're a nice fit for a lot of advisers. Their pipelines seem pretty strong, and they can afford to be pretty selective because there are a lot of advisers interested in joining those types of practices. In contrast, if you're a large firm with 15,000 advisers, you need 1,500 new re-cruits a year just to stay even. So their smaller size gives aggregators some power.
If an adviser is going RIA, the benefits of aggregators are pretty immense. The firms have a pretty robust product and service menu, and can help with locating an office, furnishing it and handling all the tricky points like account transfers. One aggregator firm was just in here, and one thing they tout is that advisers can call up the chief investment officer at 7 a.m. and bounce investment ideas off him. That's what he's there for. At an independent B-D, you don't necessarily have that. Those B-Ds have to serve a mass of advisers.
