RIAs are losing competitive edge

Imitation is supposed to be the sincerest form of flattery, but with wirehouses and regional broker-dealers starting to look more like registered investment advisers, the trouble could just be getting started for independents. Wirehouses and regional firms are rapidly turning to fee-based compensation models and focusing more on financial planning than ever before — two characteristics that RIAs have long used to separate themselves from the bigger players. “I wonder if RIAs are cognizant of just how quickly they are becoming undifferentiated from their competition,” said Michael Kitces, a partner and director of research for Pinnacle Advisory Group, an RIA. “What made them unique for many, many years is no longer the case,” he said. “Being fee-based is becoming less and less distinct.” Asset-based fees are expected to make up 70% of wirehouse compensation by 2016, up from 58% last year, according to Cogent Research LLC. At the regionals, asset-based fees are expected to grow to 57% of business, up from 42% last year. The big players are shifting away from the traditional commission-based model for a number of reasons, such as wanting a more predictable revenue stream, but primarily because more and more, that is what wealthy clients are seeking.

Catering to the affluent

Although 29% of investors with more than $100,000 in assets reported paying asset-based fees, 43% of investors with more than $1 million said they pay such fees, according to Cogent. “We see more and more firms trying to swim upstream to attract and retain more-affluent investors,” said Meredith Rice, senior director of research at Cogent. The switch to fee-based assets has also meant a greater focus on financial planning. “At all four of the majors, there's a big push to do financial planning,” said Michael Silver, senior managing partner at advisory consultant Focus Partners LLC, referring to Bank of America Merrill Lynch, Morgan Stanley, UBS AG and Wells Fargo & Co. UBS Wealth Management Americas, for example, pulled in more than $3 million in the first half by charging an average of $4,100 for a financial plan, up from $1.4 million during all of 2012. The regionals are getting in on the action, as well.

Planning software

Raymond James Financial Inc. ramped up its financial planning capabilities with the launch of its Goal Planning and Monitoring software last year. The software has been a huge hit with advisers, said Tash Elwyn, head of the private-client group at Raymond James & Associates Inc. “It's perhaps the most accepted and embraced rollout in the firm's history,” he said. The fee-based programs at Raymond James have grown by 19.5% over the past year, outpacing the industry's 18% growth. The changes at the bigger firms mean there will be greater challenges ahead for independent RIAs as the lines between the different options become less clear to clients. “It's a huge challenge to figure out how to grow your firm from here,” Mr. Kitces said. “When you're competing against someone who may or may not be a fiduciary but uses the same business model, it's indistinguishable.” The growth challenge could lead to increased consolidation within the industry, according to some industry watchers. “Scale is becoming even more important. The pressure on small firms is increasing,” said Alois Pirker, research director at Aite Group LLC. But independent RIAs still have one big advantage over the larger firms, said Mike Durbin, president of the institutional wealth unit at Fidelity Investments. “The vast majority are local businesses,” he said. “They're members of the community. They can be flexible and customize their service to meet the client's unique needs,” Mr. Durbin said. Indeed, RIAs still do the most customizing of portfolios of any adviser channel, according to Cogent. Three out of five RIAs do independent research and customize portfolios, according to the research firm, while less than half of advisers at wirehouses and regionals do the same. Instead, they rely on model portfolios, either from third parties or their companies. Linda Leitz, co-owner of financial planning firm It's Not Just Money Inc., an RIA, and incoming chairwoman of the National Association of Personal Financial Advisors, thinks that that distinction will continue to play the biggest role for independents. “The industry isn't becoming more similar; it's just becoming harder to tell [firms] apart,” she said. “We're still able to help clients in the way that's best for them, without any conflicts.”