The top RIAs pose strong competition to large brokerages

When Veritable founder Michael Stolper was working at Kidder Peabody & Co. in the early 1980s, he found that sometimes the best advice for clients was to do nothing. But that wasn't very lucrative, since his income depended on commissions. So he asked his firm for permission to do something revolutionary at the time: charge a flat fee for financial advice. “Sometimes the way I was paid as a broker was in conflict with the advice I was giving,” Mr. Stolper recalled. “I had a few wealthy clients who were willing to pay a quarterly fee just to get advice, not necessarily to buy and sell things.” Mr. Stolper left Kidder Peabody, which eventually became part of UBS Wealth Management, after a client challenged him to strike out on his own. He opened Veritable in 1986 with 10 clients and $60 million under management. Thanks largely to referrals from that core group, the firm now has 300 ultrawealthy clients and more than $13 billion in AUM. The top of InvestmentNews' annual ranking of fee-only registered investment advisers reflects a hodgepodge of different business models. The largest, Financial Engines Advisors ($104.4 billion in AUM), relies exclusively on providing advice to employer-sponsored retirement plans. Two others among the top 10, Fisher Investments ($60.8 billion in AUM) and Edelman Financial Services ($14.4 billion in AUM), have attracted thousands of clients through mass marketing. (Related data: Ranking the industry's top RIAs)

Competition for ultrawealthy

But the bulk of the top RIAs are traditional firms that collectively pose some of the strongest competition to the largest brokerages when it comes to ultrawealthy clients. As a group, the 10 largest firms account for $300 billion in AUM, and none has less than $11 billion under management. Despite their size, these traditional RIAs are somewhat old-fashioned, relatively quiet businesses that are operating as large family-office-style practices focused on clients with $5 million or more. The average account at many of the firms is in excess of $10 million. They don't make a lot of noise with acquisitions. They grow organically through referrals, and aren't concerned about robo-advisers or jumping on the latest industry trends. “This is a pretty simple business,” said Mark Hurley, chief executive of Fiduciary Network, which provides consultation and financing for advisory firms. “There is no silver bullet. It's all about execution.” “It's a matter of the maturity of our business and success in executing,” said Richard R. Hough III, chief executive and founder of fifth-ranked Silvercrest Asset Management Group. “Success in many ways begets success.” One key for many of the firms has been getting clients to go all in. Usually wealthy clients split their assets up among several advisory firms, but Veritable, for example, makes it mandatory that clients keep 100% of their assets at the firm. “Sometimes we don't win clients because of that,” Mr. Stolper acknowledged. “But it is an approach that we think is absolutely necessary to avoid ending up in a situation where you don't have complete information and are in a horse race with another consultant or performance-based manager.” Around two-thirds of clients at Chevy Chase Trust Co. also have 100% of their assets at that firm, according to CEO Peter Welber.

“Sometimes the way I was paid as a broker was in conflict with the advice I was giving. ”—  Michael Stolper,  founder of Veritable

Several firms, including Silvercrest, manage all or most of their clients' money in-house, as opposed to outsourcing investment management. “We brought that capability in-house right away,” Mr. Hough said. “It was a clear differentiator for us to have institutional-quality management.” Most of the firms are still privately held, although some have monetized their success by selling their firm or going public. Silvercrest, which opened its doors in 2002 with $30 million in AUM, is one of two firms on the list to have gone public (Financial Engines is the other), a decision that was made in 2013 when the firm had $12 billion in assets. In hindsight, the decision may have been made sooner than was ideal, according to Mr. Hough, but he said the move ultimately proved to be a boon for the company. “We were close to the right time, but it was perhaps a bit harder than expected,” Mr. Hough said. “We had to be very clear about our business strategy and how we would execute it. We had to tell a very compelling story.” Oxford Financial Group, which targets clients who have assets between $5 million and $40 million, represents the contingent of privately held firms still led by their founders. Jeffrey H. Thomasson started the firm in 1981, the day after he graduated from college, and began cold-calling local business owners. “Thomasson is like the Michael Dell of this industry,” said Mr. Hurley, referring to the founder of Dell Inc., who at a young age helped revolutionize the distribution of personal computers.

Two breakfasts

Mr. Thomasson also represents the commitment required to build a firm into the $10 billion-plus range. He spent his first several years making thousands of cold calls and setting up 15 to 20 meetings per week. Most days, he ate two breakfasts, one at 7 a.m. and another at 8 a.m, he said. “The biggest challenge was making sure the seven o'clock guy was done before eight o'clock,” he recalled.

For all their success, few of the top RIAs appear to be resting on their laurels. Many are still growing at a dramatic clip. Chevy Chase Trust, fourth on the list, added $3 billion last year alone, bringing it to $21 billion in AUM. Some smaller fee-only firms are growing even more dramatically, as much as 165% at $4 billion firm Halbert Hargrove, for example. Mr. Hurley warned that firms that began to believe in their own success would be the ones to start sliding down the list. “The leadership of a lot of organizations that have gotten to a certain size kind of let up and take it easy,” Mr. Hurley said. “The minute you start believing your own press release is when you're in trouble.”