The Rise of the Registered Investment Adviser

David O'Brien, a financial adviser in the Richmond (Va.) suburb of Midlothian, likes to visit his clients in their homes. At kitchen tables and on front porches, he counsels them on how best to save, invest, and plan for retirement. Shepherding just $17 million, O'Brien, 46, represents an emerging juggernaut in the U.S. retail investment services industry: the registered investment adviser. Assets overseen by RIAs more than tripled in the decade ended Dec. 31, 2009, to $1.7 trillion, according to researcher Cerulli Associates.

The RIAs' appeal stems from the idea that their goals are aligned with those of their customers. Unlike stockbrokers, they are bound by fiduciary duty, meaning they must put clients' interests ahead of their own. Stockbrokers are under no such obligation; they must simply offer products that are suitable for their customers. Most advisers charge a fixed annual percentage of the client's money, typically 1 percent to 2 percent, and do not depend on commissions. "I have no incentive to sell someone's product," O'Brien says. "That's a sea change."

Bernie Clark, executive vice-president of Schwab Advisor Services, which provides record-keeping and other services to more than 6,000 RIAs, says the movement to fee-only advisers is "redefining the way investment advice is delivered and what consumers expect from their financial advisers." RIAs, who must pass licensing exams and register with their state's securities agency or the Securities and Exchange Commission, emerged to challenge stockbrokers in the 1990s when individuals with growing portfolios sought out affordable and reliable guidance. Advisers range from thousands of small firms, such as O'Brien's, to GenSpring Family Offices, based in Palm Beach Gardens, Fla., with more than $20 billion under advisement. Together, they are the fastest-growing competitor to the four largest broker-dealers—Morgan Stanley Smith Barney (MS), Wells Fargo (WFC), UBS Financial Services (UBS), and Bank of America Merrill Lynch (BAC). Assets overseen by the four brokers declined 17 percent, to $4.75 trillion, in the two years through 2009, according to Aite Group in Boston.

While only a small number of the stockbrokers at Wall Street houses operate as registered investment advisers, the fee-only model they use has been influential. Wall Street banks began encouraging their brokers to switch clients to a fee-based model more than a decade ago, says Ben Phillips, a partner at consulting firm Casey, Quirk & Associates in Darien, Conn. That push was aimed only partly at stemming customer defections. More importantly, the banks wanted the steadier revenue associated with asset-based fees, instead of the peaks and troughs produced by sales commissions, he says. Morgan Stanley now holds $470 billion, or 28 percent of its customer money, in fee-based accounts, compared with 18 percent in 2001. Of the $14.1 billion its brokers gathered in new individual investor assets last year, 89 percent went to fee-based accounts. "Fee-only advisers are no threat to our business because we can and do offer more options than they do," says Christine Pollak, a Morgan Stanley spokeswoman.

The growth of advisers, and the shift to fee-based accounts within brokerages, has benefited mutual fund companies that sell directly to the public, such as Vanguard and T. Rowe Price Group (TROW). Previously, brokers did not offer no-load funds because they didn't pay commissions to salesmen. Vanguard's mutual fund assets rose to $1.45 trillion at the end of 2010 from $564 billion in 2000. The firm passed Fidelity Investments last year to become the No. 1 mutual fund manager. Because brokers would not offer T. Rowe Price funds, "We had no opportunity to play in 70 percent of the retail market in the U.S.," says Edward Bernard, the company's vice-chairman. After brokers introduced fee-based accounts, he says, "all of a sudden we were totally compatible." T. Rowe Price's mutual fund assets rose to $266 billion in 2010 from $101 billion in 2000.

Fund managers including Capital Group, owner of the American Funds, which are sold only through brokers and advisers, and Fidelity have catered to fee-based advisers by lowering, waiving, and eliminating commissions.

Fee-based advice has helped create another winner: the exchange-traded fund, a cousin to the index fund that trades all day like a stock. ETF assets in the U.S. surged fifteenfold, to $992 billion in the decade ended Dec. 31, data from the Investment Company Institute in Washington, D.C., show. Stock and bond mutual funds rose 76 percent, to $9 trillion, in the same span. "The fee-only adviser has an incentive to keep overall costs low," says Anthony Rochte, a senior managing director at State Street Global Advisors, the world's second-largest provider of ETFs. "That makes ETFs much more competitive."

The bottom line: Registered investment advisers tripled assets this past decade as Americans came to view them as more impartial than brokers.

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