Barrons: Top Independent Financial Advisors Ranking

Once a pebble in the U.S. wealth management landscape RIA firms will soon account for 30% of all retail investment assets, according to Mark Tibergien, CEO of Pershing Advisor Solutions.

Recent figures from Cerulli Associates have RIAs managing about $4 trillion of client assets, compared with about $6.5 trillion within the traditional brokerage, or wirehouse, model.

And while thousands of mom-and-pop shops still populate the RIA universe, they are shrinking in number as operating costs rise and fees drop. In short, financial advice is rapidly becoming the domain of firms that have the scale to handle the intense technological and regulatory challenges.

This is largely good news for clients. For starters, as bigger firms gain prominence, advisory fees are dropping.

According to the most recent State of Retail Wealth Management report from McKinsey’s PriceMetrix unit, fees for both individual transactions and for broader financial planning have dropped every year since 2014

The average fee last year for households with between $1 million and $1.5 million to invest was 1.08% of assets managed, down from 1.16% in 2014.

At the same time, the range of services and expertise available to clients is growing, as RIAs expand their teams. Investing acumen remains important.

But in an era of low-cost investing options from the likes of Vanguard and so-called robo providers such as Betterment, advisors understand that they need to bring other services to the table, such as estate and tax planning. If you’re a client, now is a good time to review what you’re getting for your fees—and to perhaps ask for more.

Barron’s produces two separate RIA rankings to help investors find quality financial guidance.

The 12th edition of our Top 100 Independent Advisor ranking, which starts on page 20, lists individual advisors; the third-annual Top RIA Firms Ranking, which starts on page 13, ranks the leading independent advisory firms.

Each of these rankings weighs dozens of qualitative and quantitative components, including assets managed, the size and experience of teams, and the regulatory records of the advisors and firms.

This year, the RIA Firm ranking expanded to 40 spots (from 30 last year and 20 in 2016), to make room for the explosive growth of elite firms. The average assets under management by the top 20 RIA firms in our survey grew 40.7% since 2016, to $15.8 billion.

Their operations are similarly expanding: The average number of offices rose from 20 to 31; the average number of advisors at each firm grew from 63 to 83; and the average number of advisory clients increased from 5,518 to 8,012.

A notable absence on the roster: Kansas City-based Creative Planning, a fast-growing firm that had been No. 1 in last year’s ranking.

At press time, the $36 billion-asset firm had a pair of pending regulatory issues with the SEC—one related to radio advertising and another related to internal reporting of the CEO’s personal securities holdings.

The issues render Creative Planning ineligible until Barron’s can fully evaluate the matter..

The Top 40 RIA Firms

The largest independent advisory firms grew by over 40% last year. With M&A only increasing, that growth is unlikely to slow anytime soon.

*Edelman and Financial Engines have merged and will be formally combining their operations in the next few months. NR=not ranked.

It’s a heady time for these firms, and much of the growth is coming from a steady increase in mergers-and-acquisition activity.

A record 94 deals took place in the year’s first half—up from just 24 in the same period in 2013, according to Echelon Partners. And the acquisitions are getting bigger: The average transaction size for this year’s first half exceeded $1.3 billion, compared with $1 billion in 2017.

The most notable deal came in April, when private-equity firm Hellman & Friedman bought Financial Engines for $3 billion and moved to combine it with Edelman Financial Services. The resulting firm will have almost $170 billion in client assets, much of which resides in 401(k) and robo accounts; $30 billion-plus will be overseen by traditional financial advisors.

The Edelman deal highlights how private-equity money is flooding into the wealth management industry, and in many cases funding mergers. It’s not hard to see what attracts these investors to the RIA industry. RIA firms are cash cows, with a median profit margin of 20%, according to TD Ameritrade Institutional.

Within five to 10 years, Tibergien predicts, the country’s thousands of RIA firms will consolidate into perhaps a dozen national businesses, and 50 to 60 large regional ones, along with several hundred dominant local businesses.

In the meantime, the deals are rewarding their participants richly, as RIA sellers monetize the blood, sweat, and tears expended in building their firms, and as buyers gain valuable assets.

For clients, one upside to mergers is that they can inject new talent and capabilities into a firm. For instance, when California-based Beacon Pointe Private Wealth Advisors acquired an advisory practice in Boston several years back, it gained an expert in environmental, social, and governance, or ESG, investing, CEO Shannon Eusey says. Another deal, for a northern California firm, brought in an advisor with special expertise in de-risking the concentrated stock positions often held by corporate executives.

Another benefit of mergers is that they help ensure that an advisory relationship will continue, should your advisor die or leave the business, says Tibergien: “The issue of continuity is an important topic for clients to consider when evaluating their advisors.”

Scaled-up RIAs can also use their clout to gain access to exclusive investment funds. And they can pressure asset managers into lowering prices.

And becoming part of a larger firm means there’s likely to be tighter legal and ethical supervision, since there’s more at risk.

On the other hand, there’s a chance that you will lose some personal attention after a sale. If your old advisor took a hands-on approach to investing your money, you may be disappointed to be placed in standardized model portfolios that lack the personal touch.

What’s more, your advisor might be sold to a firm that’s profit-driven, in which case you might have to take a more proactive approach to monitoring fees.

Anytime a change in ownership occurs, says Tibergien, it’s smart to at least research other advisors.

“There may be absolutely no reason to leave, but the sale should essentially be considered as another life event that leads clients to pause and take stock,” he says.

The trend toward consolidation may create uncertainty if you’re a client of a smaller firm that lacks a clear succession plan.

And there are many such firms: Three-quarters of financial advisors lack a written succession plan, according to the Financial Planning Association.

Without a plan for competing in the evolving RIA business, it’s more likely that owners will wind up selling to whoever makes the best offer. And that new owner might not necessarily be the best match for the firm’s clients. Clients of big RIA firms might also wonder if the economies of scale will benefit them. As noted, fees to clients have dropped, but not at a breakneck pace.

With fees falling for everything from individual stock trades to back-office services, RIAs will have to decide how to sweeten the value proposition for clients going forward—either by expanding and improving their services or by marking down their prices, Tibergien says.

As RIAs grow, the big question is whether certain aspects of the independent model will rub off on traditional brokerage firms.

Specifically, independent RIAs charge fixed fees rather than brokerage commissions, and because they are legally required to act as fiduciaries, they’re set up to avoid conflicts of interest in ways that traditional brokerages aren’t. Prominent regional brokerage firms such as LPL Financial and Raymond James have added RIA channels to adopt so-called hybrid platforms, and it’s expected that the RIA effect will continue to spread.

“I do think there is a morphing of the ideas,” says Tibergien.

Though major Wall Street brokerage firms have taken steps in recent years to root out conflicts of interest, the absence of a regulatory imperative to act as fiduciaries means that independent and brokerage models are likely to continue to maintain some separation.

As Tibergien notes, RIAs are professional buyers of investments for clients, while brokers are professional sellers.

Speaking of pricing, some RIAs are gravitating away from the traditional fee model, in which clients are charged a fixed percentage of their investment assets annually.

In its place, firms like WE Family Offices are charging a retainer fee that’s based on the complexity of clients’ overall needs—from investing to estate planning to family governance. The retainers compensate advisors for attending to clients’ broad needs, not just their investments.

As RIAs become more visible, though, investors will be increasingly weighing their options. “The beauty of what’s happening is that they now have a choice,” says Tibergien.

Barron's : Top 100 Independent Wealth Advisors 2018