Independent and hybrid RIA channels are adding advisors the fastest, Cerulli report says

November 1, 2023 2:16 PM

While the wealth management industry's wirehouse giants still top the list in terms of total AUM, financial advisors looking to run their practices on their own terms continue the steady march toward independence.

A new study from research and consulting firm Cerulli Associates finds that independent and hybrid RIAs have seen the largest year-over-year advisor headcount growth rate when compared to other channels. The analysis finds that this is a trend that holds true over five- and 10-year periods as the promise of independence continues to be alluring to advisors.

According to Cerulli, the number of independent RIA firms has grown at a compound annual growth rate (CAGR) of 2.4% over the last decade, while the number of advisors operating at independent RIAs has grown at a CAGR of 5.2% over the same period.

While Cerulli projects industry financial advisor headcount will remain relatively flat over the next five years, independent and hybrid RIAs are projected to experience the biggest gains in advisor headcount market share. By 2027, Cerulli projects the independent and hybrid channels will control nearly one-third (31.2%) of intermediary asset market share.

At the end of 2022, there were 18,558 retail-focused RIA firms with 78,282 advisors, collectively managing $7.1 trillion. Hybrid RIAs have, on average, 8.9 advisors per firm, while independent RIAs have an average of just three advisors per firm.

"Although the wirehouse channel dominates industry assets and average advisor productivity, the flexibility and higher payout percentages of independence is appealing to many advisors," said Andrew Blake, a Cerulli associate director. "[Broker-dealers] will need to continue to leverage the benefits of working under corporate scale, which include access to technology, training, and client resources, to highlight the alluring aspects of affiliation with a major B/D. Otherwise, they risk seeing channel migration trends continue."

The findings are in line with Fidelity Investments research released in October that says 1 in 6 advisors have proactively switched firms in the past five years, with independent business models as the top destination. The report says 94% of advisors are happy with their decision to move, with 85% noting increased control over their future.

Eighty percent of movers reported assets under management growth since switching, with a median increase of 42%. The Fidelity study also finds that nearly all advisors (99%) said their clients were ultimately supportive of their decision to move, with more than half (54%) noting they were immediately supportive.

Among the many factors influencing an advisor's decision to move, the top considerations include compensation, better firm culture and the ability to provide a higher level of client service. But knowledge remains a roadblock.

Only half of advisors told Fidelity that they consider themselves knowledgeable about firm types (54%) and independent models (49%), and only 25% say they know enough about the various intermediaries like recruiters, consultants, clearing or custody providers that can help with finding a firm.

Scroll down to read the key takeaways from the latest Cerulli research and find out what is driving the growing demand for financial advice.

Demand for advice rising alongside uncertainty

The Cerulli report suggests that as economic volatility lingers, young affluent investors are increasingly searching for financial advisors of their own.

Young investors increasingly are moving from seeking advice to becoming more reliant on an advisor for their finances. Beginning typically in the depository channel, these advice seekers are looking to bank advisors as their main financial partners, although the banking crisis of spring 2023 has led to potential trust issues with brands as advisor trust remains high.

While 36% of investors identified as advisor reliant in 2021, this share has increased to 43% as of Q2 2023. Private bank providers (75%) and bank advisors (71%) are the top-two channels with the highest concentrations of advice seeker and advisor reliant investors.

Among investors in their 30s, quality of service and workplace retirement offerings are tied as a primary reason for starting a provider relationship, but quality of service ranks second among investors in their 40s.

"This generation is used to being able to obtain answers to any question with just a few taps on their smartphone, so the idea of being on hold for minutes — let alone hours — can be off-putting, particularly when dealing with something as important as their finances," the Cerulli study says.

Advisor channel trends

Notable trends regarding advisor affiliation have continued in the last year, as advisors gravitate toward both independence and working with larger broker/dealers. Nearly two-thirds of B/D affiliated advisors are associated with one of the top-25 largest firms when ranked by headcount, according to Cerulli.

Continued acquisitions have magnified the concentration at the top of the leaderboard, as more than one-quarter of B/D advisors now are affiliated with one of the top-five biggest firms.

Cerulli says the advantages of working under corporate scale include access to a variety of advisor-focused resources that promote business building, help with portfolio construction and provide access to an effective infrastructure in which the advisor can operate and grow their practice.

"Although the wirehouse channel dominates industry assets and average advisor productivity, the flexibility and higher payout percentages of independence is alluring to many advisors," the study says. "Many B/Ds have responded by expanding affiliation options to include at least a hybrid registration."

The study also finds that the wirehouse advisors' lead in average productivity is a direct result of a focus on serving high net worth and ultrahigh net worth investors. "With higher levels of average advisor AUM, wirehouse practices are built with expanded teams including firm-provided administrative support. For independent advisors, hiring junior advisors, analysts, and support staff can be a costly and time-consuming process that may not be alluring to inexperienced business owners."

Client and advisor segmentation strategies

The Cerulli analysis also explores how wealth managers can leverage segmented advisory practices to best serve their clients and improve advisor productivity.

Wealth management firms across the U.S. market target clients ranging from mass market to ultrahigh net worth individuals and their families. That made understanding the range of services required by clients across all wealth tiers a key focus for wealth managers in 2023, and looking to segment internal business lines to most efficiently service clients of all shapes and sizes will remain a top priority for the near future.

"As U.S. household wealth has grown from $27 trillion in 2011 to $56 trillion in 2022, the range of client types and financial needs across all wealth tiers has grown tremendously," Cerulli says. "With this in mind, careful consideration of the benefits and drawbacks of a client segmentation strategy should be on the list of priorities for many wealth management shops in the coming years."

Executives within the private bank and trust channel have reported that segmentation strategies within their wealth management department have allowed for improved quality of service (71%), better management of intergenerational relationships (41%) and increased profitability (35%), as well as increased productivity from advisory teams.

Besides productivity, profitability and client experience, Cerulli says a number of soft benefits accompany an effective segmentation strategy. "One core benefit of having separate financial planning divisions within a wealth management firm is the sense of camaraderie that can be built by constructing lean, specialized groups within the organization."