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Industry News

Advisor figures up in 2022 even as AUM and client totals fall

By Dan Shaw
June 26, 2023 6:18 PM

Like broker-dealers, investment advisory firms saw an increase in newcomers to their industry in 2022. 

The number of fiduciary advisory firms in the U.S. rose by 2.2% last year to hit a record high of 15,144, according to a recent report from Investment Adviser Association. At the same time, the professional organization representing more than 600 advisories found that the industry's assets under management and client figures both showed declines.

But over the long run, the industry is on the rise. The $114.1 trillion advisors had under management for clients may have been down from $128.4 trillion for the previous year, a result largely of falling stock and bond markets. But it's still far above the $83.7 trillion the industry had under management in 2018.

It's likewise with client numbers. The 61.9 million people, groups and institutions who consulted financial advisors may have been down from 64.7 million for 2021. But it's still far above the 43.6 million figure for advice seekers in 2018.

"Investors are increasingly engaging investment advisers, which continuously provide investment management advice as fiduciaries, putting their clients' interests ahead of their own," Karen Barr, the CEO and president of the IAA, said in a statement.

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The IAA produced its report in conjunction with National Regulatory Services, a subsidiary of the consulting company COMPLY. Most of the data analyzed was found by combing through the Form ADV documents registered firms are required to file every year with the Securities and Exchange Commission.

Among the snapshot's other findings: The advisory industry continues to be dominated by small firms — 91.7% of all advisories had 100 or fewer employees. 

And the majority of firms tended to have relatively small amounts of assets under management. Roughly 70% of the total had less than $1 billion under management in 2022 and 88.5% had less than $5 billion.

Read on for more insights from the IAA's latest industry snapshot:

Bandwagon

Joining the club

Advisory numbers not only reached a record high of 15,144 last year, they've steadily been on the rise for the past five years. The industry had only 12,993 firms in 2018, meaning the industry has grown by 16.5% to get to where it is today.

With more firms has also come an influx of employees. Nearly 971,500 people worked for advisory firms in 2022, a figure up about 16% from the 835,124 who did in 2018. 

Kate McBride, the founder and president of consulting firm FiduciaryPath, said the figures are good news for institutions who are looking for financial advisors who adhere to fiduciary principles, meaning they're under an obligation to put their clients' interests first. FiduciaryPath works with nonprofit groups, retirement plan managers, government pension departments and similar entities on their investment strategies.

"This means that intermediaries who want to go RIA have more opportunities to do so, and investors have more opportunities to find a fiduciary," McBride said.

Continuing the industry's dominance by small firms, almost all of the newcomers to the industry in 2022 had less than $1 billion in assets. For the industry as whole, firms on average had nine employees, two offices and $330 million in assets under management.
Markets

As go the markets…

With both bond and stock markets in the tank in 2022, it should come as no surprise that advisory firms saw their assets under management decline as well. 

The S&P U.S. Treasury Bond Index finished last year down 10.7% and the S&P 500 Stock Index nearly 20%. Firms saw their assets under management decline from $128.4 trillion to $114.1 trillion, a roughly 12% drop.

Mark Elzweig, the president of the advisory consulting firm Mark Elzweig Company, said the figures shouldn't necessarily be taken as bad news in the industry. It's when markets are bad that investors are most likely to turn to professionals for help with placing their money.

"Challenging markets have bolstered the need for solid financial advice," Elzweig said. "It's not surprising then that the ranks of advisors and people working in the advisory business have increased."
Clients

Where did all the clients go?

The IAA makes an important distinction when talking about the decline in client numbers seen in 2022. The number of people and institutions who turned to financial advisors for help with asset management actually rose last year to a record high of 54.3 million, showing an increase of 2.1%

It's only when that figure was coupled with the number of clients who sought services other than asset management — such as help building model portfolios — that there was a decrease. The total for these non-asset management clients fell from 11.7 million to 7.6 million.

The IAA's report states that "this decline is attributable to a sharp drop in the number of non-asset management clients at a single digital advice platform," which a spokesperson for the group later identified as the financial services firm Stash.

The report states: "This firm was the adviser for over one-third of the industry's clients in this category in 2021, and the decrease resulted from a change in the criteria for including accounts in this category."

Attempts to reach Stash were unsuccessful Monday.

So this "bad news" for the industry is really no more than a technical blip.

"Over the past five years, over 22 million more individuals have engaged an investment adviser for asset management – a rate of growth in both the number of individual clients and assets of roughly 12% per year," Barr said in a statement.
money-sack-fotolia.jpg

Making it pay

It's hardly a surprise that advisors bound by a fiduciary duty to avoid conflicts of interest almost never rely on commissions or similar transactional charges to make money. Fees — usually charged as a percentage of a client's assets under management — are far more common in the advisory industry.

The IAA's report finds that a full 95.2% of firms charge some type of assets under management, or AUM, fee. But only 20.8% of advisors rely solely on AUM. 

The vast majority — more than 85% of the total — charge either a fixed annual fee or fees charged for each hour worked on behalf of a given client. Roughly 36% of advisors charge fees that depend on the performance of advisors' investment recommendations.

As for the firms that don't charge AUM fees, they're most likely to be digital advice companies that work on a subscription model, according to the report.
A girl uses laptop for remote work or home leisure

No place like home

As is true in most other industries, advisors have increasingly taken to working from home.

The IAA's industry snapshot found that firms had 5,103 offices other than their principal offices operating out of private residences in 2022. That was up by 25.6% from the figure for the previous year, suggesting that many advisors "are transitioning to a permanently remote or hybrid model."

The report also found that the majority of firms — 78.6% of the total — maintained only one or two offices. Roughly 8% had more than 6 and only 1.4% had more than 50.
Dan Shaw
Reporter, Financial Planning
Industry News Economic indicators Economic news Fee disclosures Independent advisors Investment returns Investments RIAs
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