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RIAs Shift Strategies to Life Planning'

It appears that reports of the retail registered investment advisor's death have been greatly exaggerated.

Motivated by a change in investor demand, however, as well as profitability, capacity and compliance issues, the intermediary distribution channel is undergoing a sea change, according to Kirby Horan, an analyst with the Boston-based research firm Cerulli Associates.

"People are always asking me, Are RIAs going to fail to exist?' No, they're not going to fail to exist, but they're not going to take over the investment world, either, because they have some constraints and some issues that cannot be overcome because of the nature of their business," said Horan, author of a new study, "Retail Registered Investment Advisors in Transition."

But why all the hand wringing over the fate of retail RIAs? Long a bastion for innovation in the client/advisor relationship, investor demands for greater personalization and costly new compliance issues have been weighing heavily on the channel, which is typically comprised of smaller firms with shoestring budgets.

Bigger players further upstream, meanwhile, have adopted a lot of original ideas of their own, like fee-based pricing and financial planning. Therefore, popular thinking in recent years is that the channel would perhaps evolve into a role that more closely resembles the independent financial advisor and that they might someday occupy the corner desk of a major broker/dealer, rather than a storefront on Main Street.

While consolidation is most certainly in their future, many retail RIAs are falling back on the very entrepreneurial spirit on which their business was built, to ensure their survival. Of course, there's also the fact they're just better at doing the little things than their big-budget rivals.

"RIAs are still very unique," said Horan, whose analysis leverages the cooperation of more than 25 industry executives who study, support or sell to the channel, as well as interviews with RIAs across the country.

"They've been doing fee-based pricing and financial planning, and all those things for years, so they're definitely better at it than most other advisors. And they still tend to have wealth management expertise beyond financial planning, but they're moving even further beyond that to what we've termed, life planning,'" Horan offered.

RIA as Investor's CFO'

In other words, today's best-practice RIA is quickly becoming a sort of "investor's CFO," where they're handling anything that might have a financial impact on any aspect of a client's life. This type of holistic financial planning is also driving RIAs to take on additional product and service offerings, and as the assets under management grow, so, too, is their support staff.

Instead of saving a few bucks and making everyone on staff a generalist, Horan explained, many best-practice RIAs are hiring specialists, such as someone to focus entirely on plan creation, or a CPA to work exclusively on tax issues, or perhaps an attorney to address estate planning. But since cost remains a major sticking point, many traditional RIAs are choosing to "rent," rather than "buy."

"They'll form a referral network, particularly for the services they don't perform quite as frequently, or when, profitability-wise, it just doesn't make sense to bring them in-house," Horan remarked. "But as more of them move towards wealth management and life planning, we'll see more specialists brought in-house and less of the renting."

Although the rise in assets under management among RIAs can be attributed to innovation, much of it is also due to a reduction in the number of firms that exist in the channel. That contraction, according to data from the Investment Advisors Association in Washington, seems to be occurring among advisors that manage less than $25 million in assets.

In its annual report on the investment advisor industry released last month, the IAA indicates that the number of entities registered with the Securities and Exchange Commission with at least $25 million in assets under management numbers 8,614, a 3.7% increase from 8,302 in 2004.

"It's not dramatic, but it's incremental," said David Tittsworth, executive director, IAA. Combined assets under management for those entities is now $26.8 trillion, up 21% versus 2002.

"Assets under management are generally going up. Most saw an increase in their AUM over previous years," Tittsworth added.

At the same time, however, a rapid segmentation is occurring within the channel, Horan contends.

The so-called "hybrid RIA," which tries to cater to both retail and institutional clients, is giving way to a more narrowly defined advisor, she said. While a combination of expense and profitability issues are forcing the hybrid RIA to choose a side, new compliance issues are compelling the independent broker/dealer RIA to choose between NASD and SEC registrations.