SEC Warns of Lax Branch Office Compliance as RIA Businesses Boom
A new report about the booming registered investment advisory industry on Tuesday found that almost 38% of RIA firms registered with the Securities and Exchange Commission had branch offices.
The report from the Investment Adviser Association, a trade group for the RIA industry, said 5,116 RIA firms registered with the SEC had more than one office as of early 2020, up 8.3% from a year earlier. About 2,550 of those firms had more than one outside office, according to the report compiled by IAA and National Regulatory Services, a compliance consultant.
The total number of SEC-registered RIAs rose 3.9% to a record 13,494, and their assets under management were up 6.2% from the previous year.
The 2020 report, compiled before the coronavirus pandemic was declared in March, is further evidence of the growth of the RIA model, which generally offers fee-based financial planning and investment services rather than commission-based transactions. But the model, which consumer advocates often described as more transparent than those of traditional brokerage firms, is attracting some warning signs.
On Monday, the SEC’s Office of Compliance Inspections and Examinations published an alert summarizing its exams of investment advisers operating out of multiple locations. The exams focused on fee and expense disclosures to clients, oversight of investment recommendations and management and disclosure of conflicts of interest, among other issues, and found a “range of deficiencies,” the regulator said.
The lion’s share of RIA firms remain one-office shops with mom-and-pop clients, have a median 8 employees per firm and manage a median $341 million on a discretionary basis in 141 accounts.
But firms are growing quickly by assets as well as by location, according to the IAA report. Aggregate assets under management at SEC-registered RIAs grew by 16.2% from the previous year’s report to a record $97.2 trillion.
The branch growth likely reflects acquisitions aimed at geographic expansion and efforts to allow more remote working arrangements, according to the report. Independent RIAs affiliated with multi-branch broker dealers also may be bulking up the office total reported on firms’ ADV forms, according to the “Evolution Revolution” report.
Much of the asset growth among RIAs reflects the popularization of digital advice platforms, which have no branch footprint. Two of the top five advisers, as measured by their number of non-high net worth individual clients, are digital advice platforms. They had 7.5 million client accounts, up 2.7 million from what they reported one year earlier.
High net worth individuals made up 11.75% of total RIA firm clients, according to the 2020 study, and the median advisor is likely to have at least one pension or profit sharing plan in its client mix.
“The vast majority of SEC-registered investment advisers are small businesses,” the trade group report said, although IAA members also include large mutual fund companies and the study did not address very small advisory firms.
More than 57% of the firms studied (7,749) said they employed 10 or fewer non-clerical employees, and 87.6% (11,819) had 50 or fewer non-clerical individuals. The largest 116 firms, on the other hand, employ 53.7% of all non-clerical employees.
In total, SEC-registered investment advisers manage $12.8 trillion on behalf of more than 42 million individual clients, according to the report. Since 2001, total industry assets under management are up 340%—or a compound annual growth rate of 8.57%. That compares with the S&P 500’s 181% growth rate in the same period (5.9% CAGR), and the Gross Domestic Product growth rate of 102.5% (4.0% CAGR), the report said.
