As the RIA movement gains millions more clients with trillions of dollars each year, its identity crisis about defining which firms offer fee-only, fiduciary advice is growing in tandem.
The vexing fragmentation stems from the fact that the giant wealth managers most responsible for the record numbers of clients and assets in RIAs are, in nearly all cases, not providing the industry’s most stringent standard of fee-only care, based on their SEC filings. While some argue that the technical distinctions don’t reflect marketplace realities meriting more flexibility, many fee-only planners view the contrasts as all the more important in light of that momentum.
“Unfortunately, a lot of people who call themselves financial planners are not really doing that work,” said Carolyn McClanahan of Jacksonville, Florida-based Life Planning Partners.
She and Emlen Miles-Mattingly of Madera, California-based Gen Next Wealth acknowledge that some advisors with broker-dealer affiliations and accepting commissions meet the planner criteria. Still, like so many from across wealth management, they say there’s widespread confusion among clients about compensation, conflicts of interest and fiduciary standards.
“The industry collectively needs to come together to figure out what we can do,” said Miles-Mattingly. “While we're fighting amongst ourselves, the consumers are suffering.”
Out of this blurry and seemingly esoteric picture capturing every wealth manager and their clients numbering in the tens of millions, Financial Planning sought input from some of the industry’s largest firms and toughest critics in compiling the annual RIA Leaders ranking. One issue: Should household RIA names such as Creative Planning, Financial Engines Advisors and TD Ameritrade Investment Management be included despite being under common ownership with broker-dealers, insurance firms or other entities that collect commissions? Any list of the biggest RIAs must draw the industry’s most important dividing line somewhere, though. And others maintain that the criteria should include many more RIAs that are hybrid RIAs or dually registered firms.
All of the controversial questions relate to an SEC filing that is well known in the industry and subject to a lot of regulatory scrutiny while getting as much attention from clients as, say, the terms and conditions for a streaming subscription or a new credit card. It’s called Form ADV.
“It defines the advisor’s core business,” said Victoria Bello, a product manager at compliance consultant RIA in a Box, who used FP’s criteria for the rankings to narrow down the more than 14,000 SEC-registered firms to 2,820 that fit this publication’s definition of a fee-only RIA providing financial planning to retail clients. Form ADV, she said, is “at the center of everything.”
Registered Investment Advisers — unlike the less formal term “advisors,” spelled with an “e” in reference to The Investment Advisers Act of 1940 — must file a Form ADV every year; the SEC posts them on the SEC’s Investment Adviser Public Disclosure
The growth chronicled by Form ADV data is unmistakable. Last year, the number of assets under management at retail-facing RIAs rose 18% to $15.1 trillion across 47.4 million individual and high net worth clients,
Here’s the rub: Just 4.6 million clients are receiving financial planning services, out of the total 60.8 million of all types with RIAs. The vast majority — 49.7 million — are asset management clients. From its beginnings in the ‘80s and ‘90s, the leaders of the fee-only RIA movement have always pointed out the difference between comprehensive advice and services and merely managing investments. Large wealth managers often exploit that message for their sappy T.V. ads. With many types of RIAs falling under the same label, there’s no way for advisors, clients or anyone to compile a list of fee-only practices without making difficult and debatable choices.
RIA LEADERS 2021: Also in this year's annual feature, find
The formula’s critics
The challenge stems from wealth management’s inability to define clearly who is a fiduciary fee-only RIA and who is not, and who gets to market themselves as such. A related and unanswered question: do clients understand, or care, whether the advisor with whom they work is a fee-only RIA?
As an example of the problem the industry faces, consider the criteria we used to assemble our RIA Leaders list. This year, FP reduced the required share of assets under management attributable to individuals and high net worth clients to 33% from the previous year’s mark of 50%, to make the pool of firms we considered larger and more reflective of market trends. FP also removed any restrictions on whether the firms’ related persons are BDs, insurance firms or other entities. The five-part RIA Leaders formula still doesn’t allow for any firms with registered representatives of BDs or those that collect commissions directly.
The resulting group includes the aforementioned big names that are under common ownership with BDs, insurance firms, asset managers and other entities. On the other hand, the list doesn’t span any of the dually registered wealth managers that comprise the giants of the industry, the hybrid RIAs that often have as little as 5% or less of their business on the brokerage side and RIA consolidators that have a few registered reps among their base of advisors. In other words, firms like LPL Financial, Morgan Stanley, Edward Jones, Raymond James, Carson Group, Private Advisor Group, Captrust, Hightower and Mariner Wealth Advisors are left out.
Industry lists in general become an area of frustration for advisors and other wealth management professionals when they don’t make their criteria clear or, worse, when they become popularity contests or disclose in tiny print that inclusion is pay-for-play, said Manish Khatta of Miami-based Potomac Fund Management. In a list of fee-only firms, there shouldn’t be any firms with registered reps or affiliated entities that are BDs or under common ownership with one, according to Khatta.
“I don't consider that any different from including broker-dealers; I don't see the distinction there,” Khatta said. “If we're saying, ‘fee-only,’ then they're not fee-only.”
Some firms that straddle this line between fee-only planning and offering other, commissioned services say they really are RIAs and deserve to be listed as such. For instance, giant RIA Creative Planning owns two insurance firms, Creative Planning Risk Management and Creative Planning Property & Casualty. The firm should make any list of firms that are “fee-only for investments,” CEO Peter Mallouk said in an email.
“Most industry lists have become a total joke, and I say this as an advisor who has been ranked many times, and Creative Planning has been ranked No. 1 six times in various ways by CNBC, Barron’s and Forbes. So many publications have created lists that they seek to differentiate themselves by creating criteria that manufacture various outcomes,” Mallouk said.
“My personal opinion is clients don’t ever want to pay a commission for an investment product and often don’t realize when they are paying one,” he continued. “But when it comes to, say home insurance, no one is confused: Clients know exactly how the advisor is compensated. This is why Creative Planning offers these solutions, but isn’t dually registered.”
Mallouk and Michael Kitces, the co-founder of the XY Planning Network and AdvicePay, agree that the central question is what the list is trying to accomplish. In an email interview, Kitces made the same point as Khatta that firms with related entities that take commissions shouldn’t be on any fee-only lists.
A rigorous list, Kitces suggested, would boost the required share of AUM attributable to individuals and high net worth clients to 70% or more and simply verify that the RIAs say they provide financial planning services as part of their advisory activities on Form ADV.
“I have to admit, I do think this is a space where there’s some ‘room for improvement’ on how these lists are traditionally constructed,” Kitces said. “Although, in the end, it really depends on what you want to highlight in the first place.”
Case studies
The decision may not be so simple, however, when applying a uniform criteria across all of the varying entities registered with the SEC as RIAs. One of the firms included under the new criteria, Eaton Vance WaterOak Advisors, traces its history to the beginnings of retail investment counseling in the 1920s and has been asset manager Eaton Vance’s “dedicated private wealth management arm for decades,” said Larry Gingrow, the co-president of the RIA.
The
The RIA has 24 wealth advisors serving primarily high net worth and ultrahigh net worth clients with an average account size of more than $8 million. It operates independently of the rest of Eaton Vance and Morgan Stanley while using the firms’ resources to “deliver a really personalized experience based on the client's priorities,” Gingrow said, noting the RIA has been operating under the radar.
“We've been very quietly growing at a rapid clip,” he said. “We are a comprehensive wealth management firm.”
Another firm involved with a giant acquisition falls on the other end of the spectrum, in terms of whether its executives believe it should be on the list. Charles Schwab acquired TD Ameritrade Investment Management as part of the purchase of its rival
“TD Ameritrade Investment Management has never appeared on such a list and has a long history of offering TD Ameritrade’s retail clients a suite of managed investment products,” spokeswoman Meredith Richard said in an emailed statement. “Referring clients to independent RIAs remains TD Ameritrade’s solution for serving high net worth and ultrahigh net worth investors with complex financial needs.”
Space for registered reps?
Others see much more space to expand the group covered by the RIA Leaders. Officials with the Financial Services Institute, an advocacy group for independent brokerages and advisors, believe the trade organization’s members should be eligible.
“There’s a growing shift in the industry to dual registration,” General Counsel David Bellaire said in a statement. “For many advisors, dual registration provides them with more options, equipping them with a broader array of services and products to choose from to best meet each client’s unique needs. To take into account the current trends and shifts in the investment advisory industry, a broad, comprehensive listing of RIAs should include all retail-focused RIA firms — both fee-only and dual registrants.”
The shifts are taking place inside of the firms themselves, as well. Take Los Angeles-based Signature Estate & Investment Advisors, a hybrid RIA that uses Advisor Group’s Royal Alliance Associates as its BD, as an example. When CEO Brian Holmes and three other partners launched the RIA in 1997, the majority of the enterprise’s business was in brokerage services.
These days, it’s about 2%, which is mainly attributable to legacy products such as insurance or 529 plans. The firm has $15.6 billion in client assets, and RIAs like it should be included as long as there’s full disclosure and it’s not “the tail wagging the dog” from the brokerage side, he said.
“There should be some differentiation to the firms where it's a very small part of their revenue or operations,” Holmes said. “We'd rather have it be 2% of our pie and be able to offer those services to the clients that want it. It's certainly not at the forefront of what we do.”
Noting the fact that it’s been “talked about forever,” he echoes many fee-only planners in calling on FINRA and the SEC to “come up with fiduciary rules and standards that are the same across the board for everybody.”
Clients and industry professionals have the Form ADV at their disposal to tell whether any RIAs have registered reps, and the SEC’s Investor.gov website enables users to see whether advisors are advisers, brokers or both. For advocates like Knut Rostad, president of the Institute for the Fiduciary Standard, the disclosure language itself makes the task of picking out fee-only RIAs from all the others much more difficult.
He points to the new Customer Relationship Summary, Form CRS, that the SEC
“Required CRS language informs investors that the standard broker-dealers and investment advisers are required to meet is the same,” Rostad said. “This language is grossly misleading. To mitigate this bad language, RIA leaders may choose to report they meet a fiduciary standard and describe what this means on CRS. Real fiduciary leaders will do so.”
Representatives for the SEC didn’t respond to requests for comment.
The Wild West
The array of issues involved with industry lists looms large among many wealth management professionals. Rachel Robasciotti, the CEO of socially responsible investment manager Adasina Social Capital, feels a “constant back-and-forth and tug of war” between the need to serve a wider base of clients historically excluded from the industry and the duty to provide the highest standard of service, she said.
“I believe so fully in the fiduciary standard in the same way that I believe in values-aligned investing,” Robasciotti said. “It just endlessly bothers me that both of those have so far required a certain amount of money to participate.”
Both Robasciotti and Miles-Mattingly of Gen Next Wealth began their careers with FINRA registrations before they became fee-only planners. Miles-Mattingly said he isn’t suggesting that there’s anything wrong with having a brokerage affiliation or that hybrid RIAs can’t do right by their clients, just that they shouldn’t portray themselves as the same as fee-only planners.
“It's just the Wild West out here; there's a lot of regulation, but then there's no regulation,” Miles-Mattingly said, adding that practices ought to decide if they want to be fee-only and stick to it. “There's no way to dress it up and act like you are.”
A further distinction favored by a growing number of planners revolves around the question of whether they use a flat fee rather than the traditional charge of 1% of assets under management. McClanahan of Life Planning Partners began using flat fees exclusively in 2007. While the ranks of advisors collecting specific fees for planning or other services has grown in recent years, the vast majority of RIAs still use AUM fees.
“To be able to just skim a percentage of assets as your pay every year, it's not a good measure of the value you're giving,” McClanahan said. “It just gives the message that the investments are the important piece, when, to me, it's all important.”
Regardless of how many different ways it’s possible to create groups of RIAs based on one criteria or another, the discussion of who is a real planner “gets a little too judgy,” according to Khatta of Potomac Fund. Ideally, rankings would use metrics that aren’t available publicly, like a firm’s net revenue divided by its AUM or measures of how RIAs treat their staff, Khatta said. And removing the firms that charge AUM fees would make the list too small, he said.
“Whatever you do to make this list is subjective,” he said. “You have to rank by something.”
