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News August 17, 2015 Issue

State of the Industry: More Investment Advisers, More AUM, More Jobs

There seems to be no stopping the growth of the investment advisory community, if figures from the past few years are any guide. The industry is thriving, despite changes in registration requirements and more.

The mostly good news is contained in the 2015 annual Evolution Revolution report, co-published by the Investment Adviser Association and National Regulatory Services. This year’s report, based on an analysis of Form ADV, Part 1 data filed by all SEC-registered advisers as of April 8, 2015, reveals encouraging developments since the 2014 report, including the largest increase in four years in the number of new SEC-registered firms, an almost 2 million increase in the number of clients served by advisory firms, and an 8.1 percent increase in aggregate assets managed by registered firms.

"Our new report demonstrates that the investment adviser profession is strong and growing," says IAA president and CEO Karen Barr. "Just as important, it shows that our industry, with its thousands of small businesses, is a vital asset to investors, to our economy and to the capital markets."

The report also noted that the investment advisory industry is creating jobs, with more than 31,000 non-clerical positions added since the 2014 report. That’s a 4.3 percent increase in an industry that employs more than 750,000 individuals, according to the 2015 report.

The typical investment adviser in 2015, the report states, had the following profile:

  • U.S.-based limited liability company that employs eight people (slightly down from last year, when a median of nine employees was found),
  • Exercises discretionary authority over most accounts,
  • $332 million in regulatory assets under management (a slight increase from 2014’s $331.2 million in RAUM),
  • 26-100 clients with 100 accounts (the same as in 2014),
  • Clients that include individuals (60.9 percent, up slightly from 2014’s 59.8 percent) and pension/profit-sharing plans (47.1 percent, down slightly from 2014’s 48.2 percent), and
  • Does not have actual physical custody of client assets or securities.

"The report can be summed up in one word: growth," said Ropes & Gray counsel and former IAA CEO David Tittsworth. "No matter how you slice it, the data filed with the SEC demonstrate growth in all major categories. Even when considering the peculiarities of Form ADV, it’s hard to argue with the proposition that the advisory profession is robust and dynamic."

Tittsworth noted that it is likely that there will be additional data in future reports. "The comment period closed this week on the SEC’s proposed rulemaking that will significantly expand Form ADV, including new information about separately managed accounts," he said.

On a related matter, "the growth begs the question of whether and how the SEC will address questions relating to the frequency of investment adviser examinations," Tittsworth said. "It seems unlikely that the SEC will receive a significant funding boost from Congress, and Congress does not appear to be coalescing around other options, such as user fees or an SRO. SEC chair Mary Jo White has indicated she is willing to look at third-party reviews as a potential option, but there are many questions about how to implement such reviews."

In trouble

The report, in addition to providing statistics about the state of the industry, also provides figures on advisers and disciplinary action. While the report noted that "it is difficult to draw broad conclusions from the disciplinary disclosure information provided in Form ADV, Part 1," and offered examples as to why such conclusions are difficult to draw, it offered these findings:

  • They didn’t get in trouble. More than 86 percent of SEC-registered investment advisers reported no disciplinary history at all. That’s more than 9,900 advisers.
  • Newly registered advisers got in less trouble than others. "While newly registered advisers made up 10.1 percent of the total number of investment advisers, the number of newly registered advisers reporting disciplinary history makes up only 6.1 percent of the 1,537 advisers now reporting such history," the report said. Since the 2014 report, 1,154 advisers became newly registered, and of those, 93, or 8.1 percent, reported a disciplinary event. Private fund advisers accounted for 27 of the 93 new advisers that reported such an event.
  • Felonies are rare. "Less than 1 percent of advisers reported that it or an affiliate had been charged with a felony," the report said. Of the 90 firms that did report being so charged, 45 reported having been convicted or pled guilty or nolo contendere.
  • Problems at home. Of the 1,537 advisers reporting a disciplinary event, 792 said that at least one of the events involved the firm or its supervised persons, as opposed to affiliates.

Findings breakdown

Here’s the nitty-gritty behind the main findings from the 2015 Evolution Revolution report:

  • An increasing number of advisers. "The industry saw an increase in the number of SEC-registered advisers in every tier of regulatory assets under management this year, from the smallest to the largest," the report states. In 2015, there were 11,473 registered advisers, up 578, or 5.3 percent, since the 2014 report, "the largest increase in four years." Further, since the last of the Dodd-Frank Act rules on adviser registration went into effect in January 2012 – rules that brought the advisers of private funds under the SEC registration umbrella, while relieving the agency of regulatory authority over advisers with less than $100 million in RAUM – the number of SEC-registered advisers increased by 9.2 percent, from 10,511. More than half of that increase occurred in 2015, the report notes. "Since our 2014 report, 1,154 new advisers registered with the SEC, while 576 withdrew their registrations."
  • More than $66 trillion in RAUM. That’s up from $61.7 trillion in 2014, an increase of 8.1 percent, according to the report. The percentage of increased RAUM is significantly larger, 34.8 percent, since 2012. "The increase in RAUM managed by advisers may be attributable to both rising markets and organic growth in the industry, evidenced by the increase in the number of investment advisers and clients," the 2015 report says.
  • More clients. It’s now up to almost 30 million, the report says. "In 2015, advisers reported serving approximately 29.7 million clients – up nearly 2 million, or 6.8 percent, from 27.8 million in 2014.
  • Jobs, jobs, jobs. In what is certain to be welcome news to today’s employment applicants, SEC-registered advisers reported 31,157 additional non-clerical jobs since the 2014 report, bringing the total of non-clerical employees working for advisers to 750,795, a 4.3 percent increase. Also interesting is that even though most smaller advisers migrated to state regulation in 2012, the report data makes clear that most SEC-registered advisers continue to be small businesses. More specifically, 57.3 percent of advisers employed 10 or fewer non-clerical employees, and 87.9 percent reported 50 or fewer non-clerical employees. "One interesting data point is that the number of advisers reporting that they have no non-clerical employees increased from 81 to 103," the report said.
  • Specialization within diversity. Many advisers serve a broad range of clients, according to the report, but 64 percent derive more than 75 percent of their managed assets from just one type of client.
  • Individual clients are not going away. "Despite the shift of smaller advisers to state registration, individuals continue to comprise the largest type of clients of SEC-registered advisers," with more than half of all registered advisers reporting that they have both high net worth and non-high net worth individuals as clients. In 2015, 59.5 percent of advisers said they have at least some high net worth individual clients and 51.6 percent said that have at least some non-high net worth individual clients. "Fully 29 percent of firms derive more than 75 percent of their RAUM from individuals," the report said.
  • The big firms get the spoils. The largest firms manage more than half the assets, according to the report. "As reported in previous years, a relatively small number of very large advisers manage a high percentage of total RAUM," the report said. Specifically, 128 advisers managed assets of $100 billion or more. These 128 firms account for only 1.1 percent of all SEC-registered advisers, yet they manage 54.9 percent of all reported RAUM, a 2.3 percent increase from 2014. On the low end, 71.3 percent of advisers managed less than $1 billion in RAUM, which represented only 3.3 percent of all reported RAUM.
  • The number of private funds and their advisers increased. This is perhaps not surprising since advisers to private funds migrated to SEC registration. In 2015, 4,350 advisers (37.9 percent) reported advising 30,342 private funds, of which 26.1 percent were funds of funds. That compares to 2014 figures of 4,156 advisers advising 28,429 private funds, of which 26.8 percent were funds of funds. "The total gross asset value of all private funds is approximately $10.4 trillion – up 9.4 percent from 2014 – representing more than 15.5 percent of all reported RAUM," the report said. Hedge funds made up 37.9 percent of all reported private funds, while private equity funds comprised 34.3 percent.
  • No growth in custody. The percentage of advisers with custody of client assets remained the same in 2015 as in 2014. Although advisers are generally prohibited from having physical custody of client assets, advisers are deemed to have custody, as defined by the Advisers Act Custody Rule, if they have any authority to possess the assets (e.g., if an adviser has bill-paying authority or serves as trustee of a client’s account). The percentage of advisers so deemed held steady at 43.2 percent in both years, according to the report. "A handful of these advisers are also banks or broker-dealers, and in that non-adviser capacity may act as a qualified custodian," the report said. But it added that "this practice is becoming increasingly rare, however, as only 78 advisers – about 0.7 percent of all advisers – reported acting as qualified custodians."