the ria channel: a roadmap for driving growth

The RIA Channel

A Roadmap for Driving Growth

© 2014 Broadridge Financial Solutions

THE RIA CHANNEL – A ROADMAP FOR DRIVING GROWTH

Executive SummaryETF and mutual fund providers should review their distribution strategies in light of the rapid growth in the sales of these products by registered investment advisors (RIAs). According to insights from Access Data, a Broadridge company, RIAs now sell more, in aggregate, than the top four wirehouses. Unfortunately for fund sales and marketing executives, RIAs tend to be small and more diverse, unlike those institutions, and therefore harder to reach using traditional distribution strategies. Gaining access and winning business in this space requires advanced segmentation and specific targeting of the individual advisor.

Drivers of growth

• The RIA channel grew slightly faster than the wirehouses in absolute terms in 2012 and 2013, with total assets increasing by $328 billion, versus a $322 billion increase in the wirehouse channel.

• Over the same period, the RIA channel has grown more evenly between long-term mutual funds, which represent 59% of new assets, and ETFs, which represent 41% of new assets. The wirehouse channel, on the other hand, saw most of its increased assets from long-term mutual funds, which represent 73% of new assets.

Segmenting the market

To develop a cost-effective distribution plan, ETF and mutual fund executives should first segment the RIA channel in the following manner:

• Identify attractive RIA segments (e.g., those with largest asset base) • Confirm that these segments offer the biggest opportunities (e.g., in terms of sales of

relevant product types). For example, RIAs with $100 million to $1 billion in assets under management have the biggest aggregate asset base of all the segments, and use ETFs and mutual funds actively

• Profile the segments to understand the composition of each segment’s client base, geographic spread and investment philosophy

• Leverage robust segmentation to develop the next step of their sales and marketing activities, as well as product positioning and future development

Building the action plan

Providers should then develop a distribution plan that answers the three following questions:

• Access: How will RIAs access your products and find information about them?• Analysis: How can you understand channel and segment preferences and behavior?• Alignment: How can you best align sales and marketing resources with the RIA channel?

These considerations will be increasingly important to funds in coming years as the RIA sales channel continues to outpace the wirehouse sales channel’s rate of growth.



Total sales of mutual funds and exchange-traded funds (ETFs) by fee-based independent advisers now exceed the total sales made by the four largest traditional distributors—the big wirehouse broker dealers. In this report, we explore a key contributor to this market dynamic: the registered investment adviser (RIA) sales channel.

While RIA sales of mutual funds and ETFs have increased rapidly in the past few years, manufacturers of investment products find the channel more difficult to work with than wirehouse firms. RIAs are numerous and diverse—ranging from single-person operations to companies with large teams—and as fee-driven businesses with discretion to select investments, they have many distinct characteristics.

Below we offer insight into:

• RIA channel growth and trends• Segmenting the RIA channel by size of assets managed• Products and services driving growth in the RIA channel

Report Highlights

Channel growth: RIA mutual fund and ETF assets reached $1.62 trillion by the end of 2013, surpassing the total fund and ETF assets held with the top four wirehouse firms: pages 3 -4

Segmentation: Medium-size RIAs ($100 million – $I billion in assets) represent the best prospect for mutual funds and ETF providers: pages 4 - 5

Channel characteristics: Product trends within the RIA channel: page 9

New data: RIA geographic dispersal by region across the United States: page 11

RIA channel growth and product trends – the latest data

RIAs are now selling more mutual funds and more ETFs than the top four wirehouse firms combined (Figure 1). RIA assets of mutual funds and ETFs totaled $1.62 trillion at the end of 2013, surpassing the total gathered by Bank of America Merrill Lynch, Wells Fargo, Morgan Stanley and UBS.

The RIA Channel: A Roadmap for Driving Growth



RIA Channel Assets

• ETF Assets with RIA Channel Now Greater than Wirehouse

• LTMF Assets with RIAs Slightly Behind Wirehouse Firms

• Combined Assets for RIAs is Slightly Higher than Wirehouse

• RIA Assets Up $68B in Q1‘14

Wirehouse Channel Assets

• LTMF Assets Continues as Dominate Product with Wirehouse Firms

• Combined Assets for Wirehouse Has Now Dropped Behind RIA Channels

• Wirehouse Assets Up by $38B in Q1‘14

The numbers over the last two years show key differences between the two channels. During 2012 and 2013, the RIA channel grew slightly faster than the wirehouses in absolute terms, with total assets increasing by $328 billion, slightly ahead of wirehouse growth of $322 billion. (This pattern continued in the first quarter of 2014; assets for the RIA channel increased by $68 billion, versus a increase of $38 billion for the wirehouse channel.) While the growth rates of both channels are roughly similar—around 25% over the two-year period—the drivers of growth are markedly different. A key driver of growth in the RIA channel has been a strong rise in ETF sales. Over that two-year period, ETF assets rose 62% and fund assets rose 18%, compared to a rise in ETF and fund assets at the wirehouses of 40% and 22%, respectively.

RIAs are now the biggest channel for ETF asset sales among the three retail distribution outlets, with some $352 billion in assets. Portfolio models are an important driver of this growth. Windhaven, an investment manager specializing in model portfolios that exclusively uses ETFs to manage money, had a 59% increase in the ETF assets it managed in 2013, compared with overall ETF growth of 33% for the RIA market during 2013, and 28% across all distribution channels.1

Figure 1: RIA Versus Wirehouse Channels

1 Access Data internal analysis

Source: Access Data, a Broadridge Company Source: Access Data, a Broadridge Company

RIA Distribution Channel Assets

AUM End of AUM End of2011 20112013 20132012 2012

$217

$1081

$1298

$264

$1126

$1390$1274

$1626

RIA - ETFs RIA - LTMF RIA - Combined

$1,800

$1,600

$1,400

$1,200

$1,000

$800

$600

$400

$200

$0

Wirehouse Distribution Channel Assets

$220

$1054

$1274

$245

$1125

$1370

$307

$1289

$1596

Wirehouse - ETFs Wirehouse - ETFs Wirehouse - Combined

$1,800

$1,600

$1,400

$1,200

$1,000

$800

$600

$400

$200

$0

$352



Even though passive products such as ETFs and index mutual funds are more widely used by RIAs than by wirehouses, actively managed mutual funds made up 73% of RIAs’ total holdings of mutual funds and ETFs at the end of 2013.2 Figure 2 shows the variability of the predominance of actively managed funds across different asset types, e.g., representing 59% of US equity assets and 76% of international/global equity funds.

While ETFs are widely used by RIAs, the channel is a major consumer of mutual funds, with over $30 billion of net inflows to long-term mutual funds in 2013. RIAs show a tendency to use actively managed mutual funds where active management offers real benefits. Examples of funds in this category are international/global funds (76% actively managed), balanced/allocation funds (99% actively managed) and municipal bond funds (100% actively managed).

Segmenting the RIA channel by size of operation

The nature of RIAs makes it impossible to build a “one size fits all” sales approach to the channel. While the four main wirehouses offer central points of contact and provide a degree of product and process uniformity for their approximately 57,000 advisers, a number of RIAs just shy of that number are spread among 14,000 RIA firms. Furthermore, RIA firms vary significantly in scale and approach.

2 US Intermediary-Sold Fund Distribution Review 2013, Key Observations, Section II – Channel Snapshots, Strategic Insight, 2014.

A key driver of growth in the RIA channel has been a strong rise in ETF sales.

382

214141

38

338

70

64

10

2

0

10

0

199

581

24

57

2

Figure 2: RIA Total Assets ($B) by Fund Type -December 2013 Active MF vs. Index MF vs. ETF

Source: Simfund Pro, 7.0 and Access Data, a Broadridge Company

US Equity

Municipal B

ond

Taxable Bond

Altern

ative

Balanced / Allo

cation

Int’l

/ Global E

quity

$700

$600

$500

$400

$300

$200

$100

$0

ETFs

Index Mutual Funds

Active Mutual Funds



Our research suggests that segmenting the RIA industry by size, and building suitable segment profiles, is a useful first step for a fund to build an action plan. Figure 3 shows the percentage of the RIA universe that falls into each of four segments, defined in terms of the size of assets under advisement. Most RIA firms fall into the “medium” and “small” categories, but which segment might provide the best target for, say, a mutual fund or ETF issuer planning its sales strategy?

Wirehouse versus RIA – Key statistics

The big four: Bank of America Merrill Lynch, Morgan Stanley, Wells Fargo, UBS

57,000 financial advisors

$5 trillion assets

Represent 36% of US wealth management3

14,000 RIA firms

55,000 financial advisors

$2.5 trillion assets in custody with clearing firms

Represent 12% of investable assets4

Wirehouse RIA

3 Source: Aite Group Research Report, Tiburon Research and Analysis4 Source: Aite Group Research Report, Tiburon Research and Analysis

• RIAs >$5B Require Institutional Approach and Not Part of Study

• RIAs < $5 Billion = 93% of All RIAs Trading with Major Custodians

• Includes RIAs With Dual Registration

• Approximately 7,000 RIAs (50%) Manage Less than $100 Million. Source: Access Data, a Broadridge Company

Figure 3: All RIAs Are Not Created Equal

Macro RIA - $2.5 - $5B

Small RIA - Less than $100M

Large RIA - $1B - $2.5B

Medium RIA - $100M - $1B

2%

5%

36%

50%

% of RIA Firms



• Small Market Segment - High Usage of Funds and ETFs, Less Upside for Growth

• The Ideal Market Segment - RIA Firms Between $100M and $1B

• Funds and ETFs Are Over 50% of Assets Managed by Medium Size RIAs

Figure 4 compares the percentage of total RIA assets controlled by each market segment with the usage of funds and ETFs among RIAs within that segment.

This reveals that, for example, reaching out to small practices will mean contacting 50% of the RIA channel—around 7,000 RIAs—but yield contact with only 14% of the channel asset base. If the intention is to visit RIAs in person, this might turn into an expensive sales strategy. The small RIA market has a high usage of mutual funds and ETFs (62%), but a telesales approach using an inside sales team or hybrid wholesalers might be the most cost-effective option for this segment of the market.

RIAs that have assets under management of between $100 million and $1 billion are categorized as the medium sized RIA market segment. This market segment has a high usage of mutual funds (33%) and ETFs (19%), as well as the largest segment of overall assets under advisement. Medium-sized RIAs are not only more likely to use mutual funds and ETFs to manage client assets; these firms also represent the largest upside for growth in terms of overall asset opportunity (i.e., assets not currently invested in mutual funds or ETFs).

Whether or not fund and ETF firms have a large sales team dedicated to the RIA market, distribution executives should follow a similar logic that allows them to:

• Identify attractive RIA segments (e.g., those with the largest asset base)• Confirm that these segments offer the biggest opportunities (e.g., in terms of sales of

relevant product types)• Profile the segments to develop the next step of their sales and marketing activities, as

well as product positioning and future development.

Source: Access Data, a Broadridge Company

Figure 4: The Best Growth Opportunity for Funds and ETFs

Macro RIA - $2.5 - $5B18%

18%

Large RIA - $1B - $2.5B30%

16%

Medium RIA - $100M - $1B52%

36%

Small RIA - Less than $100M61%

14%

Funds/ETFs as % of Total AUM

% of Total Assets



Building action plans

Segmentation offers a great way to approach the RIA channel, but funds need to build three other elements into their action plan:

• Access – How will RIAs access your products and find information about them?• Analysis – How can you understand channel and segment preferences and behavior?• Alignment – How can you best align sales resources with the RIA channel?

Access

RIAs will not sell fund products that they cannot easily access or find information about, and the key to facilitating access is the relationship between RIAs and their custodians. Custodians offer RIAs a range of essential services, and this has boosted the growth of the channel over the last few years.

With the exception of the largest RIAs, which are not the focus of this report, RIAs generally work with large brokers such as Charles Schwab, National Financial Services (Fidelity), TD Ameritrade and others, that have custodial businesses geared toward smaller advisory firms and provide access to the products they use to manage their client’s investment portfolio.

Some RIAs hold assets with multiple custodians, and in some cases the type of business the RIA conducts may drive the selection of a custodian. For instance, an RIA that acts in a fiduciary capacity may be more inclined to work with a bank that can provide unique trust services. Others may be more inclined to use a brokerage firm that provides a wide selection of packaged products and managed portfolio services.

It has not always been easy for funds to understand which custodians have strong relationships with specific types of RIAs, not least because many RIAs use multiple custodians to different degrees. Figure 5 shows the amount of RIA assets under custody with each of the four leading RIA custodians and with the other key types of custodians (banks and independent broker dealers).

• Study Focused on RIAs with Assets Held at Major Custodians

• There Are ~14,000 RIAs, with $2.4 Trillion Held at Custodians

• Many RIAs Use Multiple Custodians

• Fund Firms Have National Account Managers That Cover Custodians Source: Access Data, a Broadridge Company

Figure 5: RIAs Can Be Found at The Top Custodians

Charles Schwab $900

Banks - US Bancorp, StateStreet, BNY, Other $250

TD Ameritrade $150

Pershing $300

Fidelity $600

Independent B/Ds - LPL, RJ,RBC, Commonwealth $150

RIA Assets Under Custody - $2.4 Trillion



Analysis – preferences and behavior

Of course, access alone doesn’t mean RIAs will use your products. Offering the right type of product at the right time is also important. To do this, fund and ETF firms need to understand the type of business conducted by RIAs, so that they can better target their approach, particularly:

• The type of accounts managed by the RIA, e.g., retirement, HNW, corporate• The kind of decisions an advisor makes with regard to client accounts, i.e., discretionary

versus non-discretionary• Product management approach, e.g., actively managed versus passive products• Product types, e.g., funds, ETFs, managed accounts, alternative investments

Figure 6 sets out a breakdown of business by account type for RIAs.

We’ve already noted the predilection of RIAs for ETFs, which they often see as a relatively low cost way to build particular risk and return characteristics into a portfolio. This is one example of a more general preference among RIAs for cost conscious “institutional type” products, e.g., no load mutual funds.

More advisors are being given discretion to select products and make asset allocation adjustments for their clients. This discretionary role means that RIAs can, and will, easily move in and out of products based on performance of the funds. One recent example was the relatively high redemptions by RIAs of bond mutual funds in June 2013 following market uncertainty over the start of the tapering of the Federal Reserve’s quantitative easing program.5 More generally, RIAs look for performance and can pull out of investments relatively quickly if the promised returns do not materialize.

RIA Assets by Account Type:

• Retirement Assets are Primarily IRA and IRA Rollover Accounts

• HNW Assets Include Assets Held in Trust

• Individual Accounts Include Managed Portfolios

This discretionary role means that RIAs can, and will, easily move in and out of products based on performance of the funds.


Figure 6: All RIA Assets by Account Type

RIA - Retirement Assets

RIA - Individual Assets

RIA - HNW and Personal Trust Assets

RIA - Charitable Assets

RIA Assets - Corporate

36.9%

16.2%

34.6%

7.7% 5.6%



Fund strategists must remember to appeal to the channel’s value-for-money preference, e.g., by offering hard evidence of performance and explaining how products relate to current market events and investment trends.

Strategists must also keep abreast of RIA channel trends. For example, a recent survey showed that nearly 80% of RIAs think they are positioned to build share in the U.S. retirement plan segment. Today, the majority of retirement assets managed by RIAs are in the form of IRAs or IRA rollovers (84% of retirement assets managed by RIAs). RIAs are beginning to focus more of their efforts on the management of defined contribution assets, which represent only 5% of RIA’s overall retirement business today (see Figure 7). A recent TD Ameritrade survey indicated that as the Department of Labor begins to tighten fiduciary rules, 48% of RIAs will be putting time and effort into pursuing retirement plans this year.6

Figure 7 breaks down RIA retirement assets by the type of retirement plan.

5 Looking Ahead: Lessons from Taxable Bond Funds’ June Redemption Activity Across Distribution Channels, Strategic Insight

6 TD Ameritrade Institutional Advisor Survey, 2014

RIA Retirement Account Type:

• DC Accounts include – 401(k), 403(b), 457 and Profit Sharing Plans

• IRAs include Individual and Rollover Accounts

• Pension Plans Include Defined Benefit

RIAs are beginning to focus more of their efforts on the management of defined contribution assets


Figure 7: RIA Managed Retirement Assets

IRA Assets

Pension

Defined Contribution

84%

10.8%

5.3%



Alignment

Investment product manufacturers also need to align their sales and marketing resources with the size of the opportunity. Determining the appropriate size for a territorial sales team and setting realistic product sales targets could accomplish this. In addition to segmenting the RIA market and spreading the best opportunities evenly among sales teams, it is also important to understand where these RIA firms are located and how the most important firms are allocated among different territories.

Figure 8 makes the task a little easier in relation to the RIA channel. The map listed below outlines the number of RIA firms and the total industry RIA assets under management for each region of the U.S.


Figure 8: U.S. Regions – RIA Distribution Channel

Total North AmericaAUM: $1.62 Trillion RIAs: 12,749

WESTAUM: $181BRIAs: 2,135

WEST COASTAUM: $332B

RIAs: 2,338

MIDWEST AUM: $320B RIAs: 2,382

Canada - AUM: $11B; RIAs: 68

NORTHEASTAUM: $433BRIAs: 2,456

MID-ATLANTICAUM: $175BRIAs: 1,443

SOUTHEASTAUM: $171BRIAs: 1,955



As well as helping with alignment, this kind of geographical segmentation can also reveal how the distribution of RIAs by market segment (overall assets managed) are allocated by region and territory. Once funds have identified and profiled a size segment that looks attractive, they can begin to look at the distribution of this segment across the key sales regions and highlight attractive product sales trends by location. Sales managers can also get a true measure of how sales are progressing by analyzing their sales teams’ success by territory and market segment, versus the mutual fund and ETF market overall. They can also get a better picture of growth by product type across the different regions, as highlighted in Figure 9.


Figure 9: RIA 2013 Asset Growth by Region

2013 AUM Change - LTMF

2013 AUM Change - ETFWest Coast

19.3%

24%

West20.2%

41.3%

Midwest Region18.3%

31.1%

Southeast Region16.5%

28.7%

Mid-Atlantic Region17.3%

33.7%

Northeast Region21.5%

27.6%

50 4540353025201510



Conclusion

The fast-growing RIA channel is made up of numerous firms that vary significantly in size and character, making it difficult for funds to efficiently approach. Understanding the unique characteristics of RIAs in terms of product usage, the client base they serve, and their general investment philosophy assist mutual fund and ETF providers to better position their products with RIAs.

In this report, we have shown how to meet the challenge through segmenting and profiling RIAs and we have identified medium-sized RIAs as one key target. We’ve also outlined how information can be used for more tactical decisions, e.g., concerning RIA geographic location and spread, product positioning, and targeting the best prospects.

These considerations will be increasingly important in coming years if, as it appears likely, the RIA sales channel continues to outpace the wirehouse channel’s rate of growth. Fund and ETF distribution strategists will have a harder time analyzing and reaching the RIA community than they do pitching to a handful of wirehouses today. But given the growth trends in fund and ETF assets, it will be critical to their success and growth, and well worth the effort.

Contact Us

To further discuss the information in this document, please call us toll-free at +1 888 799 1744 or visit access-data.broadridge.com.

About Broadridge

Broadridge Financial Solutions, Inc. (NYSE:BR) is the leading provider of investor communications and technology-driven solutions for broker-dealers, banks, mutual funds and corporate issuers globally. Broadridge’s investor communications, securities processing and business process outsourcing solutions help clients reduce their capital investments in operations infrastructure, allowing them to increase their focus on core business activities. With over 50 years of experience, Broadridge’s infrastructure underpins proxy voting services for over 90% of public companies and mutual funds in North America, and processes more than $5 trillion in fixed income and equity trades per day. Broadridge employs approximately 6,400 full-time associates in 13 countries. For more information about Broadridge, please visit broadridge.com.

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