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The influence of regulation on the state of the US investment advisor industry

Steven Lofchie, Cadwalader Wickersham & Taft, Partner, New York, 24 November 2020


Doubtless there are many causes for the decline in the number of broker-dealers registered with the US Securities and Exchange Commission, but regulation has to take some share of the responsibility for it.

The US Investment Advisor Association and National Regulatory Services recently published a report on the state of the SEC-registered investment advisors' profession "based on data from before the Coronavirus." The report included information about the number of investment advisors, regulatory assets under management, "industry concentration" and pay for investment advisors.

According to the report, the latest in an annual series, the typical SEC-registered investment advisor has eight employees, 141 accounts and $341 million in regulatory assets under management (RAuM). With regard to industry concentration, a fairly small group of advisors manages the majority of regulatory assets under management. The number of advisors managing more than $100 billion represents only 1.3% of all SEC-registered advisors, yet this group manages 63.8% of all RAuM. The associations noted that the number of SEC-registered investment advisors is continuing to rise, as does the aggregate RAuM managed by investment advisors, though there has been a steady decline in the number of broker-dealers.

In addition, the associations said that the growth of private equity funds has outpaced that of hedge funds. On the topic of digital advice platforms, the associations stated that of the top five advisors, two served as digital advice platforms, representing clients that tend to have lower (and sometimes zero) account balances.

One of the most interesting statistics in the IAA report is the steady rise in the number of investment advisors (up from about 11,000 in 2014 to about 14,000 in 2020) compared with the steady decline in the number of broker-dealers (down from about 4,000 to about 3,500 in the same time period).

Regulation must shoulder some of the blame

Doubtless there are many causes for the decline in the number of broker-dealers, but regulation has to take some share of the responsibility for the decline. Practitioners have been worried that the adoption of Regulation Best Interest would do significant damage to the business of providing "full-service brokerage." In this regard, it would be interesting to know how many of the remaining broker-dealers (i) actually make a business out of providing full service brokerage and (ii) are dually registered firms that provide advice to natural persons wearing their "advisor" hats and charging advisory fees rather than through their broker-dealers.

* Steven Lofchie can be reached at Steven.Lofchie@cwt.com

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