Recently, the Financial Industry Regulatory Authority ("FINRA") published its first annual industry snapshot which contains insightful data ranging from the total number of FINRA-registered representatives to the most common types of marketing materials submitted by FINRA-registered broker-dealer ("BD") firms. In addition, the detailed report discloses the total number of broker dealer and registered investment adviser ("RIA") firms from 2008 to the end of 2017. In this blog post, we analyze the total number of firms highlighted in this report combined with other publicly available data on the number of RIA firms registered historically with the Securities and Exchange Commission ("SEC") to understand the relative growth in the number of broker-dealer firms compared to state and SEC-registered RIA firms over the past ten years.
How has the total number of broker-dealer and RIA firms changed from 2008 to 2017?
This first table outlines the historical number of firms, regardless of size, registered with FINRA as a broker-dealer or registered at the state or federal level as an RIA firm:
Source: 2018 FINRA Industry Snapshot as of August 9, 2018.
As the table above depicts, the total combined number of registered broker-dealer and RIA firms has increased by 14.7% from 29,042 firms in 2008 to 33,325 firms in 2017. However, this growth in the total number of firms has been driven exclusively by the rising number of investment advisory firms which has offset the steadily declining number of broker-dealer firms.
The total number of broker-dealer firms registered with FINRA has declined by 23.9% from 4,895 firms in 2008 to 3,726 firms in 2017. In particular, the number of firms dually-registered as both a broker-dealer and RIA firm has declined by 35.9% from 926 firms in 2008 to 594 firms in 2017. Broker-dealer-only firms have declined at a slower pace of 21.1% moving from 3,969 firms in 2008 to 3,132 firms in 2017.
On the other hand, the number of investment adviser-only firms has increased by 22.6% from 24,147 firms in 2008 to 29,599 firms in 2017. It's interesting to note that the number of investment adviser-only firms increased by 6.3% in a single year from 25,523 firms in 2011 to 27,134 firms in 2012. It's likely much of this one-year increase was driven by the implementation of the Dodd-Frank Act which required a number of private fund advisers to register for the first time as investment advisers. In October of 2015, former SEC chairwoman Mary Jo White estimated that 1,500 new private fund advisers registered for first time with the SEC as result of the implementation of the Dodd-Frank Act.
How has the total number of state vs. SEC-registered RIA firms changed from 2008 to 2017?
While there are a number of exemptions, in general, RIA firms with $100 million or more in regulatory assets under management ("AUM") register at the federal level with the SEC. On the contrary, firms with less than $100 million in regulatory assets under management will generally registered with the relevant state(s).
This second table outlines the historical number of RIA firms registered at the state level and at the federal level with the SEC:
Sources: 2018 FINRA Industry Snapshot as of August 9, 2018 and publicly available data provided by the SEC. Note: This data does not include exempt reporting adviser ("ERA") firms. The total number of state-registered RIA firms is estimated is based on the total number of RIA firms listed in the 2018 FINRA Industry Snapshot and total number of federally-registered RIA firms listed in publicly available data provided by the SEC.
As the table above shows, the total number of SEC-registered investment adviser firms has increased by 12.3% from 11,274 firms in 2008 to 12,659 firms in 2017. In general, there has been a steady annual increase in the number of SEC-registered firms except for between 2010 to 2012 when the number of federally-registered advisory firms declined by 8.8% from 11,794 firms in 2010 to 10,754 firms in 2012. More recently in 2017, the number of firms grew by from 4.0% from 12,176 firms in 2016 to 12,659 firms in 2017. As of August 31, 2018, there are presently 13,181 firms registered with the SEC which would already represent a 4.1% annual increase from 2017 to 2018. Thus, it appears the number of SEC-registered RIA firms may be increasing at an accelerating growth rate.
It's likely much of this temporary decline in the number of SEC-registered firms between 2010 to 2012 can be attributed to the implementation of the Dodd-Frank Act which increased the regulatory AUM threshold from $25 million to $100 million to generally qualify for federal registration. The North American Securities Administrators Association ("NASAA") previously published a report highlighting that over 2,100 RIA firms transitioned from SEC to state registration as part of the implementation of the Dodd-Frank Act. However, this decline in federally-registered RIA firms was largely offset by the additional new Dodd-Frank Act requirement for private fund advisers to register for the first time at the federal level with the SEC as investment advisers.
As shown above, the total number of state-registered RIA firms increased by 27.1% from 13,799 firms in 2008 to 17,534 firms in 2017. In general, there has been a steady small annual increase in the number of state-registered firms except for between 2011 to 2012 when the number of state-registered advisory firms increased by 16.9% from 14,643 firms in 2011 to 17,124 firms in 2012. As discussed above, much of this one-time increase in the number of state-registered RIA firms can be attributed the implementation of the Dodd-Frank Act which required over 2,100 investment advisory firms to transition from SEC to state registration.
If the approximately 2,100 existing RIA firms that transitioned from federal to state registration between 2011 and 2012 are removed from the total number of state-registered RIA firms, the total number of state-registered RIA firms would have increased by around 11.8% from 2008 to 2017. Post Dodd-Frank from 2013 to 2017, the total number of state-registered firms has generally increased between 0.1% and 1.0% on an annual basis. Furthermore, the total number of state-registered investment advisory firms has not declined in a single year over the past decade.
Be sure to check back soon as we continue to provide additional analysis from the 2018 FINRA Industry Snapshot and other publicly available industry data.
RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.