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The Rise of Online / Robo Registered Investment Adviser (RIA) Firms

Posted by RIA in a Box

Dec 3, 2015 10:42:50 AM

It's hard to go a day without reading about the emergence of online registered investment adviser (RIA) firms. These firms have taken on many names including:

  • Online Advisors
  • E-Advisors
  • Robo Advisors
  • Internet Advisors

However, there hasn't been much analysis done looking at the present number of these types of firms and the number of new such firms starting up for the first time as online advisory firms.

Download our 2015 RIA Technology Landscape Infographic

How many Online or Robo Investment Adviser Firms are there Today?

Fortunately, public data provided by the Securities and Exchange Commission (SEC) provides some great insights. Since 2003, the SEC has provided an exemption for "Internet Investment Advisers" to register as an RIA firm at the federal level with the SEC regardless of the firm's level of regulatory assets under management (AUM) as long as the firm meets the definition established under Rule 203A-2(f). The existence of this exemption allows us to take a look at the number of investment advisory firms currently registered with the SEC that are utilizing this exemption.

As of December 1, 2005, there are 12,026 total firms registered with the SEC. Of those 12,026, 107 firms are currently using the "Internet Investment Adviser" exemption to qualify for federal registration. Thus, today around 0.89% of federally-registered investment advisory firms are clearly defined as advisory firms operating either exclusively or primarily as an online or e-advisor. However, it's important to also include the large number of state-registered RIA firms as part of our analysis. According to Meridian-IQ, including state-registered RIA firms which far outnumber the number of SEC-registered firms, the total number of investment advisory climbs to 33,671 meaning that roughly 0.32% of all investment advisers are operating as an internet-only firm (107 of 33,671).

How many new Online or Robo Investment Adviser Firms are being Started each year?

Although the number of online RIAs today represents a very small percentage of the industry, the number of new robo advisors being created each year is accelerating as illustrated in the chart below:

Number Of Online Robo Advisors Started Per Year

To provide some additional perspective, in the 12 month period concluding on May 31, 2015, Meridian-IQ estimates that there were 2,241 new RIA firms started. Thus, as of late, roughly 2.59% of new investment advisory firms being started are online or e-advisory firms (58 of 2,241 firms). While this is still a small percentage of new firms being launched, it does represent a more than 7x increase relative to the present 0.32% of total RIA firms that internet advisers currently represent.

Does this Analysis include all Online or Robo Investment Adviser Firms?

It is also important to note that looking just at advisory firms that rely on this exemption to register with the SEC does slightly under estimate the total number of online RIA firms. As an example, both Wealthfront and Betterment, two of today's most prominent robo advisors, no longer rely on this exemption to register with the SEC as their AUM levels have climbed well above $100 million making the exemption no longer necessary to maintain the firm's federal registration. The same can be said for a handful of other online advisory firms as well. Thus, the total number of firms operating exclusively or primary as an internet advisory firm is probably closer to ~120 firms, or 1.00% of all SEC-registered RIA firms and 0.36% of all investment advisers (120 of 33,671). 

In addition, this total does not include the emergence of traditional RIA firms that are now adding online advisory capabilities to their firm as a secondary or separate business line, as it is likely that the vast majority of these firms are already registered today as a traditional investment advisory firm at the state or federal level. We continue to see an increasing number of traditional advisory firms exploring this option. 

 Download the Top RIA Compliance Deficiencies 2015 Infographic 

As RIA compliance consultants, we are happy to further discuss how to start and register as an online RIA firm or how to best add online or robo advisor capabilities to your existing RIA firm in a compliant manner. In addition, our latest technology infographic also provides a list of automated portfolio management providers serving investment advisers.

Lexington Compliance and RIA in a Box LLC are not law firms, investment advisory firms, or CPA firms. Lexington Compliance and RIA in a Box LLC do not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

Topics: RIA Compliance, RIA Operations, RIA Technology

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