This is the third of a series of blog posts in the coming weeks that provide select insights from our 2015 Registered Investment Adviser (RIA) Industry Overview Report that will be released later this summer. This proprietary RIA in a Box study used detailed survey responses from 1,198 advisory firms paired with publicly accessible data provided on the Securities and Exchange (SEC) website.* The goal of this annual study is to understand different options that comprise each firm characteristic, and to determine whether specific characteristics affect the growth, size, or operational efficiency of an RIA firm.
Outsourced vs. In-House Portfolio Management
Another important decision RIA firms face is whether to manage client investment portfolios in-house or to outsource management to a third party. An important consideration when making this decision is how it may impact a client's perception of services offered by the advisory firm. As such, firms want to select reputable and trustworthy 3rd party asset managers with which to entrust their clients’ assets.
Selected Observations From Our Survey
- 82% of RIAs manage client investment portfolios in-house
- 57% of firms that outsource client investment portfolio management grew assets under management (AUM) in 2015
- 49% of firms that manage client investment portfolios in-house grew AUM in 2015
The profiles of the types of investment advisory firms in regards to average AUM and number of clients are similar for firms that manage portfolios internally versus outsourcing. However, firms that outsource portfolio management do appear to charge a lower advisory fee compared to firms that manage portfolios internally. This difference may be explained by a few factors including that firms that manage investments with a passive strategy are more likely to outsource and perhaps more notably, the advisory fee stated above may not include additional underlying fees charged by third party asset managers or investment products.
Many RIA firms that outsource portfolio management today utilize the services of a traditional turn key asset management platform (TAMP). However, there are a growing number of firms that are now utilizing the services of emerging online portfolio management platforms. Some of these new platforms are “robo advisors” that initially sought to build direct to consumer investment solutions but are now looking to repurpose the platform for advisor use as well. While the current RIA industry adoption of these new online RIA platforms is not overly significant, we have observed some early adoption from newer, financial-planning focused firms. The emergence of these new portfolio management platforms will be interesting to continue to probe in future studies.
In 2014, we observed that 81% of investment advisory firms manage client investment portfolios internally. That number held nearly true again in 2015. We also noted that firms that use a passive investment management style are more likely to outsource the portfolio management function compared to firms that use an active investment management style. That also remained true, however we did observe a slight increase in the percentage of firms managing portfolios internally across all portfolio management styles.
Be sure to check out our previous posts from our most recent investment adviser industry study:
- RIA Industry Study: Active and Passive Portfolio Management Styles
- RIA Industry Study: Comparing 2014 and 2015 AUM Growth Rates
Note: As discussed above, the average investment advisory fee charged by the RIA firm may not include additional underlying investment manager or product fees.
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.