Here are some of the highlights from a report titled “A Profile of the Investment Adviser Profession in 2015”. The report was jointly published by The Investment Adviser Association and National Regulatory Services
There are 11,473 firms in the Investment Advisory business.
They employ 750,000 people.
They serve 30 million clients.
They have $66 trillion of regulatory assets under management RAUM.
The largest 128 firms (1.1%) collectively managed 55% of total RAUM.
6,576 advisers (57%) have 10 or fewer professional employees.
10,127 advisers (88%) have 50 or fewer professional employees.
2,615 advisers (23%) get most of their business from pooled vehicles other than mutual funds and ETFs.
3,327 advisers (29%) specialize in serving individuals.
Only 3% of advisers primarily serve pension clients.
The 2015 “Typical” SEC-Registered Investment Adviser
• Is a U.S. based limited liability company
• Exercises discretionary authority over most accounts
• Has $332 million in regulatory assets under management (median)
• Each client has $4.15 million invested (median)
• Has 8 professional employees (median)
• Services 80 clients (median)
• Manages 100 accounts (median)
• Clients include individuals (61%) and pension/profit sharing plans (47%)
Regulatory Assets Under Management
RAUM reported in 2015 was $66.7 trillion. However, the industry’s aggregate RAUM overstates actual RAUM because more than one investment adviser can “claim” the same assets. For example, an adviser that allocates assets among mutual funds on a discretionary basis will report the same assets that are reported by these funds.
Similarly, a sub-adviser to a fund may count the same RAUM as the primary manager of the fund. In addition, the RAUM figure includes assets in addition to those actually currently invested for clients. For example, RAUM includes uncalled capital commitments, proprietary assets, cash and cash equivalents.
We do not know the extent to which these figures are overstated. Nevertheless, RAUM is the figure required to be reported on Form ADV, and is reported each year to the SEC.
While advisers are prohibited from having physical custody of client assets, 43% of advisers report that they or a related person were deemed to have custody in 2015. A handful of these advisers are also banks or broker-dealers, and in that non-adviser capacity may act as a qualified custodian.
The number of private funds increased, as did the number of advisers to private funds. In 2015, 4,350 investment advisers (38%) reported advising 30,342 private funds, 26% of which are funds of funds. Hedge funds comprise 38% of all reported private funds, while private equity funds comprise 34%. The total gross asset value of all private funds is approximately $10.4 trillion, representing more than 15.5% of all reported RAUM. The average gross asset value of these private funds is $341.2 million, while the median is $53.7 million, reflecting the existence of a small number of very large funds.
Investment Adviser Profession Emerging Themes
Several themes emerge from the data on the types of advisory clients served by investment advisers. Individuals remain important to a great many investment advisers and continue to comprise the largest categories of advisory clients. The 2015 data indicate that 6,828 (59%) of SEC-registered advisers have at least some high net worth clients and that 5,917 (52%) have at least some non-high net worth clients.
6,988 advisers (61%) report that they have at least some individual clients of either type. These two types of client categories listed on Form ADV are the only ones that exceed the 50% mark for all advisers. This dominance of individual clients continues despite the Dodd-Frank Act changes that shifted a significant number of smaller advisers to state registration and required SEC registration of certain private fund advisers.
Many advisers have pension clients as well. In 2015, nearly half of all investment advisers (47%) reported that at least one client is a pension or profit sharing plan. This data relates to advisers to the plans only; it does not include advisers to plan beneficiaries or participants in 401(k) plans or individual retirement accounts.
Other types of non-individual clients reflect some specialization within the advisory profession. For example, only 764 (6.7%) reported any banking/thrift institution clientele; only 1,014 (8.8%) reported any insurance company clients; only 1,355 (11.8%) reported any state or municipal government clients; and 1,863 (16.2%) reported any investment company clients.
Private Funds
In 2015, 4,350 advisers (38%) reported advising 30,342 private funds, 26% of which are funds of funds. The raw numbers of private funds increased slightly from 2014, but as a percentage of the now larger industry, the percentage declined slightly (in 2014 there were 4,156 advisers or 38%, advising 28,429 private funds, 27% of which were funds of funds).
Hedge funds and private equity funds continue to represent the largest portions of the private funds group, comprising 72% of all reported private funds, with hedge funds comprising 38% and private equity funds 34%. The total gross asset value of reported private funds is approximately $10.4 trillion, more than 15.5% of all reported RAUM with an average gross asset value of $341.2 million.
The median gross asset value, on the other hand, is $53.7 million. The difference between the median and average is attributable to a relatively small number of very large private funds. The number of beneficial owners of private funds also continues to vary widely, with most funds reporting few owners and a small number of funds reporting a very large number of beneficial owners. The median number of beneficial owners is 15, while the average number is 145.
Hedge funds and private equity funds are the most popular types of Private Funds
Investment Adviser Profession Compensation
Although advisers may be compensated in a number of ways, asset-based fees continue to dominate in the investment advisory profession. Consistent with our prior reports, 95% of advisers report that they are compensated based on a percentage of their clients’ RAUM.
In addition, 4,415 advisers charge performance based fees. This is not surprising, given that there are 4,350 private fund advisers. Performance-based fees are nearly universal in the private fund context.
Affiliations with other persons
Form ADV requires advisers to disclose information relating to their affiliations with other persons in the financial industry. In 2015, 2,518 advisers (22%) reported only one financial industry affiliation, 1,936 (17%) reported two affiliations, 1,161 (10%) reported three affiliations and 1,637 (14%) reported between 4 and 14 affiliations.
Broker-Dealer Affiliations
Included in the numbers cited under “Other Business Activities” and “Financial Industry Affiliations” are broker-dealer relationships, where investment advisers are either dually registered as broker-dealers or are affiliated (through common ownership and/or control) with broker-dealers.
Relatively few firms—only 456, or 4%—are dually registered advisers (those entities registered both as SEC investment advisers and SEC/FINRA broker-dealers). This number has not changed this year after decreasing slightly, from 480 in 2012, to 477 in 2013 and 456 in 2014.
It is interesting that these numbers do not appear to be impacted in any way by the downward-trending broker-dealer numbers. FINRA has reported that membership in the SRO has declined approximately 24%, from “about” 5,400 in 2003 to 4,031 as of May 2015. Based on available information, it is likely that this trend will continue during the coming years.
While the number of broker-dealer firms is declining, it appears that registered representatives are having no difficulty finding new homes, indicating significant consolidation into fewer, larger firms has occurred while demand for the services offered has remained constant. Since 2003, FINRA reports have indicated a high of 673,000 registered reps (2007) to a low of 613,000 (2010), with the last several years settling in at around 630,000.
As of May 2015, FINRA oversaw 638,322 registered securities representatives. More than half of these registered representatives appear to be employed by SEC-registered dual registrants (SEC-registered advisers reported employing 359,862 registered representatives in 2015).
Investment Adviser Profession Disciplinary Information
• 9,936 registered investment advisers (86.6%) reported no disciplinary history.
• 1,537 registered investment advisers (13.4%) reported some disciplinary history.
• While newly registered advisers made up 10.1% of the total number of investment advisers, the number of newly
registered advisers reporting disciplinary history makes up only 6.1% of the 1,537 advisers now reporting such
history.
• A total of 90 firms reported that it or an advisory affiliate had been charged with a felony. Of those, 45 reported having been convicted or having pled guilty or “no contest” to the charges in court.
• 165 firms or advisory affiliates reported that the SEC or the Commodity Futures Trading Commission (CFTC) found them to have made a false statement or omission and 455 firms to have been involved in the violation of SEC or CFTC regulations or statutes. 13 firms reported that they or an advisory affiliate has been found by the SEC or CFTC to have been the cause of an investment-related business having its authorization to conduct business denied, suspended, revoked, or restricted.
• Of the 1,537 advisers reporting at least one disciplinary event, 792 advisers reported that at least one of the events involved the firm or its supervised persons (as opposed to an affiliate).
• Of the 1,154 advisers newly registered since our last report, 93 (8% of new advisers) reported a disciplinary event, and 46 (4% of new advisers) reported that the event involved them or a supervised person. Private fund advisers make up 362 of all newly registered advisers (31.4%), and accounted for 27 of the 93 new advisers (29%) that reported a disciplinary event.