Need to balance pulling in new business, keeping existing clients happy. The two biggest service agencies for registered investment advisors (RIAs) debuted improvements to their respective platforms last week. Schwab Institutional says it has improved its back-office offering with “enhanced online trading services, improved cashiering” and e-access to client statements and tax reports. Fidelity Investments Registered Investment Advisor, meanwhile, introduces a trustee referral program and “a series of enhancements to its online fixed-income platform.” In fact such announcements – and the improvements that underlie them – have been coming fast and thick in recent months, as custody and clearing providers jockey for position in a rapidly expanding segment of the financial service sector.

Banks and full-service brokerages dominate the U.S. wealth market, with each channel controlling about $6 trillion in a consumer wealth market that had $17.1 trillion in investable assets and the end of 2004, according to Tiburon Strategic Advisors, a Tiburon, Calif.-based financial-service consultancy. But Tiburon’s managing principal Chip Roame says that the independent advisory channel is the fastest-growing channel, with RIAs and independent brokers making gains analogous to those of full-service brokers in the 1980s and discounters in the 1990s. Fee-based independent broker-dealers, set the pace in the number of new practitioners, he says; RIAs in terms of asset growth.

Hidden gem

Tiburon also sees that $17-trillion consumer investment market growing to $30 trillion by 2010, as baby boomers prepare for retirement by selling their businesses and rolling over pension vehicles. In sum, the picture of RIAs as the biggest asset gatherers in an expanding wealth market provides incentive for service agencies – providers of trading, custody and reporting services in addition to a growing list of ancillary services such as client referrals, wealth-management platforms and advice on practice-management – to compete for RIA business.

Right along those lines, schwab.com Charles Schwab Corporation chairman and CEO Charles Schwab called his company’s RIA-support division an “important and growing business and a big part of our future” in remarks to Schwab shareholders last May. “In 2004, 50% of our net new client assets came from independent advisors,” he said. “[Schwab Institutional] has proven to be a hidden gem for Schwab.”

Service agencies are also keen to position themselves as advisors to wirehouse brokers who are thinking of becoming RIAs. Schwab, Fidelity and TDWaterhouse offer advice along those lines, backed by market research and “best-practice” consulting.

Similarly, Pershing recently got into the act by making a practical appeal to full-service brokers. This past summer the bankofny.com Bank of New York’s clearing firm re-named its advisor-service agency – formerly “Investment Manager Solutions,” now “Advisor Solutions” – to reflect what it calls a “broadened strategic focus” on independent advisors as well as asset managers. In doing so, Pershing emphasized its ability to accommodate wirehouse brokers who want to retain commission-based accounts on independent-brokerage platforms as “dually-registered” investment advisors.

The thinking there is that some wirehouse reps are coming to see RIA status as “an opportunity to both improve their client service and enhance their practice economics by leaving the employee-based cocoon,” Mark Tibergien, a principal of Seattle-based business consultancy Moss Adams, says in a TDWaterhouse press release from last May.

Existing clients 

And that trend could become more prevalent as a result of industry shake-ups. Recent developments like Citigroup’s purchase of Legg Mason’s brokerage business, Merrill Lynch Merrill Lynch’s acquisition of Advest, and layoffs at Morgan Stanley could make some wirehouse brokers ponder the advantages of running their own shops.

But to get that business – and, more important, to keep it – service agencies have to make constant improvements.

Most RIAs – 67.1% – weigh a provider’s “level of resources” when selecting a service agency, according to a recent report by Boston-based research firm Cerulli Associates. Considerations like “brand and reputation” and “objectivity” come in a close second and third with 42.5% and 42.3% of RIAs rating those as “major factors” in choosing a service agency.

But, for all the fuss about attracting breakaway brokers, Cerulli says that service can gain more in the long run by focusing on their existing RIA client bases rather than attempt too strenuously to lure in brand-new clients. “[Service agencies] would be well advised to spend their time building a strong reputation [by serving] their RIA clients properly and less time using strategies that are not as effective, such as actively pursuing new RIAs,” says the Cerulli report Retail Registered Investment Advisors in Transition.

Schwab Institutional provides custodial, operational and trading support to about 5,000 independent fee-based investment advisors. It was custodian to $365 billion in RIA-client assets on 30 June 2005.

Fidelity Registered Investment Advisor Group provides custody and brokerage support to 2,800 or so bee-based RIAs. It was custodian to $145 billion in RIA-client assets as of 31 August 2005.

Click here to see a précis of the Cerulli report. –FWR

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