The findings in this blog post come from our annual survey of over 1,500 registered investment adviser (“RIA”) firms that was conducted in the first quarter of 2018. This proprietary RIA in a Box study is paired with publicly accessible data provided by the Securities and Exchange Commission (“SEC”). The goal of our 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. In this blog post, we focus on the frequency and the key attributes of RIA firms that manage client investment portfolios directly or instead outsource portfolio management to a third party. Investment advisory firms that outsource investment management have a variety of turn key asset management platforms (“TAMPs”) available to them to choose from.
Profile of RIA Firms that Manage Client Portfolios In-House vs. Utilizing a 3rd Party
After many years of studying the RIA space, we expected advisory firms that utilize a third party asset manager to generally have smaller account sizes, however this year’s study revealed that firms that outsource portfolio management are not necessarily working with smaller clients. Instead, the average account size for firms outsourcing portfolio management was more than double the average account size for firms managing portfolios internally. On the other hand, we did once again observe that firms with less total assets under management (“AUM”) are generally more likely to consider an outsourced investment management solution.
This year’s survey took a closer look at advisory and total fees charged to the client and we observed that RIA firms outsourcing portfolio management were charging a lower average advisory fee but a higher total all-in fee compared to firms managing portfolios internally. However, it’s unclear if the relatively lower average advisory fee is more driven by the relatively higher average account size or the use of a third party asset manager:
Previously, when we explored the use of outsourced portfolio management we noted that 30% of new RIA firms recently started were outsourcing portfolio management compared to a smaller percentage of firms registered years back. As the chart below depicts, we have seen a slight uptick in the percentage of RIA firms outsourcing portfolio management compared to previous annual studies. Yet, with only 20% of investment advisory firms currently outsourcing portfolio management, the vast majority of RIA firms continue to manage portfolios in-house:
As previously discussed when we first explored “What Percentage of RIA Firms Outsource Client Portfolio Management?” , we continue to see firms that outsource portfolio management are more likely to utilize a passive investment management style compared to firms that do not outsource.
While there has been a slight increase in the number of RIA firms utilizing a third party asset manager or TAMP, we have yet to see a sharp increase as some predicted with the launch of a number of online automated investment platforms over the past few years. Instead, the traditional TAMPs seem to be continuing to lead the outsourcing movement. We will continue to closely follow these developments in future studies.
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.