In Practice August 14, 2007

Pershing Study Reports Rapid Growth in RIA Market

The registered investment adviser (RIA) market will continue to experience rapid growth in the next five years says a new study from the Pershing Advisor Solutions LLC unit of The Bank of New York Mellon and Moss Adams LLP.
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The study estimates the number of retail-focused advisory firms will grow to over 19,000 from the current 15,500 in the next five years, according to a press release.

The study report, “Uncharted Waters: Navigating the Forces Shaping the Advisory Industry,” indicates that advisory firms will need to educate consumers, take new steps to frame the public’s understanding of advisory services, and clearly define the industry’s quality standards.

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The top three challenges that RIAs will face over the next five years, according to the report, include:

  • Dramatic growth of the RIA market is expected to fuel increased competition: Demand for comprehensive and objective financial advice is growing rapidly. The study predicts that the average independent registered investment adviser will exceed $1 billion of assets under management by 2012.
  • Growing demand for advice will come from increasingly sophisticated clients: RIAs have enjoyed a strategic advantage for the last five years as consumers sought objective advice and a departure from commission-based compensation models. However, as competitors converge and consumers’ needs change, to be successful, RIAs will need to distinguish themselves from new competitors, explore opportunities to be more specialized and identify meaningful market niches where they can lend expertise;
  • Competition among RIAs is for top talent: Moss Adams forecasts that by 2012, there will be close to 52,000 independent registered investment advisers practicing inside RIA firms. According to the study, 37% of advisory firms are actively recruiting RIAs.

“As the business landscape and RIA market both continue to rapidly evolve, especially in light of changes driven by the Pension Protection Act and the recent ruling surrounding fee-based brokerage accounts, independent registered investment advisors will continue to face unique challenges to service their clients and grow their businesses,” said John Iachello, chief operating officer of Pershing Advisor Solutions LLC, in the release.

For a copy of the executive summary and full report, e-mail Pershing Advisor Solutions at pasinformation@pershing.com.

In Practice August 14, 2007

Electronic Trading by Institutional Investors Increasingly Common

The use of brokers by institutional investors to execute single stock trades is gradually becoming defunct, giving way to more cost efficient electronic and portfolio trading systems, according to recent research by Greenwich Associates.
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According to the Connecticut-based firm, a survey of institutional investors predicted that by the year 2010, 55% of equity trading volume will be executed through electronic and portfolio trading systems.

Among other effects of this transformation, this means that commissions paid to brokers by institutions have fallen off by 4% in the 12-month period studied by Greenwich Associates. According to the study, commissions held steady at about $10.8 billion in 2005 and 2006, but slipped to approximately $10.3 billion in 2006-2007.

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The authors of the study argue that commissions declined because more trading volume was executed through portfolio and electronic trading systems. The volume of trades conducted in this way spiked to 37% between 2006 and 2007, a decline from less than a third the prior year.

Electronic trading has also driven down trading costs. “All-in” blended commission rates for institutional trades across single-stock, program and direct-to-market electronic trades have fallen to an average of just 3.16 cents per share, according to the study. Included in that average is the 3.8 cents per share weighted average commission rate on NYSE agency trades — down from 3.9 cents in 2006 and 4.0 cents in 2005 — as well as the 1.8 cent per share average rate on electronic trades and 1.7 cent average for portfolio trades.

Algorithmic trading is propelling this increase in electronic trading in U.S. equities, showing a growth of 15% of U.S. equity trading volume in 2006-2007 from 10% the prior year. Institutions predict this trend will continue and account for 23% of total U.S. share trading volume on a market-wide basis over the next three years, according to the research.

For more information, visit www.greenwich.com.

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