By targeting boutique advisory firms, asset managers are in a better position to exploit opportunities from the burgeoning independent channel, new research indicates.

By targeting boutique advisory firms, asset managers are in a better position to exploit opportunities from the burgeoning independent channel, according to Scott Smith, director at Cerulli Associates, and author of a new report.

The report, Boutique Advisory Firms and RIAs: Balancing Scale and Independence for Top-Tier Advisors, predicts that as larger industry players continue to relinquish market share, boutique firms will emerge as an increasingly important aspect of the wealth management conversation.

The findings also add weight to the argument that, particularly in the wake of the financial crisis, smaller firms are becoming increasingly appealing to investors by virtue of greater perceived independence and client-centricity. For example, last September the Luxury Institute found that investors with at least $5 million in assets and a minimum annual income of $200,000 prefer smaller boutiques than larger Wall Street firms.

At the same time, asset managers have been struggling with how to effectively address the RIA market, Smith said. “Boutique advisory firms allow them to target several practices simultaneously.”

For the record, Cerulli defines a boutique advisory firm as one of limited scale, one which focuses on “above-average” advisors and one which operates in an “advisor-centric” model.

The report points to a “significant increase” in the independent advisor market share, which it notes rose from 29 per cent in 2007 to 35.3 per cent in 2012. By contrast, market share of employee advisors slipped from 60.4 to 59.8 per cent during this period. As this trend continues, more opportunities are emerging to partner with advisors in the independent segment - both as equity partners and platform providers.

Game still very much on

The leading industry players will, however, “continue to enjoy their positions for the foreseeable future,” Cerulli said. “Putting advisors and investors ahead of corporate margins does not guarantee success in the wealth management arena, but Cerulli expects it will be increasingly difficult to succeed without embracing this stance.”

The research firm added that, from the perspective of the wirehouses, boutique firms are a “distinct threat” to their client bases. Larger firms, it said, must pursue innovation as opposed to “just trying to sign the biggest teams to the longest deals.”

High-production teams will increasingly select firms which take in hand their specific needs, rather than those providers that are trying to serve advisors across multiple segments, Cerulli predicts; indeed, one of the main attractions of a boutique firm is its ability to specialize in a niche market at the advisor or practice level, it added.

Among other observations, the Boston, MA-based research firm notes in the report that many investors are under the impression that their advisors operate under a fiduciary model (in which clients’ interests must come first), as opposed to the “suitability standard” of brokerage accounts.

And while diligent advisors within a big employee advisor firm can overcome inherent conflict, affiliation with a more “product-neutral” enterprise puts the advisor in a better position to consistently provide a fiduciary standard of care.

Another interesting point worth mentioning relates to the overall efficiency with which a firm is run. Research last year from Russell Investments found that larger firms are often slower to identify or react to issues. A boutique firm, it said, might have a flat reporting structure, whereby a trade error to the chief investment officer or chief executive can be “instantaneous.” However, the same issue at a large firm - where there are three or more layers of management - could take “days, weeks or months,” it said.

Challenges facing the boutique segment

Cerulli highlights, on the other hand, that independent firms “generally lack the home-office support of practices in the employee channel.” Another challenge of this segment is scale, as the stand-alone boutique segment often lacks “clout” to receive the lowest vendor pricing perhaps available to larger firms.

“Cerulli believes that breakaway teams and existing RIAs that can surpass the $100 million plateau and institute professional management systems will serve as the bellwethers that drive the growth of the segment,” the firm said. “This asset level also generally allows the practice to hire professional management outside the advisor principals, which allows the principals to continue focusing on growing the practice’s asset base,”

Lastly, while advisors who have built solid practices within wirehouses often show interest in migrating to the independent channel, the opportunity for “substantial payment” in the near-term with minimal disruption to their business is frequently more appealing.