Breakaway advisors aren’t just an issue for the big brokerages anymore. 

The RIA industry is larger than ever, topping $128 trillion in assets under management last year and growing. Attractive assets and revenue streams have fueled record M&A deals in recent years and opened up the door for monster private-equity firms to buy up businesses. That impressive consolidation may be starting to take its toll. 

Some 4 in 10 independent advisors now say they are considering leaving their current firm in a year or two, according to a July J.D. Power report. Over a quarter of those unhappy advisors are now a “flight risk,” and that has been driven in large part by changing company cultures, according to J.D. Power executive managing director Craig Martin. 

“With private equity coming in snapping up different firms, advisors are saying, ‘This is not what I signed up for,’” Martin told The Daily Upside. “You are more focused on growth than you are on me.” 

Please Don’t Go

While the top reason for leaving a firm was autonomy, the second-most common response was mergers or acquisitions. The RIA market announced 75 M&A deals in the second quarter, involving almost $1 trillion in assets under management, according to boutique investment bank Echelon Partners. It’s the second-most active Q2 in the last five years.

Those deals are forcing advisors to find greener pastures or to become part of the new, much larger firm as a result. “We definitely see this tendency with a lot of folks, where they’re not out the door, but they’re looking at this, and not loving where it’s going,” Martin said. 

Too Big and Failing. While employee advisors were happier at their firms this year, less than half of independent advisors strongly agree that their firm is headed in the right direction. While growth and expansion make sense from a strategic standpoint, advisors aren’t always on board. For many advisors, that big-firm feel is exactly what they broke away from in the first place. 

“Tenured advisors went to their firms because they wanted to be independent, but they’re now losing that,” Martin said. Support functions, like technology and operations, are often cited by advisors as being negatively impacted as the business grows, he added. 

The survey did find some bright spots. Commonwealth took the top spot in the independent channel for the 11th straight year, followed by Raymond James. In welcome news for Wells Fargo Advisors, the firm had the largest year-over-year increase in overall satisfaction in the study.

Company stake limits may be the next frontier in the battle over “woke capitalism.” 

Vanguard is sounding the alarm that regulators may soon enforce 90-year-old laws that set limits on how much of a company financial institutions and utilities can actually own. The rules — some of which got their start alongside the newly formed electricity industry in the 1930s — are being pushed by conservative lawmakers. 

They’re worried that the big three asset managers — Vanguard, BlackRock, and State Street — are controlling too much proxy voting power, and are pushing progressive agendas like ESG and diversity. Those companies collectively own nearly 25% of many US companies, according to an Financial Times analysis. Whoa.

Speak to a Manager

The rules restrict companies from owning an excess of 10% ownership stakes, but those rules have gone largely unenforced as long as the investor doesn’t seek management roles. That (let’s call it professional courtesy) may be coming to an end, and could force asset managers to take on more risk to track the indexes of their funds. 

Vanguard updated its disclosures in July, highlighting the potential impact. When a fund is subject to an ownership limitation, it usually seeks permission to exceed it, although there’s no guarantee. The company may now be required to sell those securities, or even agree to vote proxies in a certain way, according to the filings.

“Vanguard believes in clear and transparent disclosures,” a company spokesperson told The Daily Upside, adding that the regulation could have “negative consequences” on fund expenses, performance, and taxes. If enforced, the bill could end up forcing managers to get creative to continue to track their indexes, like by using more sophisticated — and expensive — derivatives strategies. 

“We continue to work with policymakers to answer questions, address concerns and minimize these risks,” the spokesperson said.

Don’t You ESG Me: BlackRock, the world’s biggest asset manager, has been the prime target of the anti-ESG pushback. The company lost around $4 billion in assets under management as a result of a political backlash against environmental, social, and governance investing in the US alone, CEO Larry Fink said last year.

• In March, Texas became one of the latest states to pull pension funds from the asset manager, citing concerns that the company will boycott the fossil fuel industry, like oil and gas producers, which make up a significant portion of the state’s economy.
• Florida, Louisiana, and Missouri have all said they plan to pull money over BlackRock’s ESG efforts. Can’t we just agree to disagree?

Japan’s largest brokerage and investment bank owes a lot of praise to its wealth management arm — and we mean a lot — and to a recent strategy the company used to segment its client base.

Nomura Holdings reported 68.9 billion yen ($446 million) in first-quarter profits this week — a whopping 195% increase year-over-year — topping analyst expectations compiled by Bloomberg. Nomura’s wealth management branch reported 42.3 billion yen ($274 million) in pre-tax income, an 84% jump from last year and the highest it’s been in nine years. 

A rally in global markets and domestic inflation of course had customers moving more of their savings into investment accounts, but the company attributed the success, at least in part, to segmenting its clients and being able to serve and monetize them more efficiently.

Personalized Management

In addition to market factors, Nomura attributed its growth in wealth management to its segment-based advising approach. That sounds slightly fancy, but it basically just means separating clients into different tiers based on factors like age, income, financial goals, assets under management, and more, then determining what services to offer them. They also differentiated how often they should engage with clients, and most importantly, how much advisors should charge:

• Banks mostly look to attract the wealthiest clients because they create the most opportunities for revenue: the more bucks for your bang. But it’s still highly beneficial to cater to smaller investors as well. Retail investors accounted for 460 billion yen ($3 billion) in Nomura’s wealth arm’s net inflows of cash and securities.
• Studies from Fidelity found that firms that segment their client base had more growth in AUM and clients with $1 million or more than firms that didn’t segment: However, only 37% of firms do it.

More Factors at Play: The most popular segment that helps firms determine management fees is AUM. But what if a portfolio barely needs any management? Or perhaps it’s getting too much attention.

“Many advisors choose to segment their clients based solely on client profitability,” according to the Fidelity report. Some 51% of households that firms serve are not ultimately profitable for those businesses, so segmentation helps clarify where an adviser’s time and energy should be focused.

Many investors are also shifting to fee-based advising. Think of it like a cable package where you get to pick what channels you get and your bill is based on that. We still remember cable, right?