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How RIAs get paid: Breaking down the fee structures
Registered investment advisors (RIAs) manage more than $4.7 trillion dollars in client assets, or about a fourth of all assets under management (AUM).
And that figure could grow by as much as $1.4 trillion by 2022. Because RIAs' fees are often a percentage of AUM, RIA revenue is also projected to grow.
It's no surprise, then, that 70% of RIAs expressed optimism for the U.S. and global economies in 2018. RIA firms showed a growth in AUM and clients, as well as an 18% growth in revenue in the last six months of 2018, even with a volatile stock market.
Fee structures of RIAs
RIAs are held to a fiduciary standard. This means they must give advice in the client's best interest. The RIA fee structure reflects this duty. RIAs are not paid on commission, as that method could create a conflict of interest between the advisor's desire to earn commissions and the client's best interest.
Although RIA fees are independent of transactional activity, there are several different methods by which RIAs charge fees.
Flat fees are a percentage of the value of the AUM on a certain date each year. The higher the AUM, the lower the percentage: $2 million or less generally costs about 1.5% of the AUM, and fees can go below 1% when assets exceed $25 million.
In this arrangement, RIAs charge varying management fees on different levels of the portfolio. For example, a client might pay 1% on the first $5 million and 0.75% on the next $15 million.
Fees by asset class
This kind of fee structure charges different fees for different kinds of assets. For instance, an RIA might charge a 1.5% management fee for the equities portion of the portfolio, but 0.75% for bonds or other fixed-income investments.
RIAs may also charge an hourly fee for their advice, typically for investors without enough capital to warrant management of their assets.
RIAs' fiduciary duty brings additional expenses, as well, given that part of that duty is to base their recommendations on competent research and diligence. Most RIA firms have research departments to fulfill this duty to their clients.
RIAs must also invest in the personnel and resources to comply with SEC and state regulations, such as compliance and ethics policy manuals and consultants.
Finally, RIAs have documentation requirements for the SEC and states where they do business.
Potential income within the RIA channel
Industry analysis shows the potential for substantial income return for RIAs who join large firms and for those who run niche or boutique practices. Large firms are enjoying a heyday—upward of 60% of client assets nationally are held at just 4% of RIA firms. For their part, solo advisors are averaging a 75% profit margin (before owner compensation) and individual compensation of $600,000 per year.
With this level of growth and potential for compensation, the RIA channel is proving a high-revenue option for investment advisors.
Content provided is for educational purposes only and is not intended to be advice for any firm.
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