Evolution Revolution 2011 Report
The Investment Adviser Association and National Regulatory Services are pleased to present our eleventh annual Evolution Revolution report—a profile of the SEC-registered investment adviser profession. This report identifies significant trends and developments based on information that investment advisers are required to file with the U.S. Securities and Exchange Commission.
We created this report in 2001 to help identify impacts of the National Securities Markets Improvement Act of 1996 and subsequent implementation of the Investment Adviser Registration Depository. During the past year, there have once again been many significant developments affecting investment advisory firms and the foundations have been laid for even greater change in the future. Aside from the impact of new and proposed regulations—mostly due to fallout from the Madoff scandal and the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act—studies regarding the basic regulatory structure of the investment advisory profession may have profound consequences in the future.
As these initiatives are considered and debated, we hope that this report will contribute to a better understanding of the diverse investment advisory profession. We welcome your feedback and comments.
Following are key findings of our 2011 report:
- Number of Investment Advisers. Since our 2010 report, the number of investment advisers registered with the SEC declined by 104 to 11,539 in 2011. Although small, this is the first year-over-year decline in the total number of SEC-registered investment advisers since we began compiling these reports in 2001. The reason for the decline is not readily apparent, although we note that it is attributable to a significant decline in the number of advisers with $25-$100 million in assets under management (AUM). Some anecdotal evidence points to two possible contributing factors to the reported decline. First, some investment advisers managing less than $30 million in assets may already have transitioned to state registration in anticipation of Dodd-Frank rules. Second, there have been reports of increased consolidation among small investment advisers. We certainly cannot predict whether the decline represents any future trend. However, given the anticipated effect of new SEC rules required by the Dodd-Frank Act (e.g., increasing the threshold for SEC registration from $25 million AUM to $100 million AUM), 2010’s 11,643 SEC-registered investment advisers may serve as the high-water mark in the number of SEC-registered investment advisers for years to come.
- Assets Under Management. Total AUM reported by all investment advisers increased 13.7% to $43.8 trillion in 2011, from $38.6 trillion in 2010. This represents the highest level of total AUM ever reported and demonstrates a two-year recovery from the substantial decline in aggregate assets during the 2008-2009 recession. Even with the anticipated reduction in the number of SEC-registered advisers in 2012, it is likely that AUM levels will actually increase, in part because of other significant Dodd-Frank Act requirements (e.g., the registration of “private fund advisers” that manage $150 million in assets or more).
- Asset Concentration. A relatively small number of large advisers continue to manage a high percentage of total AUM. For example, the 78 largest advisers, those that reported $100 billion AUM or more, managed over half (50.9%) of all reported assets. Similarly, the 565 advisers with $10 billion AUM or more reported managing 84.4% of all assets.
- Small Advisers. The vast majority of SEC-registered investment advisers are small businesses. In 2011, 81.2% of advisers reported managing less than $1 billion AUM and 41.3% reported managing less than$100 million AUM. Additionally, about half of all advisers (49.8%) reported fewer than 5 full and part-time, non-clerical employees. More than two-thirds of all advisers (68.8%) employed fewer than ten full and part-time, non-clerical staff, and more than 9 in 10 of all advisers (90.6%) employed fewer than 50.
- Custody. Most investment advisers do not have custody of client assets or securities (other than being deemed to have custody by virtue of deducting fees). In 2011, only 29.7% of all SEC-registered investment advisers reported that they or a related person have custody of advisory assets, a slight decrease from 2010. These advisers reported $4.4 trillion in custodied assets attributable to their own firms and $2.5 trillion in custodied assets attributable to related persons. Given the fact that a general partner of a limited partnership is deemed to have custody of partnership assets, hedge fund advisers report a higher incidence of custody of client assets. Indeed, of advisers who reported hedge funds or other pooled investment vehicles as clients, 53.0% also reported that they or a related person have custody of client assets. Only 1.0% of advisers (120) reported acting as a qualified custodian in connection with their advisory services—that is, only 1% have actual physical custody of client assets.
- Hedge Fund Advisers. The number of investment advisers that specialize in hedge funds has declined in recent years. In 2011, a total of 1,200 investment advisers (10.4%) reported that more than 75% of their clients are hedge funds or other pooled investment vehicles, compared with 16.1% in 2006. With the registration of private fund advisers required pursuant to the Dodd-Frank Act, the number of hedge fund advisers will undoubtedly increase; indeed, the SEC staff estimates that an additional 700 private fund advisers will register with the SEC under the Investment Advisers Act when the requirements are implemented during the first quarter of 2012.
- Mutual Fund Advisers. During the decade we have been compiling these reports, the number of investment advisers reporting that more than 75% of their clients are investment companies has remained relatively stable at around 400 firms. The vast majority of investment advisers do not manage mutual funds—in 2011, 9,805 (85%) of all SEC-registered advisers reported that they have no investment company clients.
- Typical Adviser. The investment advisory profession is extremely diverse. However, using median values we can sketch the profile of a typical SEC-registered investment adviser. This typical adviser is a U.S.-based limited liability company or corporation with discretionary authority over most of its 133 accounts. It manages $136.3 million in assets for 26-100 clients with 1-5 full and part-time, non-clerical staff. Lastly, its only business is to give investment advice by providing portfolio management to individuals, small businesses, and other clients.
- Dodd-Frank Act: SEC Registration. The Dodd-Frank Act will have critical implications for investment advisers. Current SEC rules state that by March 30, 2012, certain private fund advisers (e.g., hedge fund and private equity fund advisers) with $150 million or more AUM will be required to have completed registration with the SEC. On the other hand, most current SEC-registered investment advisers1 with under $100 million2 AUM will need to end their SEC registration and switch to state registration by June 28, 2012. This “switch” will move an estimated 3,200 advisers from SEC registration to state registration.
- Dodd-Frank Act: Form ADV, Part 1. Another component of the Dodd-Frank Act will significantly change Form ADV, Part 1. Current SEC rules state that by March 30, 2012, all SEC registered advisers will be required to file a new Form ADV, Part 1 with the SEC. The new form will, among other things, request a statement as to whether the firm is eligible to continue to register with the SEC; contain additional questions regarding employees, clients, advisory services, affiliations, custody, and soft dollars; contain a new method for calculating AUM; and for private funds advisers, contain questions on investment strategies and service providers. These changes will provide significant additional data for our 2012 report.
- Form ADV, Part 2. One of the most important regulatory changes during the past year was implementation of the SEC’s rules amending Form ADV, Part 2. Under the final rule, all investment advisers were required to produce a plain English brochure that describes an investment adviser’s qualifications, investment strategies, conflicts of interest, and business practices. In addition, advisers are required to provide new and prospective clients with a brochure supplement that includes information about specific individuals who provide investment advisory services. We have not undertaken a review of this wealth of data but note that Part 2 information submitted by all SEC-registered investment advisers is publicly available on the Investment Adviser Registration Depository (www.adviserinfo.sec.gov).