Evolution Revolution 2012
The Investment Adviser Association and National Regulatory Services are pleased to present our twelfth 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.
This year’s report reflects significant changes in the composition of the investment advisory profession primarily driven by requirements of the Dodd-Frank Act. On one hand, the so-called “switch” in the Dodd-Frank Act (increasing the dividing line between SEC- and state-registered advisers from $25 million AUM to $100 million RAUM) has resulted in about 2,400 SEC-registered advisers switching to state registration and regulation. On the other hand, provisions of the Dodd-Frank Act requiring the registration of certain “private fund advisers” under the Investment Advisers Act appear to have resulted in the addition of more than 1,500 new investment advisory firms. In addition, the SEC has made changes to Form ADV, Part 1, the basic registration form for investment advisory firms. The revised form contains additional questions regarding employees, clients, advisory services, affiliations, custody, and soft dollars; contains a new method for calculating AUM; and for private fund advisers, contains substantial new information about the adviser and each private fund it advises.
We hope our report will contribute to a better understanding of the diverse investment advisory profession. We welcome your feedback and comments.
Explanation of Report Data
This report is based on Form ADV, Part 1 data filed by all SEC-registered investment advisers as of July 16, 2012. Advisers are required to file information electronically using the Investment Adviser Registration Depository (IARD) system.1
Following are key findings of our 2012 report:
- Number of Investment Advisers. Since our 2011 report, the number of investment advisers registered with the SEC declined by more than 1,000 to 10,511. The number of SEC-registered advisers at the time of last year’s report was 11,539. A decline was expected as a result of various provisions of Title IV of the Dodd-Frank Act, which amended the Investment Advisers Act of 1940 by increasing the threshold for SEC registration from $25 million to $100 million in regulatory assets under management (RAUM).2 This change produced a significant decline in the number of “mid-size” advisers (i.e., those reporting RAUM between $25 million and $100 million), from 3,651 advisers in 2011 to 1,245 advisers in 2012. The deregistration of “mid-size” advisers was partially offset, however, by the registration of more than 1,500 private fund advisers pursuant to the Dodd-Frank Act requirement that private fund advisers with RAUM in excess of $150 million register with the SEC.3
- Regulatory Assets Under Management. SEC-registered investment advisers in 2012 reported $49.4 trillion in aggregate RAUM. While this amount represents a substantial increase of 12.8% in 2012, from $43.8 trillion in 2011, the methodology for calculating RAUM has changed significantly, making a comparison of last year’s AUM to this year’s RAUM less telling. This year’s increase is also partially attributable to the Dodd-Frank Act’s requirement that private fund advisers with RAUM of at least $150 million register with the SEC. These factors led to an increase in reported assets, even with the reduction in the number of registered advisers.
- Asset Concentration. As in years past, a very small number of large advisers manage the highest percentage of total RAUM. This year, the 90 largest advisers, those reporting $100 billion RAUM or more, manage nearly half (48.9%) of all reported regulatory assets under management. This same category of advisers accounts for less than 1.0% of the number of registered advisers. Further, the 664 firms with at least $10 billion in RAUM manage 82.7% of all reported assets, while representing only 6.3% of all registered advisers.
- Small Advisers. Despite the shift of “mid-size” advisers to state registration, small businesses continue to comprise the largest category of SEC-registered investment advisers. In 2012, approximately 74.0% of advisers reported less than $1 billion in RAUM. While this represents a decrease from last year’s total of 81.2%, the difference is attributable to “the switch” from SEC to state registration for many smaller advisers. Additionally, 35.1% of advisers reported having five or fewer full- and part-time, non-clerical employees. More than half (58.4%) reported having ten or fewer such employees, and 88.7% have 50 or fewer such employees. Similarly, 54.4% of firms reported having five or fewer employees engaged specifically in investment advisory functions (including research), and 74.6% reported having ten or fewer.
- Custody. While most investment advisers still do not report that they or their related person have custody of client assets or securities (other than being deemed to have custody by virtue of deducting fees), the percentage of those that do increased dramatically to 42.4% (from 29.8% in 2011) of all SEC-registered investment advisers. This change was primarily due to the double impact of the “mid-size” adviser and private fund adviser registration provisions of the Dodd-Frank Act. This year, 4,456 advisers reported $6.6 trillion in custodied assets attributable to their own firms and $7.7 trillion in custodied assets attributable to related persons. Only 1.0% of advisers (106) reported acting as a qualified custodian in connection with their advisory services – that is, only 1.0% have actual physical custody of client assets. Given the fact that a firm that acts as both adviser and general partner to a limited partnership is deemed to have custody, private fund advisers reported a high incidence of custody of client assets. Indeed, of advisers that reported hedge funds or other pooled investment vehicles as clients or identified themselves as an adviser to private funds, 77.9% also reported that they or a related person have custody of client assets.
- Private Fund Advisers. In 2012, 36.7% (3,856)4 of all registered advisers reported advising at least one private fund, with a total of 26,202 private funds reported. More than 25% of reported private funds are funds of funds. The median number of private funds advised is three, while the average is approximately seven. The total gross asset value of all reported private funds is $8.1 trillion, 16.4% of all reported RAUM in 2012, with a median gross asset value of $47.7 million. Hedge funds and private equity funds comprise the two largest categories of private funds, with hedge funds comprising 40.8% of all private funds and private equity funds comprising 33.1% of all private funds. This year, the number of registered advisers reporting that more than 75% of their clients are hedge funds and other pooled investment vehicles increased by 87.8%, from 1,200 advisers in 2011 to 2,254 advisers in 2012. Of those advisers, 1,863 reported that 100% of their clients are hedge funds and other pooled investment vehicles. Even more advisers (2,333) reported that the assets of hedge funds and other pooled investment vehicles comprised more than 75% of their total RAUM. This enormous increase in the number of advisers specializing in hedge funds is attributable to the Dodd-Frank Act’s elimination of the private fund exemption upon which hedge fund advisers had previously relied: 1,346 of these advisers are newly registered.
- Mutual Fund Advisers. The number of registered investment advisers that report advising mutual funds has remained relatively constant over the 12 years that we have been compiling this report. In 2012, 16.0%of advisers reported having at least one investment company client, and about 3.7% (about 388 advisers) reported that between 75% and 100% of their clients are investment companies. This year, 4.5% (476 advisers) reported that more than 75% of their RAUM are attributable to investment company clients, while 6.0% reported that more than 50% of their RAUM are attributable to these clients.
- Firms Subject To Executive Compensation Rules. Pursuant to Section 956 of the Dodd-Frank Act, the SEC and other federal regulators are seeking to limit excessive incentive-based compensation arrangements for registered investment advisers with at least $1 billion in balance sheet assets. In response to a new question on Form ADV, Part 1 this year designed to identify such investment advisers, 284 advisers reported having at least $1 billion in total balance sheet assets on the last day of their most recent fiscal year.
- Soft Dollars. Form ADV also includes a new question on soft dollars this year, asking registrants that receive soft dollars in connection with client securities transactions whether all of those soft dollar benefits are eligible “research or brokerage services” under section 28(e) of the Securities Exchange Act. In 2012, 4,866 investment advisers reported receiving some form of soft dollars in connection with client securities transactions. Most of those advisers (90.8%) reported that such soft dollar benefits were eligible research or brokerage services.
- Typical Adviser. The investment advisory profession is extremely diverse, with advisers of varying sizes providing a broad range of services. However, using median values, we can sketch the profile of a “typical” SEC-registered investment adviser. Due at least in part to the Dodd-Frank Act changes discussed above, the data comprising the profile of a typical adviser have changed over the past year. In 2012, the median number of employees increased and median RAUM nearly doubled last year’s median AUM. The median number of accounts, on the other hand, decreased from 133 to 92.