As our nation celebrates its independence this week, it’s a fitting time to spotlight another movement toward freedom—this time, within the financial services industry.

Over recent decades, a growing number of financial advisors and their clients have migrated from the traditional wirehouses to independent registered investment advisors (RIAs). While we’ll explore the drivers behind this transformation in greater depth in a future article, it’s clear that the trend took root after the Dot Com bust, gained significant momentum following the 2008 Financial Crisis, and saw even greater acceleration in the wake of the COVID-19 pandemic.

This article by Damian Gardiner at Scale does a good job of capturing the state of balance in the industry today, though he might need to get a new investment advisor. At its core, wealth management should be about advice and service, not sales and marketing. Based on Damian’s comments, it’s a safe bet that his advisor is currently sitting at a wirehouse…  

More to come on that subject, but for now let’s focus on understanding the different wealth management models and how market share has shifted among them over time.  

Here is the state of play today:

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At first blush, the statistics on where advisors sit might suggest that this is a very consolidated industry, but in fact it is highly fragmented, particularly when we shift our focus to share of assets under management (AUM).  In AUM terms, the total industry size is about $147 trillion (yes, with a “T”) and control of the market is split fairly evenly across three major segments:

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As mentioned above, the balance in the industry has shifted dramatically toward the RIAs over the last twenty years, but before diving in more deeply on that, let’s put a bit more definition around how the industry is segmented:  

• Wirehouses: The dozen or systemically important Wall Street financial institutions such as JP Morgan, Merrill Lynch, Goldman Sachs, etc.  Historically, employees of these firms were pairing buyers and sellers of securities, a la Gordon Gecko in the original Wall Street movie.  From a regulatory perspective, this meant operating as a registered representative at a broker-dealer (a.k.a., a “broker” or “RR”).  

• Registered Investment Advisors: The roughly 12k independently owned and operated advisory firms that do not have an affiliation with a bank or broker-dealer.  These firms specialize in the delivery of holistic investment and financial planning advice, and owe a fiduciary duty to their clients, dramatically reducing the number of conflicts that plague the wirehouses.  Traditionally, these were smaller, owner operated firms, but in recent years there has been a wave of private equity backed consolidation of the independent space.  Regulatorily, employees of these firms are registered as investment advisor representatives (“IARs”).  

• Independent Broker Dealers: There are about 1,000 or so smaller Broker-Dealers that specialize in the paring of buyers and sellers of securities.  These firms function in much the same way as their counterparts at the larger wirehouses with the same registered representative status.  LPL and Cetera are among the most recognizable names in this space today.  

• Dual-registrants (a.k.a., hybrid advisors): Financial professionals at these 4,000 or so firms function as both RRs and IARs, meaning that they are both brokers and advisors depending on the circumstances and the nature of their client relationships.  Some household names are Raymand James, Edward Jones, Ameriprise, and Osaic.  

• Regional banks/Broker-Dealers/Insurance companies: The repeal of Glass-Steagall in 1999 allowed businesses that had long been kept separate to merge and a wave of consolidation followed, slowed momentarily (and later accelerated) by the 2008 Financial Crisis.  These 2,500 or so combined banks/broker-dealers/insurance companies often grew up separately with a strong regional affiliation and then combined once the regulatory regime allowed them to do so.  Employees at these firms function as RRs, IARs, bankers and even insurance salesman.  Example firms include PNC, Comerica, RBC, etc.

Admittedly, there has been a significant blurring of lines between these segments over the years, with firmsof all sizes offering traditional brokerage and investment advisory functions, as well as insurance and other products.  However, the key takeaway for builders and investors in wealth tech, is that the growth of the industry is focused on the independent segment, which creates massive opportunities for those building in the space:

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As you can see, in 2005 wirehouses still dominated, controlling over 50% of the market, with RIAs having only a 10% share.  By 2024, the balance had shifted to less than 30% share for the wirehouses and just over that amount for the RIAs. Headcount changes within these respective categories have largely followed the same trends.  

Notably, the market share of the IBD/Hybrid/Regional category has remained roughly 40% over this entire period. For those building and investing in the space, the growth of the independent segment has created a tremendous opportunity for big outcomes that didn’t exist all that long ago.  Innovators take note, these trends are highly likely to continue, at least partly because of the rapidly improving technology in the independent space.  

With wirehouses operating as walled gardens, developing home grown technology tools at a snail’s pace, the independent segment operates on third-party technology solutions that can iterate much more quickly thanks to recent improvements in data sharing and APIs at the major custodians (more on that subject here: A Brief Primer on Data Sharing).  

As advisors increasingly need access to the latest technology tools to scale their businesses more efficiently, the independent space will offer more—and larger—venture outcomes.