Three essays on Registered Investment Advisors in the United States
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The study of Investment Advisors is important to practitioners, government legislators, regulators, and household consumers. This three essay dissertation examines Registered Investment Advisors in the United States. The first essay examines the association between type of compensation and type of clientele. The second essay examines what type of clients hire RIA firms with more agency costs. The third essay explores the shifts in assets under management and clients in the 2 years after the economic downturn in 2008. This dissertation adds to our understanding of Registered Investment Advisors in the United States and provides insights about the type of clients associated with various types of RIA firms. This study supports the notion that RIA firms charging commissions are more likely to work with lower net worth clients, and have more employees. RIA firms charging commissions are also more likely to provide financial planning services to their clients. In light of recent regulatory reforms in the United Kingdom, Australia, Holland, and other nations considering eliminating commissions in financial services it should be noted that doing so needs to be complemented with efforts to increase the availability of financial planning services to lower net worth clients. Perhaps this is done by increasing the number of professionals offering financial advice (without sacrificing competency standards), or by providing incentives to either professionals or lower net worth clients to seek professional advice. This study finds that lower net worth consumers are more likely to hire investment advisory firms with agency costs like previous ethical violations, dual registration as a broker-dealer, or opaque forms of compensation. This study finds the opposite association between high net worth clients and firms with agency costs, suggesting that lower net worth clients either need to increase their monitoring or become more aware of the variance in quality and costs associated with selecting one investment advisor over another. This study further finds that in the two years after the economic downturn of 2008, that clients did appear to pay closer attention to their investment advisors and any potential conflicts of interest. From July 2008 to July 2010, clients appear to have shifted their assets and accounts towards RIA firms charging fees (AUM fees, fixed fees, hourly fees, and other fees) and clients appeared to shift assets away from firms with agency costs and opaque forms of compensation. The findings of these studies should assist practitioners, regulators, legislators, and consumers as they examine the association between certain forms of compensation and types of clients. Consistent with the literature, it appears that less informed consumers need to be protected from themselves as much as they need to be protected from potential conflicts of interest. Consumers appear to have an implicit trust that anyone holding themselves out to be a professional investment advisor is competent, ethical, and has their best interests at heart when they make recommendations. Regulatory authorities in various countries are making efforts to elevate or regain that trust amongst consumers.