An analysis of RIA, Hybrid, Independent Broker-Dealer, Aggregators, and more
This article focuses on the pros and cons of different business methods and what's best for you and your client. There is no doubt that the financial services industry is currently in a state of evolution. Advisors now have an overwhelming variety of options to choose from when considering their future; unlike in the '90s, when financial advisors chose to start their transition, they only had about five firms to choose from. Today you have to change your way of thinking; if I move, where do I go? The options become very complex. Do I move to a wirehouse, regional firm, bank, small boutique, or do I go independent? With these increasing options, it's hard to know if you're making the right choice.
Let's assume you decide that you want to go independent; now comes the fun part. Do you join an independent national broker-dealer? Do you start your own pure RIA, or do you join an already established RIA? Do you join a hybrid? Or, do you join an aggregator or consolidator? You can make so many choices, which is why I'm here to try to simplify these hard decisions.
I am not writing this article to tell you that you should break away or start your own RIA but rather to educate you on the multiple available choices today.
Going Independent / Breaking Away From The Wirehouse
If you're an entrepreneurial advisor, independence gives you control, customization, and creativity to run your business with freedom. Advisors are looking to grow their business, and they are passionate about providing customized solutions to individuals and families. Many advisors breakaway to have the ability to offer their clients several different fee structures based on the scope of work they desire. This means the advisor is in charge of the business model, culture, location, and other aspects of the business. Unlike a wirehouse advisor, there is a considerable amount of flexibility in the offerings and pricing structure that fall under an independent advisor category.
National Independent Broker-Dealer
Broker-dealers, on the other hand, charge a commission for each transaction. FINRA is responsible for regulating broker-dealers under the suitability standard, requiring each investment to be suitable for the investor at the time of purchase. Independent broker-dealers act as full-service brokerage firms but do not have many larger firms' strains and restrictions. An independent advisor has the same licensing requirements as a wirehouse advisor. Independent advisors work for advisory firms such as LPL Financial, Raymond James Financial Services, Commonwealth Financial Network, and Ameriprise in a manner very similar to a self-employed independent contractor. Independent advisors have greater freedom over whom they take on as clients and how they do business with them. An independent advisor is, as the name implies, independently operated.
Hybrid-Brokerdealer/RIA
A Hybrid Advisor is a representative of both an RIA entity and a broker or dealer. Hybrid RIAs are independently registered firms owned and managed by Hybrid Advisors. A Hybrid advisor is a person who maintains their securities license to sell commission-based products and also has their own personal RIA, which they use for managing money on a fee basis as a fiduciary. Historically most registered reps would use their Broker/Dealer's (B/D's) RIA. Now there is an increasingly popular trend of advisors "breaking away" from the B/D and using their own RIA, especially among the Independent B/Ds. They have some percentage of their business in managed money (advisory) and some in transactions (commissions). A "hybrid" model has supervised persons of the RIA registered as investment adviser representatives of the RIA and are also registered representatives of an unaffiliated broker-dealer; This allows reps to have clients in both places.
Pure RIA
According to Cerulli, it is not only the fastest-growing segment of advisors for the last several years, it has been the only consistently growing segment as well. Pure RIAs are firms that have no affiliation with any broker-dealer. RIA's are regulated directly by the Securities and Exchange Commission. They are considered acting in a fiduciary capacity ,so they are held to a higher standard of conduct than registered Representatives. This fiduciary standard mandates that an RIA always puts the client's best interest ahead of their own. Some RIAs charge clients a percentage of their assets under management what others charge either an hourly or flat fee for dispensing advice. Advisors in this model must obtain their Series 65 License, which offers flexibility to run their business and manage accounts however they choose. This comes in many different forms such as flexibility to utilize multiple custodians, flexibility to establish their fee structure, flexibility in the way they market to clients and prospects, and finally flexibility and freedom in working with the regulators and compliance departments since FINRA and your B/D isn't responsible for supervising your RIA; except for Hybrids.
Fee Structures Offered by RIA's
1. Construction of a comprehensive financial plan- fees range on the complexity of the entire relationship
2. Hourly financial consulting- hourly rate
3. Full-Service Wealth Management- Asset-based flat fee
Large RIA Aggregator
Many ex-wirehouse advisors thrive in this model. Advisors focus on the fiduciary standard and running a primarily fee-only wealth management practice. These advisers often don't possess experience operating a stand-alone business in the independent Channel. They are not ready to form their independent registered investment advisory firm and be fully responsible for running it. Some of the RIAA aggregators are Dynasty Financial Partners, Focus Financial Partners, Commonwealth Financial Network, LPL Financial, and Hightower Advisors.
Below is a list of some of the components they offer as breakaways:
Compliance
Trading
Operations
Facilities
HR and Benefits
Research and due diligence
Finance and Accounting
Legal
Technology stack
Marketing, PR, and social media
Key Consideration
Models and options are abundant for an advisor to understand. Whether you're a W-2 employee advisor considering a move to another wirehouse, regional firm, or bank, or have questions about the many versions of independence, we have the expertise to help you define a path.
Talented advisors are considering change now more than they ever have in the financial services industry's history. It's essential to consider your options to make the best choice for you and your clients.
To make the best choice for you and your clients, you need an unbiased advocate with unmatched experience and industry knowledge to help you navigate the landscape.
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