Financial advisors currently at a wire house, bank, insurance company, or regional broker dealer that are thinking about becoming independent have a number of options. However, it's important that each potential breakaway broker take a step back and evaluate if he or she is willing to settle for a scenario that offers less than full independence. In this post, we break down the various options available to financial advisors that are looking to go independent.
Below are the different independent financial advisor models available to breakaway brokers or other transitioning advisors ranging from full to partial independence:
- Start your own registered investment adviser (RIA) firm
According to Meridian-IQ, 2,159 new RIA firms were created in 2014. This compares to 1,959 new RIA firms formed in 2013 which implies a 10.2% year over year increase in the number of new advisory firms being created. Many in the industry assume that firms need a significant amount of assets under management (AUM) in order to prosper. However, the industry stats paint a much different picture. According to Meridian-IQ, of the 2,159 new firms formed in 2014, only 635 of those shops currently have an AUM figure greater than $50 million. Thus, over 70% of new RIA firms which are created start with less than $50 million in AUM. Furthermore, most advisors do not realize that the median AUM of the 32,000+ RIA firms currently registered is only $19.3 million according to the latest Meridian-IQ statistics.
At RIA in a Box®, we continue to see an increasing number of small advisory firms thriving as more advisors seek to act as a fiduciary for their clients. This is largely due to the rapid evolution of the ecosystem supporting independent RIA firms. From the registration process and onward, firms like ours along with a number of custodians, technology vendors, and others allow even the smallest of investment advisory firms to operate with incredible efficiency at an affordable cost. Compliance is a serious consideration for any new RIA firm, but again, firms like ours have experience helping thousands of fellow investment advisers implement comprehensive, yet efficient compliance programs with the benefits of the latest technology.
Creating his or her own investment advisory and firm and becoming an independent RIA is not for everyone, but we do encourage every breakaway broker to give it serious consideration before considering other "quasi independent" options given the potential emotional and financial benefits of full independence.
- Start your own hybrid RIA firm by partnering with an independent broker dealer (IBD)
Under the RIA model, investment advisers are only allowed to charge fees and may not receive any commissions. Some financial advisors transitioning from larger institutions may still have a significant percentage of their practice operating under a brokerage model. Thus, there are a number of IBD firms which will allow an advisor to operate his or her own RIA firm while simultaneously operating as a registered representative of the IBD firm generally as an independent contractor.
While a hybrid setup may allow an advisor to offer both brokerage and advisory services, it should be noted that this arrangement is generally under greater regulatory scrutiny given the potential conflicts of interest and there will be some financial trade-offs to the advisor. As such, we generally recommend that advisors only consider this option if they have a significant brokerage business. All else being equal, we believe that operating 100% under the RIA fiduciary model best aligns both client and advisor incentives and allows for much more simplicity and clarity. However, there may be times when it makes to sense to explore a hybrid setup.
As part of the RIA registration consultation process, we are happy to make introductions to IBD firms that may be a good fit for your practice. It's also important to note that when registered to an IBD firm, an advisor is still generally responsible for securing office space, hiring and compensating staff, and other general overhead expenses.
- Join an IBD as both an investment adviser (IA) and registered representative (RR)
If an advisor is reluctant to operate his or her own RIA firm, most IBD firms will also allow a financial a advisor to be registered to the IBD firm as both an investment adviser and registered representative. This scenario is at times referred to as joining a corporate RIA. In this case, the corporate advisory firm is generally owned and operated by the IBD firm. In other similar scenarios, the financial advisor will join a super office of supervisory jurisdiction (Super OSJ) that may be affiliated with a particular IBD. The corporate RIA and/or Super OSJ firm will provide additional infrastructure and compliance support, however there may be significant financial trade-offs to the financial advisor. And much like the hybrid setup, the financial advisor will still be considered an independent contractor and will be responsible for paying for all general overhead expenses.
Often, under this arrangement, an advisor will operate under a "doing business as" (DBA) name but all investment business is still conducted directly through the corporate RIA and IBD firm. This scenario does usually offer more independence than being affiliated with a traditional wire house. However in our experience, we often see advisors shortly transition to starting their own RIA firm given the financial trade-offs of this model along with the realization that operating their own firm is not as daunting as it may have first seemed and offers more flexibility in regards to investment, custodian, technology, and other vendor decisions.
- Join an existing RIA firm
Financial advisors can also join an RIA firm already in existence and operating exclusively as a fiduciary with no brokerage business. This scenario can range from partnering with another local advisor already in business or by joining a larger, national investment advisory firm or corporate RIA. Each individual arrangement can vary dramatically as far as the autonomy, economic rewards, and overall independence offered. It's important for a financial advisor to remember that in this case he or she will be partnered with or be working for another individual or group of individuals. Thus, it's essential that it is the right cultural fit.
Please feel to contact us with any questions regarding the state and SEC registration process for a new RIA firm. RIA in a Box® has helped register over 2,000 new investment advisory firms and also provides ongoing compliance and technology assistance to over 1,000 RIA firms on a monthly basis.
Lexington Compliance and RIA in a Box LLC are not law firms, investment advisory firms, or CPA firms. Lexington Compliance and RIA in a Box LLC do not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.