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Blogs - Asked and Answered
Asked and Answered: Can RIAs Go Independent Without Going It Alone?
Monday, March 26, 2012
Partner Insights

Going independent may have a lot of appeal for advisors who have spent a while working in banks or large brokerage firms. But not everyone is cut out to be a business owner. Running an RIA day-to-day involves entirely new skill sets for most people, and also takes time that could otherwise be spent advising existing clients and prospecting for new ones.

There is a third way to go, however.

It’s a hybrid business model, one in which an advisor is independent but also affiliated with a broker-dealer. Jimmy Lee, managing partner and financial advisor at Strategic Wealth Associates, spoke with Financial Planning about how the hybrid model works and why it can make sense.

How can advisors be both independent and work with a broker-dealer at the same time?

Well, independent contractor relationships with broker-dealers are very common among independent broker-dealers, insurance company-affiliated broker-dealers and limited regional wirehouse firms.  In these examples the advisor owns their own business and is self-employed.  I think the real question is: how can an advisor own the business but not have to worry about the complexity of running that business?  One business model that does exist is the hybrid model in which advisors may want to go out on their own, but not by themselves.

What are the advantages of this hybrid business model?

A hybrid business model usually describes an advisor who has his or her own RIA, but is also affiliated with a broker-dealer. The advantages of having both an RIA and broker-dealer relationship include ownership of the business while having the support of a full service broker-dealer. This allows the advisor to provide both asset management and brokerage services.  Some can benefit from this model and be part of a larger organization that provides office space, benefits, staff, specialists, etc. Some firms exist that provide an independent broker-dealer relationship within a full service environment.

Many advisors that come from wirehouses, banks, insurance companies, etc. decide they want to be independent but don't fully appreciate the differences in skill sets of being a good advisor versus a good business owner.  They go out and hang their own shingle with "My Firm, Inc." on the door and soon find out that they don't enjoy what running their own business may entail.  In many cases the advisor gets bogged down with negotiating leases, hiring new staff, writing new office policies, handling H.R. issues that arise later, payroll, etc.  All of these issues need to be addressed but are very different from, say, writing a good financial plan, managing assets, providing risk management strategies or building an estate plan.

Of course, some advisors really enjoy their new entrepreneurial spirit.  But my experience has been that many more advisors would rather focus on financial advice, and would rather not worry about paying their office rent on time.  So, is there a model that allows the "best of both worlds" of being independent, but be supported in a full -service environment?  The answer is yes.  There are some firms that view the advisor as their client and have created a value proposition to serve this market.  Some of these firms are affiliated with independent broker-dealers and others with insurance affiliated broker-dealers.  Some firms employ on-staff specialists such as advanced markets attorneys, risk management, investment advisory, and financial planning experts to help their advisor manage their client relationships.  In these models, the advisors may have payouts that are similar to what they would receive on a net basis with an independent broker-dealer, but in some cases get benefits such as group health insurance and/or retirement plans.

Are advisors giving up anything that they could have if they went fully independent?

This really depends on the situation and advisor.  Some would say that these models may limit their ability to market the sale of their practice at the end of the road, but again that is dependent on the particular firm and business model in question.  Some firms have built in succession strategies that their advisors may want to explore when the time comes and also consult on how to increase the value of their practices.  So, in my opinion, the real difference may boil down to the advisor really wanting to do it their way versus the culture of the firm that they may decide to affiliate with.  In more situations than not, I think that advisors who leverage this type of structure will have more time to acquire and service clients that bring in revenue to their business rather than spending time on nonproductive activities as we've discussed earlier.







(1) Comment
Within the brokerage industry there is no large scale institutionalized support for fiduciary standing that makes advice, safe, scalable, easy to execute and manage. RIAs have no scale and broker/dealers with scale will not acknowledge fiduciary standing of the broker. It is long established that broker/dealers, whether large or small, independent or employee firms do not acknowledge or support fiduciary standing. So, RIAs aligning with an independent broker/dealer for their support of fiduciary counsel essential for an RIA to function is at best highly misleading.

Just ask the broker/dealer whether it is responsible for and supports in writing the advice its brokers are rendering.

Not one such firm exists. Such permission to act in a fiduciary capacity is very rare and is only granted by exception of circumstance and the broker's skill. Otherwise, brokers do not render advice and it is a violation of internal compliance protocol for brokers to acknowledge they render advice and have ongoing fiduciary duties to act in the client's best intererst.


Posted by Stephen W | Monday, March 26 2012 at 8:41PM ET
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