How a so-called IBD is boosting the fee-only movement

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AUSTIN, Texas — When financial advisor Ted Kerr of Touchstone Capital dropped his FINRA license to go full RIA in 2017, he and his team needed to get signatures on 20,000 pages of documents.

If he had waited about a year, though, the practice could have avoided the tedious repapering process.

Commonwealth Financial Network has created several ways to help advisors go fee-only, says Devon Cordell, manager of RIA transitions. For example, advisors going full RIA can now send negative consent letters allowing clients to opt out if they wish, without requiring forests of forms.

The firm, the No. 4 independent broker-dealer, launched a specific RIA Services division with 22 staff members this year. At least 75 advisors have abandoned their Series 7 licenses, with 65 of them registering under the corporate RIA and 10 under their own RIAs, according to the firm.

Most advisors at the largest IBDs are dually-registered, but Commonwealth and rivals like Cambridge Investment Research are boosting their RIA offerings as the movement gains steam. The number of SEC-registered RIAs has jumped by 20% since 2012 to 12,578, according to the Investment Adviser Association and National Regulatory Services.

On the other hand, the potential flow of assets to outside RIAs from corporate platforms threatens revenue losses to IBDs. But IBDs have stopped short of reining in indie RIAs, such as LPL Financial’s recent rollback of a corporate RIA requirement on incoming advisors.

The industry has seen a “rapid acceleration” of advisors ditching their FINRA registrations, said Commonwealth CEO Wayne Bloom. He cited the firm’s expanding count of fee-only advisors in his keynote speech at the firm’s annual conference last week. Many more advisors are exploring moves to fee-only as well, he said.

“As the transition to fees continues to accelerate throughout the industry,” Bloom said, “I think we’re on the front end of a wave of advisors dropping their FINRA licenses to be exclusively fee-based.”

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Kerr of Pittsburgh-area Touchstone and Michael Comstock of Brentwood, Tennessee-based Premier Wealth Management chose different paths in becoming fee-only in 2017. Comstock decided to remain formally affiliated with Commonwealth’s RIA as an investment adviser representative.

Out of 30 fee-only Commonwealth offices with nearly $7 billion in advisory assets, 26 have become IARs. Comstock said that helped reduce paperwork and the headache of converting brokerage accounts to advisory relationships under the firm’s options for 529s and other products.

The move was “a natural progression” for his largely fee-based practice, Comstock said. “It was a philosophical thing that just made sense for us, and where we saw our vision for our company moving forward, and who we wanted to work with.”

While he’s no longer formally aligned with Commonwealth, Kerr taps the company as he would a consulting firm or service provider, he says. The move from brokerage to advisory accounts was difficult, but his existing clients switched $5 million worth of dormant assets to advisory accounts.

Kerr echoes Commonwealth executives who now refer to the firm as an “infrastructure provider” more than a BD. Identifying it as a BD does a “gigantic disservice” to its menu of offerings for advisors, he says.

In a conference panel with Comstock and Cordell, Kerr said going fee-only allowed him to provide more services to clients while altering their relationship in more ways than the flow of assets.

“The ability to say you’re fee-only, it may not seem like a big deal, but I’ve perceived a change in the way my clients see me,” Kerr said. “It certainly has substance to it. There are less conflicts of interest. I think I am a better advisor because of it.”

Dealing with SEC supervision rather than FINRA represents one of the most common reasons for making the change, Cordell said. The fee-only side is “where the business is going and where the industry is going,” she said.

“It just fits their way of doing business,” Cordell said. “It seems to be a very seamless process with the clients who already feel that these advisors are fiduciaries, and they’re just able to actually now say they’re true fiduciaries.”

Bloom said in his speech that the company is not trying to push any particular affiliation for its more than 1,800 advisors. Next year, the firm will give them more custodian choices to make potential fold-in acquisitions easier for advisors, says Managing Partner John Rooney.

Commonwealth started to “cross-train” existing service staff about the RIAs needs before creating a specific RIA unit at its Waltham, Massachusetts-based corporate office, he says.

“We made the financial commitment to say, ‘Even though it might not be the most efficient business model right now to break these people out, in the long run, it’s what we need to do,’” Rooney says. “We need to be able to service the wave of fee-only as it really picks up momentum.”

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RIAs Independent BDs Independent advisors Practice management Fee-based compensation Wayne Bloom John Rooney Commonwealth Financial Network Practice Management Resource Center