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The $50B chess game: High stakes for IBDs embracing RIAs

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NEW ORLEANS — Independent broker-dealers and financial advisors considering their own RIAs are playing a high-stakes game of chess, according to Michael Bryan, CEO of Triad Hybrid Solutions.

“It’s the way in which you configure those chess pieces that makes you a unique practice,” said Bryan, who leads the Ladenburg Thalmann IBD’s multi-custodian RIA. “There’s an infinite number of combinations of the game of chess, but they’re the same pieces and we’re all playing with them.”

IBDs who fail to embrace the growing array of advisory and affiliation structures in the RIA channel could lose the game before it even starts, according to Bryan and other wealth management executives on a panel at last week’s FSI OneVoice conference.

Advisors dropping their IBD affiliations to launch fully independent RIAs represent the largest source of new SEC-registered RIAs. New indie RIAs account for some $50 billion in assets under management flowing into the channel each year, according to Charles Schwab Advisor Services.

IBDs like Commonwealth Financial Network and Cambridge Investment Research are increasingly vying to serve RIAs. Even the wirehouse stalwart Wells Fargo Advisors has launched a new RIA channel, and custodians such as Pershing and Fidelity Clearing & Custody Solutions are also changing their approach.

Rather than try to resist the growing independence movement, IBDs would be better served by making advisors aware of what’s required to run an independent RIA, according to Stephen Smith, the chief compliance officer of 1st Global. Technology and compliance make it an expensive challenge, he says.

“‘Are you prepared to do all of these things? Are you prepared to maintain all these records?’” Smith said his IBD asks advisors. “And if you are, fine, that’s great. I just really want you to understand and know what you’re getting into. We can support any flavor of RIA, support any flavor of affiliation.”

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The issues include due diligence, business continuity, best execution, codes of ethics, disclosures, contracts, internal and external audits, as well as investment and risk committees. The burden and the tax-focused IBD’s resources “sometimes” convince advisors to stay with the corporate RIA, Smith says.

Other advisors opt for a middle ground by opening their own RIA while tapping the IBD or its corporate RIA for white-labeled technology offerings, third-party asset management or other support. Triad Hybrid Solutions works with four different custodians, while its main corporate RIA uses only Fidelity.

IBDs have an opportunity with RIAs if they approach the issues like consultants, according to Bryan. Rather than “try and dogmatically hold on to the old broker-dealer model,” they should strive to understand what advisors are “ultimately trying to achieve, and go about providing those solutions,” he said.

“The days of being an independent broker-dealer who also has a red-headed stepchild of advisory business, those days are long gone,” Bryan said. “And we just have to decide as an industry if we’re really ready to embrace that.”

The role held since August by Adam Roosevelt, a director with BNY Mellon’s Pershing Advisor Solutions, displays the shift within the industry. Roosevelt leads both the clearing and custody sides of the firm’s corporate and hybrid RIA services for its IBD clients due to the “convergence” of IBDs and RIAs, he says.

Advisors who are going independent often tell Roosevelt, “‘I didn’t see the value in my broker-dealer any longer, I didn’t see the value in retaining that relationship,’” he said. “We need to try to figure out a way, as business partners, to try to define what that value is, and make sure that the advisors that are affiliated with our firms know that and appreciate that.”

Fidelity’s client IBDs often request multi-custodial capabilities for the onboarding of assets from new advisors and clients, more so than their existing bases, according to Carolyn Clancy, head of Fidelity’s BD segment. Many account opening processes “can still be more cumbersome than we’d like,” Clancy says.

Clancy, who spoke in an interview separate from the panel, acknowledges that both IBDs and custodians may lose revenue when advisors decide to use multiple custodial partners. Fidelity is therefore developing and rolling out “foundational, core work” relating to the tech user experience, she says.

“We’ll accommodate what the best thing is for them. We’re in it for the long term with these clients,” Clancy said. “And hopefully over time we can show them why it’s a good thing, what the benefits of one provider are, whether it’s on the clearing or custody side.”

Providing multiple custodians also has pros and cons for IBDs, according to panel moderator Erinn Ford, president of Ladenburg’s KMS Financial Services. The IBD’s corporate RIA offers four custodians, which can serve as “a natural insulator” against the departure of large enterprises.

On the other hand, the custodians can differ in terms of their offerings for firm’s advisors, according to Ford, who emphasized the importance of addressing the individual needs of each practice.

“It’s all about relationships,” Ford said. “It’s all about making sure that they feel they have a business partner that’s helping them grow in the way that they want. And so it’s not easy, because of clients and oversight.”

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