Should financial advisors be dually registered or RIA-only?

This is the seventh installment in a Financial Planning series by Chief Correspondent Tobias Salinger on how to build a successful RIA. See the previous stories here, or find them by following Salinger on LinkedIn.

Financial advisors eager to join the continuing movement toward registered investment advisory firms must decide if that entails some form of a brokerage relationship.

That question can prove tricky, though, in a profession that has traditionally treated brokerage business as separate from RIAs — even though most advisors operate as dually registered representatives of both types of firms. 

The regulatory distinction between brokerages and RIAs starts with the supervisory agencies overseeing the two kinds of firms, with brokers subject to FINRA's rules and advisory firms responsive to the Securities and Exchange Commission. However, the SEC is in charge of FINRA. And most advisors point out that the key distinguishing factor stems from the standard of care: RIAs must put clients' interest first under the fiduciary duty, while brokers' advice is only subject to a lesser level of scrutiny requiring their recommendations to be in the "best interest" of their customers. 

The possible ramifications of being a broker extend much further than compliance considerations, though. Advisors wondering about whether to be, in the industry's parlance, a "full RIA" advisor will need to figure out how that choice will affect their current client bases and possible future ones, their pick out of a growing number of options available for firm registrations and ownership, and the extent that the decision could hamper their ability to recruit more teams to their firm down the line, experts said. 

The loss of a Series 7 license that is required to register as a broker in the first place can sometimes even add an emotional component to the equation, said Shelby Nicholl, founder of advisor recruiting and consulting firm Muriel Consulting. But advisors and their clients are certainly making their preferences clear.

"We are seeing a pretty seismic shift toward RIAs today," Nicholl said, noting that many more clients have learned the meaning of the word "fiduciary" than had just 10 years earlier, and advisors generally see much more room to work under that level of duty to their customer at RIAs. "They want less restrictions on the compliance side, so by going RIA, they can achieve that goal."

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The broker-RIA tradeoffs

That RIA-only route, however, entails addressing the declining yet notable sliver of advisors' businesses that are based on brokerage accounts that pay ongoing trailing commissions, according to Brad Wales, founder of consulting firm Transition to RIA. 

A brokerage firm of some kind must service that business in order for the advisors to keep that revenue stream. So advisors dropping their longtime wirehouses or leaving independent broker-dealers to be fully advisory with no sales commissions must find their answer to the question of, "can they cross that bridge near term, or is that a longer term project?," Wales noted.

"Most would like to be full RIA, it's just whether they can bridge that gap or not," he added. "If you have hundreds of thousands of dollars in trails, it might make sense to retain that business long term. It does come with tradeoffs."

Those challenges revolve around whether to use one of the so-called friendly brokerages that often work with independent RIAs or giant firms with a lot of resources on one hand and no shortage of requirements on the other. 

Other options for advisors include transferring the brokerage business to a different so-called rep of record while "they keep full control of those client relationships" with the collection of a consulting fee for their ongoing advice, said Simon Hoyle, founder of advisor recruiting and consulting firm RIA Choice. But that often brings some higher costs and headaches from working under multiple regimes at once, so one advisor who recently worked with Hoyle opted to join a midsize brokerage as a dually registered rep instead.

"It becomes a little bit messy," Hoyle said. "He practically wanted to join on the first call with this BD, which I don't think has ever happened." 

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By the numbers

The data from two annual industry reports respectively collected by FINRA and the Investment Adviser Association and COMPLY show the shifting affiliations of the advisor profession. As with many wealth management-related metrics, the numbers come with some limitations based on the fact that some portion of the representatives who formally affiliate with a brokerage or RIA are not retail client-facing advisors. But industry experts generally estimate that there are roughly 300,000 advisors — or about 75% of the number of registered representatives who are either with an RIA or dually-registered at a brokerage.   

In 2017, 50% of FINRA-registered representatives were only affiliated with a brokerage firm, compared to 41% who were dually registered and just 8% who were RIA-only. Only a half dozen years later, 45% were dually registered, 43% were brokerage-only and 12% were RIA-only.

Between 2019 and 2023, the number of brokerage-only reps slipped 6% to 308,795, while the ranks of dually registered professionals expanded by 8% to 319,597, and that of RIA-only reps soared 30% to 85,814. Those diverging directions in rep count over recent years came amid a longer-spanning trend involving RIA firms that are either dually registered as a brokerage or owned by a parent company with a broker-dealer. 

Between 2001 and 2024, the share of RIAs with a brokerage arm tumbled to just 16% from 38%. Regardless, dual registration as a broker and an investment advisory representative remains the most common form of advisor affiliation.

"The number of SEC registered investment advisers has been increasing, while the number of brokerage firms has been declining. However, despite their decline in number, brokerage firms play a critical and required role in the U.S. securities markets," according to the IAA and COMPLY report. "The financial industry's shift toward investment advisory firms and investment adviser representatives has been a longer-term trend. Investors are increasingly seeing the value of the fiduciary advice offered by investment advisors. At the same time, investment professionals are seeing the benefits of the investment advisor business model."

READ MORE: How financial advisors are going full-RIA — with a 'brokerage'

A wealth of options

But they're tapping into those advantages in so many different ways as they consider whether they should be an RIA-only advisor. Many firms known colloquially in the industry as brokerages these days do more advisory business, and they're increasingly pitching teams on the idea of working with them as RIA-only advisors. 

Meanwhile, the growth of RIAs has given rise to another group of competitors for advisor talent in the form of platforms or aggregators that may or may not have their own brokerages or use outside broker-dealers. 

And still another model that is most appealing to flat-fee planners offers them a corporate RIA that will manage every compliance and operational task on the advisory team's behalf for a "very competitive" rate, Hoyle noted, describing that idea as being "at the beginning stages" of its popularity. In general, technology in the form of advisor matchmaking and lead-generation websites are fueling the shift toward RIAs as well, according to Hoyle.

"They're training consumers to work with a fiduciary, and reps charging commissions may be challenged going forward," he said. "That's really, in my opinion, influencing higher net worth people in terms of how they're working with an advisor."

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A handy tool in the chest?

Regardless of their pick out of the many paths available for being a full-RIA advisor or a dually registered one, advisors often elect to remain the latter out of habit or in response to "a little bit of misinformation about what you can and cannot do inside of the RIA space," said Nicholl. 

Muriel Consulting

She cited the example of a family's highly concentrated individual stock holding that they have kept in a brokerage account for decades, to the point that an advisor isn't even charging them a fee for that portion of their business. Many advisors may not know that they can convert the stock to an advisory account and put it in a separate sleeve from other assets to keep the cost nominal or nonexistent, she said.

"It really depends on your broker-dealer platform today," she said. "When you come from a firm that doesn't have that type of sleeve technology, that's a new learning to you that you could even do that."

For certain teams, the criteria involves more than just their own characteristics. Even though the industry's momentum keeps moving to the RIA side, the teams and firms with recruiting and M&A plans often seek to provide a means of converting brokerage business to advisory accounts or another solution for new advisors, Wales said.

"It typically is helpful to have that friendly BD solution to onboard that advisor without forcing them to whittle that commission piece down to nothing," he said.