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The Rise of the RIA


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How IBD advisors are reconsidering their future in a changing business climate and landscape

The independent broker dealer (IBD) space has experienced a transformation of late, just short of the consolidation we witnessed in the wirehouse world during the financial meltdown of 2008. Today, a changing regulatory environment and an increase in the overall cost of doing business has placed an enormous burden on independent broker dealers, no matter their size. Small broker dealers that lack the scale necessary to invest in their compliance and overall infrastructure are rapidly becoming an endangered species. As a result, mergers and acquisitions in the IBD space abound, and many IBD reps are finding themselves at firms that look nothing like the ones they joined years ago.

Acquisitions and the consolidation that’s ensued have resulted in enormous upheaval for IBD reps, and these advisors are often faced with a home office ill-equipped to support the new larger entity and an overly taxed compliance department focused on managing to the lowest common denominator. These unsettling changes have been the tipping point for many and as business owners, they are taking the opportunity to evaluate their long term business strategy. While some will seek out a new broker dealer offering greater stability, scale and support, others desire an even greater modicum of freedom, flexibility and control and are choosing to launch either a hybrid RIA (for advisors who want to continue capturing revenue from commission business) or an RIA (for advisors with fully fee based practices). The RIA channel has been growing steadily in terms of both headcount and assets under management, with IBD advisors representing a new wave of breakaways. Having built successful, stand-alone businesses, these confident entrepreneurs want true open architecture in order to best serve their clients, greater customization of technology and compliance, a community of like-minded advisors and the final word when it comes to their bottom line.

The New Breakaways

For advisors with predominantly fee-based businesses and assets exceeding $100mm, the broker dealer world can be limiting in terms of economics, platform, technology and compliance—not to mention many advisors have found that their businesses have grown too complex to be supported by this model. IBD’s can be expensive – with many hidden costs – while advisors often feel constrained as they’re limited to a set menu of investment products and often less sophisticated technology. With average rep production in the IBD space hovering around $400,000, broker dealers offer core services designed to serve the smaller advisor. Plus, heavy-handed compliance departments built to manage to the lowest common denominator often create inefficiency, which results in a decrease in productivity for highly successful advisors.

As an RIA, advisors keep a greater share of their revenue and have complete control over fees and expenses. Advisors who have outgrown the IBD space often require more sophisticated services to meet their clients’ needs, and access to an open architecture with the ability to leverage the best of what Wall Street has to offer – allowing RIAs to better customize the client experience. With client assets held safely at a custodian, the advisor sits on the buy side, becoming a client of “The Street” on behalf of his clients.

Superior technology, including better CRM and portfolio management systems along with more advanced performance reporting, often top the wish list for advisors contemplating a move. Many find utopia in the RIA world as there’s more optionality when it comes to software solutions and greater customization in terms of compliance.

With greater control over supervisory decisions, RIAs have more flexibility and experience an overall ease of doing business. As a fiduciary, RIAs deliver highly personalized advice and must avoid any conflicts of interest. In this model, advisors offer investment recommendations to their clients and purchase services from a custodian, whereas broker dealers must act in accordance to a suitability standard which in turn imposes limitations on how an advisor can run his business.

What’s in a Move?

Launching an RIA is not as herculean a task as many perceive it to be. With most of the infrastructure already in place, there are essentially 3 components involved for the IBD business owner transitioning his business to an RIA model:

  • Custodians: Custodial services go beyond holding client assets and choosing a custodian often comes down to identifying the right fit. Custodians will guide advisors as they formulate and execute their business plan and prepare to launch their firm. As business-to-business partners, they provide access to a wide array of investment and banking products, not to mention highly integrated technology solutions. Custodians have to earn “their clients’” business every day and offer ongoing practice management as well as technology and operational support.
  • Technology: Leveraging the best of what the street has to offer, RIAs can pick and choose from a broad array of dynamic technology solutions designed to benefit the needs of their business. Rather than being limited to a technology platform that’s one size fits all, customization defines the RIA space and given today’s technology is anything but static, advisors will often find software solutions that surpass what they had in the broker dealer world. Whether it be a turnkey package from a custodian or individual systems that “talk to” one another, advisors will find solutions that are highly integrated.
  • Legal Support: Having spent years relying on a broker dealer for compliance supervision and support, the legal considerations surrounding an RIA practice are often the most daunting for advisors coming out of the broker dealer world. RIAs have far greater autonomy and control over the decisions they make and as such, there are a number of regulatory requirements that must be met. For starters, most RIAs will hire a compliance consultant to walk them through registering their firm with the SEC, filing their Form ADV (the uniform form investment advisors must submit to the SEC that specifies their investment style, assets under management and key officers of the firm) and drafting their compliance manual. As for ongoing supervision, custodians provide some surveillance but most RIAs will hire a compliance consultant. In fact, an entire cottage industry of third-party consultants and experts has been born to support the independent advisor and with superior economics, the cost for these services has minor impact on an RIAs bottom line.
  • Platform Providers: With a greatly evolved independent landscape, there are more turnkey solutions available than ever before. Platform providers such as Dynasty Financial Partners and HighTower Network alleviate much of the heavy lifting by offering access to fully built out, customized platforms that advisors can, for a fee, leverage.

While advisors in the IBD space enjoy many of the benefits of operating independently, a desire for even greater freedom and control has led many to plot a path to the RIA world. Add to that the angst that plagues many in the space who worry that their firm isn’t equipped to deal with the changing regulatory environment and who may not have the financial stability to remain competitive. In making the transition to an RIA, advisors should think about it as unbundling the services that their broker dealer provides with the luxury of selecting and paying for only those that they need. While there’s indeed some heavy lifting involved, having a well-oiled machine already in place coupled by access to an entire cottage industry of consultants to handle legal, compliance and technology, charting the path to become an RIA is relatively seamless.

When considering evolution, Charles Darwin stated, “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” The flexibility offered in the RIA space provides advisors with the opportunity to grow and prosper in what’s proving to be a highly unsettling business climate. Those that adapt will find greater potential to not only survive, but to thrive.

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