Are Regulators Forcing You to Become an RIA?

Are Regulators Forcing You to Become an RIA?

Written by: Jason Plucinak

For many advisors, the slow-motion action on the Department of Labor/fiduciary rule has led them to take a serious look at their business models. With regulators moving the industry inexorably toward strict rules on commission-based business, advisors are considering whether turning their practice into a Registered Investment Advisor (RIA) now will keep them ahead of the industry and allow them to retain valuable clients.

The commissioned broker working for a wirehouse has been in decline for more than a decade. Aite Group estimates wirehouses have declined from almost 42 percent of all assets in 2007 to 36 percent this year. Cerulli Associates projects that independent RIAs will rise to 28 percent of the market in 2020.

RIAs do not make commissions on securities’ sales but rather charge a fee for their advice and services.

As important, RIAs are already fiduciaries to their clients and are not regulated by the Financial Industry Regulatory Authority (FINRA) but are by the Securities and Exchange Commission (SEC). And, there’s a level of independence an RIA can experience that is an attraction on its own.

But, it’s no simple decision. The move to become an RIA offers its own options: whether to be a pure RIA, charging clients a flat-fee or a percentage of assets, or to be an RIA hydrid, registered as both an RIA and with a broker-dealer.

Importantly, you have to consider what your clients want and need. The more sophisticated they are, the more likely they are to look closely at how you are compensated (and the more access they have to competitors that include RIAs and robo-services that are growing marketshare on their own).

So, if it’s on your mind, here’s a place to start. What follows are three reasons NOT to change your business model to RIA-only and three reasons TO change to RIA-only:

The case for switching to RIA-only:

1. It’s the future

Some say the handwriting is on the wall: commissioned “salespeople” have no place in managing Americans’ retirement dollars and regulators will never stop until every financial advisor in any capacity is acting as a fiduciary in all scenarios.  If this happens sooner than later, why fight it?

2. Stress Relief/Quality of Life

If you are able to successfully transition your business and clients to a fee-based only relationship, you now have much less pressure to “sell” your clients anything.  You are now getting paid to successfully manage their assets – if you make them money, you make more money. Interests aligned.  Win-win for you and your clients.

3. To save yourself and your practice from the coming legal war

Most commissioned brokers feel that FINRA will “get them” at some point – it’s only a matter of time.  Even though you run a clean practice and do what’s best for your clients, the impending fiduciary standard rules will crack open doors that plaintiff attorneys and regulators want to bust open.  Go now while you still can.

Related: What's an Investor to Do When History Doesn't Repeat Itself?

The case against switching to RIA-only:

1. Business continuity

Transitioning a practice takes a lot of time & effort, requiring you to explain the differences in your compensation to every one of your clients and having them sign off on the change. Are you ready for what could be difficult conversations with your clients about past practices?

2. A cut in pay

Commissioned brokers generally make lump-sum compensation upon every sale to every client. Changing to the RIA model means you will only make a fixed rate fee on the amount of assets you are managing for each client and you’ll generally only collect that small fee once per quarter -  at the most. Transitioning to RIA from a financial aspect generally will take two-to-three years of building your Assets Under Management (AUM) until your total fees equal or exceed what your prior take-home income was.

3. Because no one tells you what to do

If you are already acting in the best interest of your clients at all times, why would anything a regulator tries to enact make you change your business?

No matter your frustration with what seems to be continually increasing regulations, keep your focus on doing what’s best for your clients.

Jason Plucinak has over 14 years of experience as a financial professional in the life insurance, securities, and alternative investment industries. Currently Senior Vice President of Business Development at GWG Holdings, his background includes wholesaling, sales management, and Broker Dealer due diligence. Mr. Plucinak holds his Series 7 and 63 license with Emerson Equity LLC, a FINRA registered broker dealer. Mr. Plucinak earned a Bachelor of Science degree in finance from St. Cloud State University in Minnesota.
GWG Holdings, Inc.
Investing in Life
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Most Read IRIS Articles of the Week: March 19-23

Most Read IRIS Articles of the Week: March 19-23

Here’s a look at the Top 11 Most Viewed Articles of the Week on, March 19-23, 2018

Click the headline to read the full article.  Enjoy!

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Douglas Heikkinen
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IRIS Co-Founder and Producer of Perspective—a personal look at the industry, and notables who share what they’ve learned, regretted, won, lost and what continues ... Click for full bio