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.
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.
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 IRIS.xyz, March 19-23, 2018
Click the headline to read the full article. Enjoy!
Let’s pretend you are a US investor that wants to deploy some of your money overseas. You think international developed market stocks are attractive relative to US stocks, and you also think the US dollar will decline over the period you intend to hold your investment. — Chris Shuba
I had a chat with The Financial Times the other day, and provided lots of background as to why I don’t think cryptocurrencies are the choice of criminals. The comment that was reported was the following ... — Chris Skinner
During the tumultuous red and green gyrations of the capital markets this year have your clients anxiously called to ask: “What’s going on with my portfolio?” What do you do when the usually smooth ride in your luxury automobile becomes as bumpy as Mr. Toad’s Wild Ride in the Happiest Place on Earth? What does the average investor do? — Ted Parker
Inflation is a bad thing, right? It make things more expensive, right? For those of us of, let’s say, a certain vintage, we recall the runaway inflation of the late 1970’s and early 1980’s. So why does the Federal Reserve – in charge of managing the country’s currency and value thereof – actually try to create inflation? It’s called the inflation targeting and it matters to your money. — Bill Acheson
As you near your 60’s, your prime earning and saving years will transition into a period of time where you get to enjoy the “fruits of your labor,” a.k.a retirement. We call this segueing from accumulation to decumulation, the period when you will be drawing from your accumulated nest egg. — Dana Anspach
Exchange traded funds (ETFs) are popular vehicles for market participants looking to engage in thematic investing. Thematic investing looks to take advantage of future growth trends, including disruptive technologies. Given that forward-looking approach, stock-picking in the thematic universe is equally as hard, if not harder, than in traditional market segments. — Tom Lydon
It’s not enough for your salespeople to be product experts, they also need to be capable of having the kind of conversations that position them as business experts and even strategic resources. — Lisa Rose
Business growth doesn’t come from wishful thinking. As you know, it takes a lot of hard work. The growth of your business is not an option – it is a necessity. Coordinating the right mix of strategies to gain market share and improve client acquisition rates is essential to advance your firm in today’s economy. — Michelle Mosher
It’s undoubtedly true that investors’ financial security is no laughing matter, and this is reflected in the stolid, dour, reliable imagery and branding that is, by and large, the industry standard. This is hardly surprising—investors need to believe they’re placing their hard-earned money in the hands of experienced, trustworthy professionals. — Alexandra Levis
The number one question advisors ask when exploring a move to independence is how the economics compare to accepting a recruiting package from a major firm. It’s certainly a valid concern, because while the recruiting deals being offered by the wirehouses are down, it is still very possible for a top advisor to get a really attractive hard-to-pass-up offer. — Mindy Diamond
Municipal bonds might not be the first thing that comes to mind when you think of a sexy investment. They don’t typically command news headlines like the stock market or bitcoin. — Frank Holmes
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