As the wealth management industry evolves, many successful financial advisors are leaving traditional banks, brokerages, brokerages, and broker/dealers to pursue the registered investment advisor designation. While there are a multitude of reasons to make such a career-defining move toward true independence through an RIA, most advisors will rank the control and flexibility to do what’s best for their clients at the top.
The rush to achieve independence may come at the expense of what is in the client’s best interest. RIAs must ensure they have the control and flexibility to take advantage of the full spectrum of investment options, even if this is a commission-based product.
Going to RIA is more popular than ever
According to Cerulli’s latest report, the RIA channel now controls 26.9% of the industry’s total number of advisors and is projected to grow to 30.2% by the end of 2027.
Leaving a captive situation like a wire or even a large IBD that is starting to look like one to start an RIA is the next logical step for an entrepreneurially minded advisor with some level of success. These advisors want to decide for themselves how to best run their practices and serve their clients.
Counselors have fully realized how much freedom they gain when they are released from a large institution. It also became clear to many that all the overhead costs they had paid out of their compensation were trivial or unnecessary, and that the client’s bond, loyalty and relationship was always with the adviser, not the firm.
The benefits of withdrawing as an RIA begin with the potential financial rewards. You are building a business for yourself that can grow in value based on your hard work and result in significant equity that you can cash out in an eventual liquidity event. You choose the clients you want to work with and help them achieve better results without the pressure of selling home team products.
Today’s customers have changed. They expect more from their professional relationships, including those with their financial advisors. They want a high-touch, personalized service experience from a loyal customer focused on always doing what’s best for them. They want a well-thought-out, comprehensive financial plan, an unlimited number of products, substandard service and prepackaged communications. These customers are younger, more diverse and increasingly female and care less about brand names than their parents. In fact, a prominent national brand can be a turn-off, as it seems cold and impersonal.
Most advisors value client relationships highly, and the RIA model helps them deliver on that promise. But is there a cost?
Maintaining your commissioned business
Creating an independent RIA with your own Form ADV is the pinnacle of independence, where you run your business as you see fit, use third-party service providers of your choice and call all photos subject to SEC or state oversight. Joining a firm’s corporate RIA is an option for many people who want independence but prefer to outsource compliance, operational and other back office tasks to someone else.
If you are considering starting an independent RIA because of the flexibility and control the model offers, this should extend to your ability to offer your clients a truly comprehensive wealth management experience, including brokerage services.
Fee-only use with an RIA does not mean you have to give up your existing commissioned business or not offer these services in the future as appropriate. You may have existing variable annuity clients or prospective clients who could benefit from opening one. You may also have clients with large company stock positions that you want to diversify over time. These are customers you value, want to maintain relationships with, and support to the best of your ability.
One way to achieve this is to work with an RIA-friendly broker/dealer to execute this business and receive commissions and trails based on their payment network. These limited service broker/dealers are designed for this type of business.
Using this approach, you will separate your fee-based and commissionable businesses. All of your fee-based activity will be through your RIA. In the meantime, you’ll keep your Series 7 and make commissionable transactions through the broker/dealer.
The benefits of true independence do not mean sacrificing the ability to conduct bespoke business. It is the responsibility of an RIA to do what is in the best interest of their clients, and sometimes, that requires a relationship with a broker/dealer.
Michael Nessim, CEO and Managing Partner of Kingswood Wealth Advisors, an SEC-registered RIA and a FINRA-licensed broker/dealer
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