WHY FINANCIAL ADVISORS ARE TRANSITIONING TO RIAS
The wealth management industry has evolved dramatically since its inception over 40 years ago. Some of these changes have happened quickly, while others have been a slow shift in trends. The landscape of financial advice has become increasingly complex and saturated with information on a 24/7 news cycle, delivering more investment options and data directly to investors than ever before. Contributing events like the financial crisis of 2008 and Covid-19 have thrown meteor-like disruptions onto the already fragile and changing financial environment. The result has been a systemic shift in the way financial advisors and wealth management firms operate, with an increase in digital technology, a renewed focus on regulations, and a hyper-focus on client experience and behavior.
Wealth management firms have responded to these changes by re-imagining their business models and structures, in addition to the speedy introduction of brand-new options and affiliation models. The key differentiators amongst the various models coincide with the top reasons financial advisors decide to move their practice: financial, regulatory, and autonomy-related factors.
The combination of these factors has transitioning financial advisors favoring the Registered Investment Advisor (RIA) model, with an estimated 1,600 moving annually to Registered Investment Advisor firms, representing over $180 billion in client assets.
Financials are about more than just revenue payout; they encompass the advisor’s philosophical preference and long-term vision of their practice. The traditional wirehouses and regional broker-dealers are on the lower end of advisor payout, typically ranging from 30-55%. The lower payout is usually justified by the broad services and resources available; however, many financial advisors today feel they end up paying for programs, services, and overhead that they simply do not use or need. It is also not uncommon for a wirehouse advisor to be denied payout if clients do not meet a minimum threshold set by the firm. Traditional bank or insurance company broker-dealers typically pay out between 35-60% of revenue to the advisor, while independent broker-dealers (IBDs) and Registered Investment Advisors (RIAs) pay out between 70%-100%. Thus, the move to go truly independent can result in substantially more revenue.
The flexibility to control what expenses they pick up in exchange for a change in payout gives the Registered Investment Advisor structure more operational ownership, explaining its allure for advisors who seek true independence. According to a report by TD Ameritrade Institutional, in general, you could expect to bring in more when working for a Registered Investment Advisor over an independent broker-dealer or wirehouse, with the trade-off being responsibility and management of resources. When an advisor is thinking about their practice like a business, the Registered Investment Advisor model is often attractive because it offers the upside of building long-term enterprise value over the windfall of short-term transition money.
For many advisors, having freedom of choice over the tools and products they use in their business is important. This is a strong distinction between models. While the pre-built technology and systems infrastructure of wirehouses can offer structure, depending on the advisor’s business model and the quality of the services offered, it also limits the advisor’s freedom to choose their own providers. In the wirehouse and bank models, there can also be limited options for third-party money managers, with a curated list lacking objectivity and non-proprietary choices.
In the Registered Investment Advisor space, advisors have the whole universe of money managers and TAMPs available and have the freedom to determine how to outsource money management services while keeping overall client fees unchanged. The Registered Investment Advisor space is about complete control and open architecture, allowing the advisor to leverage an entire scope of services, technology, and platforms. It’s ideal for the advisor who desires ownership and control and wants the freedom to establish their own marketing, geographic preferences, and culture. Alongside this freedom can come an increase in responsibility and complexity.
There is a second piece to autonomy, which is the ability of the financial advisor to maximize the monetization of their practice in the future. Bank models typically provide less ability to move assets. This may be because the assets are more closely tied to the firm, or because the firm’s employment agreements are restrictive. Moving client accounts and re-branding can happen more quickly with Registered Investment Advisor firms, and with far less legal and corporate red tape than when a broker-dealer is involved. This advantage, in turn, makes Registered Investment Advisor firms more attractive to potential buyers, who may be willing to pay a much higher price for them. Thus, for financial advisors looking for the maximum future value for the business, the Registered Investment Advisor model is a clear winner.
Broker-dealers, who operate under the jurisdiction of FINRA (regulated under the Securities and Exchange Act of 1934), and Registered Investment Advisors, who register with the SEC or state governing body, are held to different standards when it comes to offering financial and investment advice. Along with lower payouts, the larger wirehouses and banks also come with more restrictive compliance and regulatory environments. This manifests to the advisor in the form of compliance-related red tape, strict client communication rules, and internal guidelines around marketing and social media. Because these firms also tend to be much larger, there is also a need to manage to the “lowest common denominator,” forcing the firm to monitor advisors with clean records as closely as they monitor advisors with disciplinary records. Often, advisors who begin their careers in this model find that the limitations of being under the umbrella of a wirehouse or insurance company inhibit their growth and ability to serve clients as their business grows. Conversely, many advisors find the Registered Investment Advisor model more attractive, as it allows for greater procedural simplicity and better control over their business and how they choose to serve their clients.
As the wealth management industry has evolved, so has the mindset of the financial advisor. With so many options, advisors are able to find the model that best aligns with the values and vision of their practice. For the advisor seeking maximum flexibility, profitability, and ownership, that model is today’s Registered Investment Advisor. In next month’s article, we will dive deeper into navigating the transition to a Registered Investment Advisor, addressing the challenges of compliance, operations, technology, and client transitions.
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 Source: CFP Board, www.cfp.net (http://www.cfp.net/), _THE ROLE OF INDEPENDENT RIA FIRMS IN A GROWING FINANCIAL PLANNING PROFESSION.
 Source: Tdainstitutional.com, “Do RIAs make more than IBDs/wirehouse brokers?”
IMPORTANT DISCLOSURE: The information contained in this report is informational and intended solely to provide educational content that we find relevant and interesting to clients of Fountainhead. All shared thought represents our opinions and is based on sources we believe to be reliable at the time of publication. While we continue to make these reports available, we do not update past reports in light of subsequent events. Nothing in this letter should be construed as investment advice; we provide advice on an individualized basis only after understanding your own circumstances and needs.