Ask the Experts: Give Up Having My Own RIA?

As Regulatory Costs and Complexities for RIAs Increase, Small and Mid-Sized Business Owners Are Exploring “IAR-Only” and “Tuck In” Possibilities

For many followers of the independent wealth management industry, it feels like just yesterday when the independent broker-dealer space was widely viewed as destined for extinction.

Back then, many industry pundits opined endlessly on how the best possible path forward for successful and experienced independent financial advisors would be to launch their own RIAs – So long as they had at least $100 million or so in client assets.

But the times are changing.  As our latest WSR survey of small to mid-sized RIA owners completed this month indicates, there has been a significant shift in these sentiments over the past ten years, driven by three key trends:

1. Reg BI and other regulatory obligations are starting to reduce the appeal of “regulatory arbitrage” for independent advisors going from the IBD to RIA segment

2. Increased demand among end clients for the latest technology tools to enhance each aspect of the service experience

3. Elevated activity among both pure RIAs as well as IBDs with an RIA platform in offering Investment Advisory Representative (IAR)-Only affiliation models

What makes the IAR-Only approach interesting to small RIA owners?  The model supposedly enables an independent financial advisory firm to wind down its own RIA while remaining an independent business, operating under its own brand, team and culture, in affiliation with a larger RIA.

Meet Our Expert Panelists

With this context in mind, our Ask the Experts Panel for this issue includes:

• The large IBD / RIA perspective:  Erinn Ford, EVP, Advisor Engagement at Advisor Group, one of the nation’s largest networks of independent wealth management firms, with over 10,000 financial advisors and more than $475 billion in client assets.

• The independent RIA perspective:  Nathan Stibbs, President, Continuum Advisory LLC, an independent RIA platform that supports independent financial advisors across the country, with over $3 billion in client assets.

• The mid-sized firm perspective:  David Pittman, EVP, Strategic Blueprint, a hybrid RIA with over $1 billion in client assets.  Strategic Blueprint is part of SFA Partners, a family of wealth management firms that also includes an independent broker-dealer, corporate RIA and insurance solutions platform.  In total, SFA Partners has $5.5 billion in client assets.

• The third-party recruiter perspective:  Jeff Nash, CEO of BridgeMark Strategies, a national consultancy focused on financial advisor recruiting and transitions.

Here’s Our Reader Dilemma:

I am the sole shareholder and leader of an SEC-registered RIA in Charlotte that is focused on wealth management and financial planning for mass affluent and lower quartile high net worth individuals and families.  I founded the firm 25 years ago (actually, I just celebrated my 55^th birthday last month!).

I’d characterize the client base as being very loyal, predominantly middle-aged to pre-retiree, and mostly spread out across North and South Carolina.

I have three employees:  Two client service professionals, one admin, and all three are full-time, W2 workers.  In addition to my other duties, I wear the Chief Compliance Officer hat.

Our revenues are stable, with minor incremental growth year over year in the past decade.  Additional key stats for the business are as follows:

• $110 million in client assets in total, about $70 million in fee-based discretionary assets, the balance in equity-indexed annuities
• Annual topline revenues around $900,000
• EBOC (earnings before owner’s comp) is roughly $700,000
• I spend $200,000 a year total in employee compensation for my three employees
• There’s also an office space lease that costs me $50,000 a year

I was previously a dual registrant with an independent broker-dealer that had an RIA platform.  I appreciated the turnkey back office support, but being under FINRA regulatory oversight was exhaustingly burdensome.

But with Reg BI equalizing much of the regulatory burden, increased costs in general for smaller RIAs like mine to operate effectively plus a wave of new IAR-only offerings with both IBDs and larger RIAs, I’m open to potential new structures for my business.

My question for your panel experts:  How should I best think through next steps on this decision?  And what are the pros and cons of the three choices currently on the table for my business:  Remaining an independent RIA, going IAR-only with an IBD, or going IAR-only with a pure-play RIA?

The Large IBD / RIA:  Erinn Ford, EVP, Advisor Engagement at Advisor Group

You’re definitely showing foresight in asking these questions now, to best control the destiny of your business, versus waiting around to let the future happen to you, as it were.

Based on the background you’ve shared, you’ve built a solid and sustainable business over the past 25 years.  Congratulations on that, and your recent birthday celebration!

I’d like to start by taking a step back to re-assess how you’re thinking about your current options.

In my view, the landscape of opportunities and challenges will be made all the tougher to navigate if you examine your situation with an overly-compartmentalized view of the outcomes.

While it’s understandable that your past experiences coming out of the IBD space are playing a role in your decision-making process, it’s crucial to point out the reality that exists today:  The wealth management space isn’t nearly as binary as it might appear between the RIA and IBD segments.

In fact, a greater convergence between these two segments – represented in many ways by Reg BI, which itself is a key driver in your thought process – could be the new normal.

Given where you are in your personal and professional life cycle, I’d say it’s essential for you to think about two key things:  

• How will your next moves support your ability to deliver an exceptional client service experience?

• And how does that next move ladder up to your broader strategy to ensure that your business is around long-term to continue to do right by your clients and their families?

At Advisor Group’s recent NxG Conference – a virtual experience for top-performing financial professionals in the first 15 years of their careers – our attendees made it clear that many next gen advisors would avoid having their own RIA.  This is because they don’t want to be where the buck stops when it comes to administration, operations, technology and compliance.

Moreover, looking at the delta between your top-line revenues and your earnings before owner’s compensation (EBOC), you might be best off creating more of an earnings cushion for the business.  Why?  So you can actively reinvest in the talent and tools that actually drive future revenues while optimizing your income.

And do you want to appeal to a next gen successor or small team of successors in the next decade or less, thereby securing how your clients will be served while capturing fair value for your business?  

If so, there’s a strong case to be made that aligning with a well-resourced, dual registrant firm is the best approach for where you are in your current business life cycle.  Large dual registrant firms that are active across multiple business models offer much wider communities of financial advisors of all ages, many of them potential succession plan partners for you.

Capturing the best possible opportunities in this regard will necessitate shifting your assumptions about what might have been correct over a decade ago about the dual registrant space – And recognizing just how convergent the IBD and RIA spaces are these days.

The Independent RIA:  Nathan Stibbs, President, Continuum Advisory LLC

The landscape of our industry is moving at the speed of a Cat 5 hurricane and advisors are now presented with more affiliation options than ever.  

But cutting through all the noise and “alphabet soup” of affiliation models, here’s the single most important question to ask yourself:  What is the optimal RIA structure that will allow you to maximize your potential and deliver the most dynamic client experience possible?   

And let’s put this into further context:  Are clients now expecting more from their advisors?  Absolutely.  All the talk about scale becoming more important?  Dead accurate.  

Independent financial advisors need to be able to deliver more comprehensive services and a broader range of resources to effectively support clients’ needs and to effectively compete for and attract more target clients.

Without a scaled infrastructure and operating model, managing your own independent RIA will become more costly, risky, and time consuming…as you rightly sense.  I’d also add that the prestige that once came with having your own RIA, even if it is small, has been tainted by operating challenges, risk, and fierce competition across the broader RIA space for firms that don’t have the resources and scale to adapt to rising complexities.  

Fortunately, what has emerged in recent years is a “tuck in” solution that gives advisors the look and feel of an RIA, but without the cost and headache of managing compliance, technology, and operations.

By joining an independent RIA that provides turnkey middle office support, access to institutional clearing platforms, and true innovative technology, advisors gain the best of both worlds.  They maintain their brand and ownership of their business, while delegating the costly and time-consuming back-office functions to an independent RIA.

Now, as to your question on becoming an IAR with an independent RIA versus joining an RIA that is part of an IBD:  I’ve worked on both sides of the industry, and I can say with experience that RIAs can move fast and be nimble, while IBDs can be inflexible, slow to react, and even slower to execute.  

Ready or not, the digitization of wealth management is, if anything, exponentially accelerating.  

Independent RIAs offering tuck-in opportunities for small RIA owners are very well-positioned to offer their IAR affiliates new technologies for scale and efficiency, without having to first dismantle or jerry-rig legacy operations and platforms.  Many IBDs just can’t make that same promise.

The Mid-Sized IBD / RIA:  David Pittman, EVP, Strategic Blueprint 

First, congratulations on creating a great business. But now is not the time for complacency. You need to always be thinking about your future and what you want your firm to look like a year, five years or even ten years down the road. That means considering the must-have building blocks for creating the best possible client experience for whatever the next stage of your business happens to be.

Here are a few key questions to consider:

• What are the tasks and responsibilities that you must control and what are the ones you can relinquish?

• What are the types of services that would best drive your ability to fully focus on client relationships?

• What kind of resources and solutions do you not currently have access to, that a larger firm could provide? 

In today’s environment – where the strains of running an independent business are getting more intense by the day – some RIAs are willing to shutter their own firm to go the IAR-only route, provided they are left alone and get the compliance and back-office support they need. 

But many others are looking at the current landscape as a strategic inflection point, taking the time to examine other ways a partner firm can drive additional value to their business, whether it’s technology, financial reporting or something else. 

It sounds like you are already acutely aware of the key pros and cons of remaining independent, so let’s look at your other options. 

The first is being IAR-only under a pure-play RIA. While there are a growing number of these firms today, a common complaint is that these firms force – or strongly encourage – advisors to use their centralized investment management programs. 

In some cases, the IAR-only relationship is priced based on the extent to which the advisor leverages the RIA’s models and investment management solutions. If you go down this path and then discover that your clients are disappointed with investment management menu, you could find yourself in a tricky situation.

Another option is going IAR-only at a dual registrant firm, which comes with its own set of opportunities and obstacles. Though the existing infrastructure and resources of a longstanding IBD can be attractive, registering as an IAR-only with a dually registered firm rarely makes sense. 

Instead, consider affiliating with a corporate RIA that is very clearly a separate and distinct entity from the broker-dealer.  This kind of structure tends to produce more specialized advisory operations, compliance, and supervision along with an advisory-focused culture. 

At the same time, you’ll still have access to the turnkey comprehensive support and services from a broader ecosystem of resources.  Good luck with your decision!

The Third-Party Recruiter:  Jeff Nash, CEO, BridgeMark Strategies

Your situation boils down to the following question:  Should I remain independent or is there significant scale at another organization where I can tuck in seamlessly?

Typically, smaller firms like yours that have less than $250 million in fee-based RIA assets are better off aligning with a strategic partner such as a larger RIA or Super-OSJ group to provide the scale and resources necessary.  

Net of fees, time and risk, finding the right strategic partner from these segments of the industry tend to provide added benefits and resources you wouldn’t otherwise have.

While the last 10 years has witnessed an explosion of newly-created RIAs, and this trend isn’t slowing, individuals with their own RIA are increasingly concerned about the regulatory risks and obligations involved.

This is why a greater number of independent RIA owners are open to the idea of tucking into someone else’s RIA.  Helping to advance this tuck-in trend is the evolution of the Super-OSJ model, which until recent years has largely served as a compliance hub for registered reps.

Now, many Super-OSJs have started their own independent RIA, thereby creating a compliance hub for IARs also.  These Super-OSJs are also building multi-custodian platforms while adding additional support services ranging from technology, to HR, to practice management tools and support.  

Super-OSJs like these have become a full platform solution for IARs, and can provide a turnkey alternative for smaller RIAs like yours.

I’d also add that becoming an IAR under a larger organization isn’t just for small and mid-sized RIAs.  We often consult with independent wealth management businesses that have more than $1 billion in fee-based AUM that still prefer to be aligned with a hybrid RIA or Super-OSJ.

These businesses have the size, scale and resources to establish their own RIA and they choose not to do so because they see the associated administrative or regulatory complexities as unnecessary distractions.

So if you choose to go with the tuck-in route with either a hybrid RIA or Super-OSJ, know that you’ll be in good company!

Janeesa Hollingshead, Senior Editor of Wealth Solutions Report, can be reached at editor@wealthsolutionsreport.com