Are IBD And RIA Channels Converging?

As Regulatory, Market And Industry Shifts Continue, Differences Between The Channels Are Blurring

Andy Kalbaugh, Expert Columnist on Leaders & Entrepreneurs, Wealth Solutions Report

Darwin’s maxim, that those best able to adapt to the changing environment will be the ones to survive, is playing out before our eyes across the Independent Broker-Dealer (IBD) and Registered Investment Adviser (RIA) landscapes.

As a result, clear division between the two is beginning to blur as players in the IBD space co-opt traditional RIA offerings to a greater degree in order to grow AUM, retain and recruit top-flight advisors and thrive in challenging economic and market conditions.

As characteristics historically associated with RIAs – and which resonate with increasing numbers of advisors – find their way into the IBD model, how relevant is the nomenclature at all?

The IBD/RIA Confluence: Modern Evolution Or Insurmountable Mountain?

IBDs see the writing on the wall: Cerulli reports that ninety-three percent of advisors across all channels expect to generate at least half of their revenue from advisory fees this year. This shift away from brokerage is not new but takes on greater relevance in today’s environment of high interest rates, near-historic inflation and market volatility.

Fed policy-driven market volatility is negatively impacting AUM in the industry at large. However, IBDs that have been smarting over decreased Cash Sweep revenue are benefiting from the uptick in interest rates.

This income can help them introduce/shore up their “RIA within an IBD” offering, closing the gap between the two models even further and creating more opportunities for advisors to deliver fee-based or fee-only services within the full-service ecosystem of an IBD. Today, many IBD firms operate as such in name only, with the majority of their client assets in advisory – leaving them more of an RIA with broker-dealer capabilities as opposed to the reverse.

Functioning as an RIA within an IBD offers scale, superior infrastructure and compliance support…support that appeals to a growing number of IARs in an increasingly burdensome regulatory environment.

We’ve spoken to firms that offer IARs this “best of both worlds” environment to learn the benefits and challenges of the model, for both advisors and the IBD itself.

Evolving Expectations In A Fast-Changing Industry

Wayne Bloom, CEO, Commonwealth Financial Network

Wayne Bloom, CEO of Commonwealth Financial Network, cites the importance of meeting expectations in an ever-changing environment. “Throughout a more than a 40-year fee-based journey, Commonwealth’s platform has evolved to compete on a multi-dimensional competitive field that includes IBDs, RIAs, pure-play technology firms, and major custodians.”

“With 90% of our flow now directed toward fees, we offer deep consultative support and almost unlimited flexibility from registration to client reporting and flexible chassis for our advisors to customize how they position their practice.”

According to Stephen Langlois, President of Kestra Financial, much of this industry discussion is about semantics. Langlois notes, “We think of ourselves as an independent wealth platform, not an IBD or RIA. Investors just want to work with a trusted professional who puts their interest first, regardless of the legal construct under which they operate.”

“Clients need planning-led advice and solutions. Advisors need a platform that offers capabilities that enable them to do this at scale, with the opportunity to outsource to us the work that doesn’t differentiate them in their clients’ eyes.”

RIAs Are Evolving As Well

Stephen Langlois, President, Kestra Financial

Ardent supporters remain confident in the superiority of the RIA model, believing IBDs can’t compete with RIAs’ strengths. RIA aggregators and larger RIAs acquiring small and mid-sized counterparts are well positioned to provide the scale, technologies, M&A backing and practice support normally the purview of IBDs.

And yes, these enhancements have already seen a number of IBD-based advisory practices jump to private equity-backed RIAs.

However, the ongoing movement away from brokerage has forced IBDs to sharpen their elbows and build out the very financial planning/advisory options that have distinguished RIAs in the past.

Gary Carrai, EVP of Strategy, Business Lines, LPL Financial

RIAs competing with the larger IBDs may need to consider bulking up their service offerings, whether it’s investing in their technology stack, marketing or third-party outsourced support. Still, no matter the spend, the macroeconomic environment will drive movement in the landscape; it will test the RIA model over the next 12-36 months.

In the opinion of Gary Carrai, Executive Vice President of Strategy, Business Lines at LPL Financial, “An unintended outcome of industry consolidation is that advisors ultimately conform to the larger company’s approach.”

“It can water down the value that made advisors successful. At LPL, we provide services and technology that help advisors better support their clients and also run a thriving business. The advisor is at the center of the relationship in our model as we leverage our strength and scale to complement the critical advice they customize to their clients.”

Regulations, Compliance And Scale

Tarah Williams, President & COO, Prospera Financial

Of course, compliance is becoming more challenging for RIAs, as increased SEC scrutiny and “best interest” type rules intensify regulaory burdens for the RIA channel. According to a recent Wealth Solutions Report survey of its financial advisor readers, there are rising concerns about escalating regulatory costs and complexities involved with owning an RIA. Indeed, these are concerns that could be alleviated by joining an IBD and handing off the burden.

According to Tarah Williams, President and COO of Prospera Financial, which encompasses both an independent broker-dealer and RIA platform, Reg BI and other forms of regulatory harmonization make forming one’s own RIA tougher than ever.

In Williams’ perspective, the rising complexities faced by the RIA channel have been exacerbated by the end of what had been a ten-year bull market for all passive equity investments, as volatile markets negatively impact revenues from fee-based assets.

Williams emphasizes, “Distinctions between the RIA and IBD segments of wealth management are rooted in regulatory definitions versus a true operational environment. Over the past decade, there has been considerable overlap in offerings to financial advisors from RIAs and IBDs.”

“As a result, their distinctions have mattered less and less to financial advisors, and the vast majority of their end clients don’t even consider these differences, as long as they are well-served in a planning-based relationship with their advisors.”

More Questions Than Answers – For Now

Of course, nobody seriously questions that increasing private equity involvement in both the IBD and RIA space has shifted the paradigm, putting more money in play that alters the traditional balance.

Indeed, many other variables at work – including the expected increase in demand for financial planning services resulting from the great wealth transfer, an aging advisor demographic and a lack of next-gen advisors – further contribute to the uncertainty.

So is this convergence a natural progression? Will it strengthen or falter as time goes on? Who will emerge victorious, and will the other remain competitive? The debate is ongoing, and time will tell. It’s tempting – but not wise – to apply broad brush strokes when contemplating these questions.

Each firm has different priorities, trajectories and leadership mandates. Is the ultimate outcome a monolithic model that takes on the best attributes of each, to the point there’s no distinction at all? I don’t know. No one does.

The past three years have been a stark reminder that even strong bulls need to rest. Our industry is at an inflection point. How each model weathers this challenging environment will go a long way in determining the long-term viability of both models. One thing is certain. Neither is shy about adopting platforms and offerings to strengthen its model to gain a competitive advantage.

One last question for the industry as a whole: In competing with each other, are the RIA and IBD models actually morphing into each other?

Andy Kalbaugh, Founder & Managing Partner of Cassique Strategies, is WSR’s Expert Columnist on Leaders & Entrepreneurs.  He can be reached via ContributingEd@wealthsolutionsreport.com.

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