When I entered the financial services industry 20 years ago, the term "going independent" referred to registered representatives moving their book of business to an independent broker-dealer and being compensated as independent contractors. Fast forward two decades and the meaning of the term has completely opened up and now encompasses a whole slew of models and structures for how a financial adviser can run their business.
In my role of consulting with advisers, I have found there to be several misconceptions about "independence." Before I get into these misconceptions, I'd like to lay out the various models available to advisers, all under the banner of independence.
1.
Independent broker-dealer. There are thousands, literally thousands, of broker-dealers in existence. Although consolidation has been rampant in this space for several years, there are still a plethora of options to choose from that offer complete independence and can serve as a partner in an adviser's growth. Under this model, advisers would run their advisory business through the broker-dealer's RIA.
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2.
Hybrid adviser. This model can include two structures. The first is an adviser who has established his or her own RIA, but also wants to affiliate with a broker-dealer. The second option is the adviser who tucks into an outside RIA, but is also still registered with a broker-dealer. Keep in mind that not every broker-dealer would be what we call "hybrid-friendly." Simply put, some allow dual registration, some don't.
3.
RIA only. This structure is also frequently referred to as "going independent," and is accomplished without an affiliation with a broker-dealer. I find advisers typically move into this structure when their book of business is at least 85-90% advisory business. The two options for someone who isn't going to have a broker-dealer affiliation are to set up their own RIA or tuck into an RIA. There are a whole slew of reasons why advisers would decide to set up on their own versus tucking in, but I find the biggest determining factor is the size of one's book of business. The general rule of thumb is that around $100 million-plus in assets under management, it starts to make financial sense to set up your own RIA. This number is much debated and will obviously depend on an adviser's individual book of business.
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Now that we are in an environment with so many options, it is important to explore which model suits you best. I find that advisers don't always understand each model's pros and cons and therefore have misconceptions about which structure is best for them.
Here are the misconceptions I hear most frequently:
1.
"I want to set up my own RIA because I don't want my broker-dealer to take an override on my fee business." In today's environment, broker-dealers are required to supervise the RIAs that are affiliated with them on the Finra side of the business. Therefore, most broker-dealers will expect some sort of override on an outside RIA's business. That said, some firms take less of an override if advisers are operating their own RIA. The question becomes at what point does it make sense to have your own RIA? The costs associated with setting up and maintaining your own RIA may be such that tucking in under a broker-dealer's RIA makes more sense from a financial perspective.
2.
"I want to set up my own RIA because I want more flexibility." I hear this a lot. Many advisers see having their own RIA as a way to create more openness in their practice. This flexibility can involve products, custodians or cost structure. The truth is, this may or may not be possible based on whether one intends to stay with a broker-dealer. To complicate things even further, it depends on what the broker-dealer you are with allows.
It's common for advisers to feel excited about the prospect of going independent. It can be financially beneficial and brings structural flexibility that is rewarding to one's practice. The common challenge, though, is deciding what form of independence suits one's practice best. I find it's a decision that takes much time and patience to explore. The good news is there are a lot of options; the bad news is there are a lot of options.
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Jodie Papike is the president of Cross-Search, a third-party, independent broker-dealer recruiting firm that connects advisers with broker-dealers and RIAs.
