Raymond Heidel is one of those rare dually registered advisors.

In one of its recent Web-cast events dubbed the Strategy Forum, Cerulli Associates Inc., the Boston-based research and consulting firm, discussed independent advisory channels, noting that 23% of all independents are RIAs, 74% are reps of independent broker-dealers, and 3% are dually-registered advisors. Dual registration is a foreign concept to most advisors. Why would anyone want to be dually registered and have to comply with the regulations of their state or the SEC as well as the NASD? Isn't one regulator enough?

Raymond Heidel is one of those rare "3%" who can answer this question. Heidel has his own RIA-Five Rivers Financial Advisors in North East, Md.-registered with the state of Maryland's Securities Division. He's also a branch manager and representative of The Investment Center Inc., a New Jersey-based broker-dealer.

The journey that led Heidel to this business model explains why he went in two directions. After working for 25 years in the finance and accounting department of a large corporation and performing family office functions for his own family's money, Heidel incorporated Five Rivers in 1997. At that time, Five Rivers was solely an independent RIA, and Heidel did most of his clients' investment business through the brokerage arm of a major no-load mutual fund company.

"As I grew and took on more clients," says Heidel, "I realized the fund company wasn't providing any of the needed services. It was just a relationship where I brought them money and they sent out monthly statements to clients that didn't even include the necessary return information. I knew then I needed more back-office support."

This was the turning point, when Heidel veered off in the direction opposite to what most other independent RIAs would have taken. He looked at all of the various back-office tasks required of a serious planner providing a comprehensive wealth management service and reasoned that he could get those services less expensively from a broker-dealer than by hiring his own employees and installing his own systems. In other words, he viewed the broker-dealer relationship as a means of outsourcing portfolio reporting (including AIMR return calculations), back-office support (billing, opening and servicing accounts), obtaining group rates on errors and omissions insurance, and other costly functions. As a rep of his broker-dealer's RIA, Heidel leaves just 10% of his fees with his brokerage in exchange for all of these services.

Why, then, maintain the independent RIA status? Most advisors who want these broker-dealer services and want to do financial planning would do everything through their broker-dealer. The problems with that, Heidel discovered, were that his broker-dealer would get 10% of his initial planning fee, which it doesn't presently, and it would be "signing" the planning contract above his name, characterizing him as an investment advisor representative of the broker-dealer. "I want only my name and the Five Rivers name on my contracts," says Heidel, "because having The Investment Center's name prominently displayed would imply I provide a less-comprehensive service than I actually do."

He might also be restricted in his choice of planning software. "My BD does research and recommends various software packages for me to choose from," Heidel says. While that's not as confining as the simplistic, modular packages many wirehouses require their advisors to use, Heidel still wouldn't have the pick of the software universe. With his independence, he chooses to use EISI's NaviPlan Extended for which his own RIA pays a $1,250 annual licensing fee.

Advisors might also question why anyone who's already started in business as an independent RIA would want to jeopardize his fee-only status, and the objectivity that implies to clients, by taking what many would consider a step backwards to BD status. But those same advisors might be more inclined to view this decision from a philosophical, rather than a cost-benefit, standpoint. To Heidel, the availability of all of his broker-dealer's services for only 10% of his gross is extremely attractive.

So how does Heidel justify his broker-dealer affiliation to a prospect who might be looking for a purely fee-only relationship? He passes on his firm belief that The Investment Center is the best broker-dealer he could have chosen. He explains that he interviewed many broker-dealers before selecting The Investment Center. And he presents a fee structure that is easy for the client to understand, with very little incentive for Heidel to sell any particular product to his client.

Suppose a new client walks through the door to have a financial plan prepared and to engage Five Rivers in an ongoing, financial planning and wealth management relationship? Heidel will charge him a flat $600 for the plan he prepares with Naviplan. To some, that low fee smacks of the loss-leader come-on that many reps use to engage a new client in more lucrative business. But, Heidel explains, "The low fee is demographically driven. I live in a small town, it's very much a senior area, and I've even had people balk at $600."

When the client hires Five Rivers for a long-term advisory arrangement, he pays according to a percentage-of-asset fee structure that averages 1%. Heidel provides all ongoing financial planning and investment management services for this fee. His broker-dealer takes 10%, leaving Five Rivers with 90%. It can't get much simpler than that.

Sticking with the outsourcing theme, Heidel then finds his client some separate account managers. "I can't imagine a client with any sum of money that I couldn't use the BD-managed account choices for. There are minimums, but they're pretty low-$25,000 to $100,000, depending upon the manager."

Again praising his broker-dealer for its due diligence and sound offerings, Heidel says most of the managers he has to choose from are household names for which he receives ample broker-dealer research. "I also use Morningstar data to do screening and analysis in addition to what my BD provides. This is not something a registered rep who's not an RIA will always do. I may recommend a mutual fund for a small account rather than a separate account manager," he says, "and for those who get managed accounts, no two clients have the same portfolio."

What if, in the course of initial or ongoing planning, it's decided his client needs long-term care insurance? This poses an exception to Heidel's otherwise simple fee structure. "I'm also insurance licensed because I'm a firm believer in LTC, and through my BD I can shop among 10 or 12 insurers for my clients."

Heidel receives a separate commission for LTC insurance he places, sharing the usual 10% of the commission with his broker-dealer. He fully discloses this to his clients, who understand they are free to implement his insurance recommendations elsewhere. Heidel sells little insurance other than LTC because the age bracket of most of his clients precludes the need for life insurance.

So the new client has had an initial plan done, has had his money placed with a separate account manager, and has purchased LTC insurance-what next? In addition to the other steps in the planning process, Heidel is big on constant communication with clients. "I make an effort to touch base monthly by telephone or e-mail. We communicate on all kinds of issues, including a client's occasional call to get permission to buy a hot tub. Depending on how close they are, we meet face-to-face every six months to a year to update their financial plan." He no longer puts out a newsletter though, because if he does it under the Five Rivers name, he can't talk about investment returns.

This is one aspect of the only problem he's got-being accountable to two regulatory bodies, the state of Maryland Securities Division and the NASD. How much of a penalty is this? "On the BD side, I've got to pay $800 a year for my IAR, registered rep and branch office registrations, while also satisfying continuing ed requirements. But my BD's compliance department takes care of most of the associated paperwork for me, keeps me apprised of when I need to take a course to get certain CEs or update my Series 6, 26 or 66 licenses, and they take the licensing fee off my 90% cut." On the Maryland side, he must file his ADV and pay his $400 fee each year like any other independent RIA.

While perhaps not as burdensome as it first sounds, Heidel still doesn't like some aspects of this dual arrangement. "I live in fear of a state audit for my individual firm RIA-not for reason of wrongdoing, but just for the aggravation it would surely entail. I am a one-man operation, and time is everything." But Heidel nonetheless persists in his dual registration. "The biggest advantage is my flexibility to serve anyone who walks through door."

So, bottom line, Heidel's business model works well for him. Although he has some costs associated with his independent RIA and his overall profit margin isn't quite the 90% it is on the BD side of his business, it's certainly much higher than the 40% to 50% margin of most independent advisors, as noted in the Financial Planning Association's 2002 Financial Performance Study of Financial Advisory Practices. Perhaps this is a model other advisors should also be considering.

The only hesitation Heidel has, aside from the dual registration aspect, is how suitable this model will be as he grows his firm. "At some critical size, it may no longer make sense to pay the 10%. I would try to negotiate a lower number or look for a better deal with a different BD," says Heidel. He's still sure he doesn't want the administrative and back-office headaches that most independent RIAs seem quite willing to accept.

A soft-spoken man, it's hard to know if Heidel is happy with what he's created. "I enjoy helping people. I spent 25 years in a large [impersonal] corporation, so I feel like I've died and gone to heaven. I'm doing what I like. I've found the BD and the business model that allows me to be truly independent."

David J. Drucker, MBA, CFP ([email protected]), a fee-only financial advisor, is co-author of the book Virtual Office Tools for the High-Margin Practice (Bloomberg Press, 2002) and the Virtual Office News newsletter, both available at www.virtualofficetools.net.