With the end of the so-called broker-dealer rule (or "Merrill Lynch rule") many people have assumed that the dominance of broker-dealers would come to an end as well-that practitioners would now be encouraged to become independent registered investment advisors. The perception was that all advisors would now be held to a common standard.

And studies have backed that up, showing that there has in fact been an exodus of registered reps (particularly from the major wirehouses), to independence on some level, whether it's as an RIA or as a dually registered advisor. Yet there is scant evidence of a wholesale defection just to the independent RIA ranks.

After the passage of the Dodd-Frank financial reform bill, an effort to reform regulations in place for more than 70 years, independent and B-D affiliate advisors now face additional layers of regulation. Controversial to say the least, the new law has raised serious questions about how such massive reform could effectively be managed, much less enforced. Even as the new rules take effect, there are rumblings in the Senate, mainly among Republicans, about repealing the new law, which only adds to the confusion and uncertainty about the eventual impact on financial advisors.

Among other things, the new law may prompt fully independent advisors, particularly in smaller practices, to return to the broker-dealer fold. Why? With the new regulations, it may simply be more cost-effective for an advisor to have a relationship with a broker-dealer, which can offer compliance services cheaper than the financial advisor could handle on his or her own.

The independent channel currently has at least one thing going for it. Under the new law, smaller independent firms, those with less than $100 million in assets under management, no longer have to register on the federal level for SEC supervision but only at the state level (the federal registration threshold used to be much lower at $25 million). Given that at least some states may be ill-equipped in the beginning to deal with this large influx of new registered firms, state regulators' enforcement efforts could fall short of federal ones, making it more attractive for smaller independents to remain independent. But this likely offers only a short-term respite before the states gear up their enforcement machines and realize the potential from the influx of new regulatory fees.

The broker-dealers aren't waiting, and are already preparing for new arrivals to their ranks. Securities America, LPL Financial, Raymond James, Cambridge Investment Research, Multi-Financial and many others have already extended their practice management offerings or increased marketing, emphasizing their practice support programs and value-added services.
So which path should financial advisory firms choose: the broker-dealer relationship, dual registration or full independence, which means trying to handle it all by themselves? If they choose the B-D path, which B-D should they pick? The answers to these questions may require some research and a lot of introspection.

Fully registered investment advisory practices face all the responsibility for compliance and regulatory work. Even if a firm hires an outside consultant to handle the filings, updates, mock audits and other regulatory activities, the responsibility and cost remain fully in the hands of the advisor. After an advisory considers the cost of an outside consultant, it may be that the firm finds it cost effective to instead tackle regulatory and compliance responsibilities through a broker-dealer, which can efficiently spread its costs among hundreds or even thousands of other advisors.

Those costs need to be fully understood, even if they aren't readily apparent. For example, if a broker-dealer offers compliance support but also a haircut on fees/commissions, etc., the advisor must compare all such fees against the costs that would be borne by the advisor if he or she goes it alone. Typically, this would involve several cost entries, such as accounting, compliance support, filing fees, etc., measured against the same tasks accomplished with a B-D.

Let's say an advisor has a practice with annual gross revenue of $100,000. If this advisor were to join a B-D that offers an 85% gross dealer compensation payout, the advisor would be giving up around $15,000 per year in compensation for the benefit of working with the B-D, which offers compliance and other services in return. However, other fees may sway an advisor against this choice-including technology access fees, marketing expenses, etc. Such additional costs must be considered in the overall decision process.

But even without the additional costs, advisors need to determine if they could accomplish the same compliance tasks on their own for less than $15,000. The key to this decision process is to fairly compare all of the costs on the independent side, such as the cost of hiring outside consultants or inside staff to handle the compliance work.