When Grant Johnstone began his journey to open his registered investment advisor, Johnstone Financial Advisors, in 2015, he did what many breakaway advisors do—turned over the annuities and mutual fund products that could not be ported onto a fee-based RIA platform to a “friendly broker-dealer.”
That solution, Johnstone explained, is commonly used by breakaways who can no longer maintain commissionable income if the goal is to be a pure RIA. The friendly broker-dealer or a dual-registered RIA still holds a Series 7 license and can continue to do broker-dealer business.
Johnstone, who worked with Smith Barney for nearly 10 years before joining Wells Fargo’s FiNet division, explained that breakaways have to leave behind their broker-dealer business or convert to an RIA business. Yet it might not be in the interest of their clients to liquidate those vehicles that were sold to them with commissions. Their annuities might have a useful living benefit or a death benefit that pays the clients extra if they die. The products might still offer income streams. On the down side, the products might have surrender charges if the clients try to get out of them.
In any of those cases, the advisor cannot in good conscience tell the client to liquidate the product and buy something new at the advisor’s new RIA firm.
“It’s not the right thing to do, so this has been a quagmire for breakaway RIAs,” he said.
Johnstone said he dealt with two of the leading friendly B-Ds in the industry at the time he was off-loading his legacy products, and it was not pleasing. Like broker-dealer reps, dual-registered advisors are subject to both internal RIA supervision as well as a broker-dealer’s supervision on all transactions. So there is no autonomy, and on top of that the onboarding process is burdensome. That leads to unnecessary delays and expenses.
“The experience was so bad,” Johnstone said. “One of them literally [cost] us $15 million in assets, just trying to work with them. … After two unsuccessful experiences with friendly B-Ds, we said there has got to be a better solution.”
He and his team learned their experience was not uncommon, so they created Johnstone Brokerage Services (JBS). The B-D, which launched a year ago and has about $50 million of its own assets, “offers the financial industry a desperately needed solution for breakaway wirehouse advisors seeking to become 100% RIAs,” Johnstone said. The turnkey solution “serves client best interests of preserving the advisory relationship while truly off-loading the broker-dealer relationship, he said.
Johnstone is also an attorney, and he said he sought the blessings of the Financial Industry Regulatory Authority. “We said, look, we don’t want to sell stocks, we don’t want to sell bonds, we don’t want to sell anything. All we want to do is provide a shoebox solution where these breakaway RIAs can have a place to off-load their annuities, get paid for them and have the client-relationship protected,” he said.
He and his team wanted Finra to understand that the current situation is problematic and is forcing clients into situations that aren’t in their best interest, and to allow his B-D to have a limited filing with them. “And so, we are kind of a limited-use strip-down B-D that does one thing and one thing only. All we do is we provide an off-loading solution for these annuities for these breakaway RIAs,” he said.
Once the legacy products are assigned, JBS sets up a 15-year relationship with the selling advisors, who then receive a monetization of that ongoing income stream. The advisors can cancel at any time, Johnstone noted. “So it effectively becomes a 30-day written contract,” he said, adding that the advisor also has the option of moving the annuities elsewhere if at some point they choose to do so.
In essence, JBS pays the advisors for the legacy annuities and protects the client relationship. “So we are just a parking place that will allow these 100% RIAs to receive a monetization of that ongoing income stream that they would otherwise be walking away from.”
As for compliance, Johnstone said the only requirement is suitability, which is an incredibly low standard, he said. And unlike friendly broker-dealers, his firm does not have to go in and supervise the RIA. “It’s really more of an arm’s length, clean breakaway from B-Ds, and then we come in and we basically take out the trash.”
Another thing Johnstone said that makes his offering attractive and is often overlooked is that advisors who completely retire from the industry can assign their legacy annuities to JBS and, in return, receive commissions from JBS for the rest of their lives. “And if that’s not enough, we can even pay it to their spouses, too,” he said.
JBS recently completed its first breakaway placement with Credentialed Wealth Advisors, a Colorado Springs, Colo., team that recently left Edward Jones for Raymond James, which serves as the custodian for Johnstone’s RIA.
Roy Hucke, the managing partner at Credentialed Wealth, said JBS was a good solution among all the options available. “We went into it with our eyes wide open to help each other,” he said, noting that Johnstone’s experience and insight were helpful. “We are hoping this works as a long-term solution,” Hucke added.
Working with Credentialed Wealth Advisors to monetize their legacy annuities helped JBS “work the bugs out” and refine its offerings, Johnstone said, noting that his firm is working closely with the Raymond James recruiting team to onboard other firms.
Johnstone said there is a definite need for this new tool in the industry as advisors break away from wirehouses and become 100% RIAs.
“The last thing they want is a B-D all up in their new business, and that’s what is happening with these friendly broker-dealers,” he said.