Many recruiters, journalists and advisors in the wealth-management industry promote the idea that “independence” comes in different flavors. This notion is wrong—and it’s worth setting straight because imprecision around the concept of independence is misleading to clients and advisors alike.

Independence means freedom from the control and influence of others.

Therefore, Independence as an advisor requires a material ownership position in the RIA. Owner-advisors have no corporate entity above them to restrict, dilute or influence the way they serve their clients—while adhering to the guidelines set by the SEC or a state-level equivalent.

By “material ownership position,” I mean you must hold an equity position in the RIA with sufficient voting rights to have a real say in how the RIA is run; you do not have to be the sole owner. It’s the material ownership position in the RIA that uniquely delivers advisor independence, being a DBA under someone else’s RIA just doesn’t cut it.

Why? A 1099 advisor operating through a DBA needs an RIA to employ them as an investment advisor representative (IAR). Without ownership in the RIA, these advisors are essentially “franchisees,” working inside the boundaries set by the owners of the RIA they’ve chosen to affiliate with. These advisors are hired by the RIA and can be fired if they fail to follow the house rules. They are only free to conduct their business inside the “box” designed and controlled by the RIA’s corporate owners. That is not independence.   

I’m challenging the notion that independence is linked to:

• The tax treatment of your compensation (1099 v. W-2)

• Simply not being at a wirehouse or bank

According to Cerulli Associates, 44% of advisors “are currently independently affiliated”—which, by itself, only means that these advisors probably aren’t W-2 employees of a wirehouse or bank.

That’s it. That’s all it means. In fact, most “independently affiliated” advisors fall into one of two categories that definitionally preclude independence.

1. 1099 affiliates of broker-dealer-owned corporate RIAs. The term "independent" is applied to 1099 affiliates of broker-dealer owned RIA’s. These advisors—who typically receive large upfront payments to join—are contractors, for whom the "1099" is the operative IRS tax form. These advisors set up LLCs to receive payment from their broker-dealer and work out of DBAs whose branding takes precedence over the broker-dealer’s to give an impression of actual independence. In reality, advisory services are offered through the broker-dealer’s RIA, and affiliated advisors’ must conform to the corporate RIA’s rules on how its IAR’s may conduct business. Advisors are hired by the corporate RIA and can be fired if they don’t follow the corporate guidelines.

As a 1099 affiliate, having an LLC between you and a corporate parent doesn’t make you independent. Real independence is about legal and material control of the RIA, not the DBA.

The fact that Raymond James refers to advisors of this type as "quasi-independent workers" makes my point.

2. 1099 affiliates of corporate RIA rollups. Another false claim to independence has emerged in the last 20 years. Here I mean corporate RIA rollups that seek to attract 1099 advisors under the guise of “partnered independence.” 

Like the broker-dealers, these firms often pay advisors large upfront checks to join. They attempt to differentiate by leading with the fact that they were built—RIA First—meaning their DNA is RIA, not broker-dealer. There is something to that, but it’s not independence. 

Just as in the broker-dealer model, these 1099 “affiliated” advisors are simply DBA “franchisees” of someone else’s RIA, with no material control or influence at the RIA level. They must conform to how the corporate RIA owners want their IARs to conduct business or risk being fired.     

Advisors interested in this option should verify that the majority of the firm’s assets are under the corporate RIA. Why? Because some of these firms lead with their RIAs but covertly run most of the money through their broker-dealer platforms.

Additional Challenges With 1099 Corporate RIA Affiliation Models
Corporate rollup models tend to develop in predictable ways:

• Flexibility at the advisor level gets curtailed

• Cross-selling becomes mandatory

• Payout grids get more restrictive

• Ownership of individual books of business comes into question

The interests of the corporate owners can often be at odds with those of affiliated advisors and their end clients. Rollups build enterprise value by continuously adding advisors. Because a sale is often planned from inception, many will eventually find a buyer, increasing the importance of keeping advisors “in their seats.” Even if a buyer is not in the picture, as advisor count grows, so too does “comingled ADV” risk, often leading to a shift towards compliance regimes tailored to the lowest common denominator. Because corporate owners naturally protect their interests first, there is little room for the needs of exceptional advisors or the dictates of unique client circumstances in rollup models.

An affiliated advisor that finds themselves at odds with their parent firm has two options:

• Go independent by launching their own RIA, or join an RIA as a material equity owner

• Move to another firm, with the potential for the same misalignment

Benefits Of Real Independence
By definition, independent advisors:

• Are true clients of the street, free to choose the best resources from across the industry, not just the resources that a corporate parent firm allows

• Sit on the same side of the table as their clients, allowing them to go from being a professional seller of the resources made available to them by their employer, to a professional consumer of resources from across the street on their clients’ behalf 

• Aren’t subject to conflicting agendas of corporate owners/managers

• Aren’t subject to being managed to the “lowest common denominator”

• Typically invest their own capital to achieve their independence, removing the potential misalignment created by large recruiting checks offered by 1099 employment channels

Vitally, advisors who own their RIAs can build and manage those firms for client alignment and enterprise-value creation—and they choose when and how to realize that value.

Only material ownership gives advisors the independence to control their own firm-wide operations and client service free from any misaligned agendas. No other approach to running a wealth-management business even comes close.

Benjamin Bines is a director of business development at Dynasty Financial Partners.