For advisors, the allure of having their own RIA may have never been greater than it is today. Wirehouse bureaucracy, broker-dealer consolidation, and regulatory pressure have conspired to make going fully (or more fully) independent a tempting choice.
On the surface, a stand-alone RIA appears to offer advisors complete freedom to determine how to spend their resources and develop the practice they want while creating equity value. For some, this is exactly the right step.
The hard truth here, however, is that many advisors who run their own RIA struggle to manage infrastructure development and operations while keeping pace with an ever-changing industry. Specifically, the two biggest hurdles for RIA owners today are keeping up with financial technology and compliance requirements.
Financial Technology
The pace of fintech evolution over the past five years has forced RIA owners to continually question whether they are providing the most effective back-office and client-facing solutions. Unfortunately, implementing new “killer apps” requires substantial capital and time in order to determine which tools are the best fit for an advisor’s practice—not to mention testing and training.
Even worse, these applications tend to quickly become antiquated when new tech surfaces and client demands shift. For too many RIA owners, it’s neither practical nor cost efficient to dedicate the resources needed to keep up with each new development in fintech, although not doing so obviously carries its own risks.
Compliance Chores
RIA compliance obligations have gotten exponentially more onerous over the last two decades, making life steadily more complex for RIAs’ chief compliance officers. Especially among mid-sized to smaller independent RIAs, many of these executives also fill other critical roles, requiring them to multi-task while they rewrite agreements for client-derived billing, run share-class reports for the SEC, work to serve clients while meeting new custody rule guidance, and more.
Moreover, state-registered firms often find multi-state registration and exam management too onerous to grow anywhere but locally.
In short, perfectly honorable, intelligent and expert financial advisors frequently find it difficult to stay current with fast-evolving regulatory expectations.
Top Three Business Structure Choices
How does an independent financial advisor business address these challenges while still enjoying independence and continuing to grow? Today’s most successful advisors are those who are able to invite assistance in managing day-to-day responsibilities without giving up the personality of their firms.
Selecting the right support structure to provide expertise in technology and compliance requires a careful examination of the advisor’s practice and goals, as well as a comprehensive understanding of the following top three available approaches:
• Tuck into an established RIA, or affiliate with an independent broker-dealer’s RIA. Tucking into an established RIA can potentially enable an advisor to share operational, office, or other expenses while also plugging into existing compliance and technology platforms. While this option may involve compromises in branding and equity, creating a potential team or ensemble can also provide multiple potential new business growth opportunities. The potential downside to this approach is that breaking up is hard to do. Advisors in such situations must choose their partners wisely and have a preset exit strategy just in case they outgrow one another.
Meanwhile, joining an independent broker-dealer’s corporate RIA can expand an advisor’s access to products, broaden compensation structures to meet a wider range of client needs, and provide the benefits of a single custodian experience for both commission and fee-based assets. The highly turnkey and user-friendly attributes of joining an IBD’s corporate RIA make this an ideal choice for independent FA businesses with between $10mm and $75mm in AUM. By contrast, larger independent advisor businesses with significantly more complex needs may find both of these choices have drawbacks.
• Affiliating with an RIA aggregator. While RIA aggregators bring numerous practices under a common ADV, they typically do not combine their various practices into a single, monolithic firm. This model provides entrepreneurial advisors with integrated technology packages and compliance support while often allowing for unique branding, investment management and planning options. It can enable advisors to enjoy economies of scale, retain flexibility, and in many cases control the future ownership of the book. Aggregators also allow for use of institutional custodians, which might be important for the day the advisor is ready to take on full RIA-ownership responsibility. Joining an aggregator RIA with a friendly relationship with an independent broker-dealer can be a significant added plus for financial advice professionals who need to offer both commissionable products and fee-based solutions in order to thrive in a rapidly changing marketplace, characterized by rapidly evolving client planning and solution needs.
• Do-it-yourself “unbundled” advisor solutions. For advisors who have their heart set on forming their own RIA firms, but who don’t want to go through the time, energy and expense of building everything they need internally, there’s always the third option of choosing from the various “unbundled” third-party outsourcing solutions that are intended to address this particular segment of the advisor marketplace. Advisors should be aware, however, that the better outsourcing solutions can be costly. In addition, many advisors who select this path with the intention of ‘keeping things simple’ try to select the cheapest providers, only to be forced to spend a great deal of time managing the inflexibility or inadequacy of their resulting infrastructure.
While finding the pathway to enter the RIA space—either with one’s own RIA firm, or as part of a broader platform—is not easy, by carefully exploring their options and clearly identifying their goals, advisors can find a model that works best with their business, especially when it comes to minimizing the compliance and technology challenges of operating their own RIA.
Michael Bryan is CEO of Triad Hybrid Solutions, an SEC registered investment advisor and part of Ladenburg Thalmann Financial Services.