As the fee-only advisory model continues to gain momentum, this growing trend is expanding into different flavors. Choosing the right one depends on various factors, according to panelists who spoke today during a session devoted to advisory models at the FSI OneVoice conference. The event was held in person in Orlando, as well as virtually.
“We’ve seen a trend toward fee-only for several years,” said Colleen Bell, vice president of operations and chief fiduciary service officer at Cambridge Investment Research Inc., a broker-dealer firm in Fairfield, Iowa. “We started a program called Advisor Advantage about seven-plus years ago that was designed specifically for the fee-only advisor space. We’ve seen an uptick in the number of people moving toward that affiliation model.”
Bell said the fee-only model runs the gamut from financial advisors who are dually registered with a broker-dealer and a corporate RIA; those who are fee-only within a corporate RIA, meaning they don’t have any affiliation with the broker-dealer; or those who are an independent RIA but are associated with a broker-dealer which provides services that independent RIAs need through clearing firms or outside custodians.
She pointed to a couple of aspects driving the fee-only movement. One pertains to young people joining the industry straight from college-level certified financial planner programs.
“They might start fee-only and never get their Finra licenses,” Bell said. “So firms need to be prepared to add people to their business [who will] stay in that fee-only space because that’s what they’ve been taught and that's what they’ll want to be affiliated as.”
The other relates to seasoned advisors who don’t want to deal with Finra anymore, and instead want to explore the fee-only route either with a corporate RIA or on their own. For those advisors, Bell said, her consultation includes a rundown of the pros and cons of the different options.
“I don’t care one way or the other whether you start your own RIA or [go] with our corporate RIA,” she said. “It’s up to you. Do you want to take on that additional burden [of starting your own RIA]?”
She added that many advisors focus on the sunny side of being on their own and figure they can handle all of the chores that come with that. But she said she tries to give them a dose of reality via some pointed questions.
“Will you hire someone to actually make sure you’re following all of the regulations?” Bell said. “Will you be ready when the DOL has a new rule, and you need to make adjustments to all of your policies and procedures? You can’t just hire a consultant and have them deliver to you what your policies and procedures are. It’s an on-going process.”
Bell noted that about 100 of Cambridge’s 3,700 advisors are fee-only, and about 70% of those are with the firm’s corporate RIA.
Desiree Sii, president and CEO of SagePoint Financial Inc., said her Phoenix-based broker-dealer firm likewise has a small number of fee-only and independent advisors under its roof. She noted a trend she’s seeing is advisors giving up their independent RIA and going to the corporate RIA.
“The primary reason is due to the complexity of running your own RIA,” Sii explained. “It can be difficult and expensive, and they find the economies of scale [in a corporate RIA] can assist them from a price standpoint. I do think the trend will be to go RIA-only, and I think firms need to be prepared for that.
“But I also continue to see a need for commissionable products and protective strategies for clients, so the B-D space is an important space to be in,” she added.
Sii pointed to the success of an advisor who heads a super-OSJ group within SagePoint who is bringing formerly independent advisors into his RIA.
"It’s because of the value proposition that he has to offer,” she said. “I’m seeing more of that, where smaller independents say they want to be part of a larger group—not necessarily part of the corporate RIA. He’s found that niche in the market and he’s one of our fastest-growing groups within our organization.”
Regulatory Concerns
One of this conference session’s prevailing themes centered on the growing regulatory scrutiny of RIA firms.
“Gone are the days of getting compliance-in-a-box for $5,000,” Sii said. “Advisors truly don’t know what [independence] entails until a regulator is in their office, and then it’s too late.”
At SagePoint, she added, the firm’s three largest ensemble practices are all corporate RIAs, and none have the desire to go independent.
“And when I ask them why, there are a couple of different reasons, but the primary one is, ‘I know you have my back. I know at the end of the day you’re keeping me straight, and I don’t have that stress,’” she said.
Bell pointed to the Securities and Exchange Commission’s announcement on Monday that it charged 27 firms—21 independent advisors and six broker-dealers—with violations pertaining to their failure to file and deliver Form CRS (customer relationship summaries) to investors. Form CRS disclosures were created as part of the SEC's Regulation Best Interest standard that requires broker-dealers to put a client's best interests ahead of their own when making recommendations.
“[The SEC] is not messing around anymore,” she said. “If you’re going to be SEC-registered, you have to make sure you have a continuous process, that you’re updating your policies and disclosures, and that everything is consistent in your policies and disclosures and actions, and that everyone at the firm is aware of the policies and disclosures and procedures, and that you’re delivering those disclosures to your clients. It has to be very systematic. So if you’re a one-person office, I do caution that creating your own RIA probably won’t be the ideal thing for you to do.”
Bell added that firms with an operations manager and compliance manager are better suited for the independent route. But, she noted, an existential question an advisor should ponder is why do they feel the need to start their own RIA?
“Sometimes there are valid reasons why,” she said. "Maybe they want to create a firm that acquires other RIAs. I think that’s a very valid reason. We make sure people are doing it for the right reasons.”