As the independent space continues to expand, prospective breakaway advisors often have a hard time deciding between different individual models and options. These 5 questions can help point you in the right direction.
As the interest in attaining freedom, flexibility and control continues to surge among advisors, new independent models are being born at a rapid pace to accommodate them, providing more choice than ever before.
For example, there are new independent models that provide breakaway advisors upfront capital and enhanced support. While established independent broker dealers are retooling their offerings to be more attractive and competitive. Plus, we’ve watched over the last few years as an entire cottage industry of support has developed in the RIA space.
Yet with more optionality often comes greater confusion.
Many advisors who once thought independence seemed like a bridge too far are now looking at the wide variety of options available today and are wondering what model might be the best fit for them.
To help provide some clarity, we often guide advisors to begin by asking themselves these 5 essential questions about their business and goals.
1) Is my business more advisory or commission-based?
As a starting point, an advisor should look at the composition of the business. A heavily commissioned business is best served by an independent broker dealer (IBD), while one that is advisory can be well served in either the IBD or RIA channel.
2) Do I want maximum freedom and control or am I okay with “independence with guardrails”?
An RIA has complete control to “shop the Street” for the best prices and products, the freedom to use marketing and social media unencumbered, and the ability to freely engage in outside business activities. It’s the path for those who want to act as a fiduciary, completely unrestricted and unconflicted with maximum freedom and control.
Conversely, an advisor at an IBD must adhere to the broker dealer’s compliance guidelines and investment menu, as well as the regulatory parameters of FINRA. Advisors who choose an IBD view these guardrails as valuable protections and believe that the resources and support an IBD provides outweighs what they view as minor limitations.
3) Do I want a turnkey independent option, or do I want the ability to fully customize?
IBDs offer a suite of resources – everything from an integrated technology stack, a fully-vetted investment platform, marketing, compliance support and practice management – all under-one-roof, making an IBD a seamless solution for breakaway advisors. Plus, top IBDs are developing new models, designed to support RIA and RIA hybrid businesses.
In the RIA space, advisors have total control over their business with no restrictions, other than remaining compliant. This allows RIA advisors the opportunity to customize every aspect of the business to suit the vision of the advisor and the needs of the business and clients. The freedom to build and operate the business exactly as an advisor envisions can be exciting for some and totally overwhelming for others—which leads us to the next question to consider.
4) Do I want to use an RIA Service Provider or launch my RIA directly with a custodian?
The advantage that an RIA service provider offers is a team of industry veterans that guide breakaway advisors on every aspect of launching an RIA—including technology and custody choices, to replicating investments, building out compliance, HR and benefit programs, negotiating real estate and transitioning assets. Since service providers charge an ongoing fee and require a multi-year commitment, advisors that utilize them value the expertise and resources they provide and believe the affiliation will ensure not only a seamless transition but also faster growth than they could achieve on their own.
Advisors that don’t hire a service provider contract directly with all of the vendors needed to launch an RIA and rely on a custodian as the primary source of expertise and guidance for transition planning, preparation and execution. This works best for advisors who are highly entrepreneurial, want to be closely involved in every decision and don’t want to pay a service provider, but instead are focused on keeping costs low and maximizing take-home economics.
5) How important is an upfront transition check versus maximizing my ongoing payout?
While the decision to go independent is usually focused on the long-term value of the business, there are still important short-term financial considerations advisors have to think about. Some advisors walk away from unvested deferred compensation, others have notes they need to repay or want assistance in funding the startup costs of an independent business. Since different independent models come with varying amounts of upfront money, it is important to understand the options.
Advisors that prioritize the upfront monetization, often look at IBDs which are currently offering top transition deals in the ballpark of 50% or more of an advisor’s T12.
Alternatively, advisors focused on maximizing take-home economics will launch an RIA directly through a custodian. In this scenario there is no upfront check, but an advisor keeps 100% of his revenue less any expenses. To help ease the startup costs, custodians provide “benefit dollars” that can be utilized for the reimbursement of certain specific startup expenses.
For advisors who are looking for something in between – that is, to go the RIA route and also get an upfront check – there are RIA Platform Models. These provide a turnkey technology, investment and support offering along with the potential for upfront money in the 40-50% range.
Of course, there are tradeoffs. Although IBDs and RIA Platforms offer larger upfront checks, payouts in these models tend to be lower and net take-home economics are usually less than what an advisor could achieve by directly launching an RIA. So, an advisor must determine what is most important: the upfront transition check or the ability to maximize take-home economics.
The decision to change firms or models is one of the most important decisions an advisor will make. And in the independent space in particular – where models seem to be born almost daily – it’s even more important to be thoughtful and strategic in your decision-making process. Taking the time to understand your business and goals early on will help guide you toward the model that is right for you.
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