Those of us who have been in the independent financial advisory space for some time should feel vindicated when we look at our industry today. Liberated from having to push proprietary products or make top-down sales quotas, independent advisers objectively offer the widest possible universe of financial solutions and services based on their clients' best interests.
There is also now considerable choice and flexibility when it comes to the business models commission-and-fee-based advisers (so-called “hybrid” advisers) can select in order to most effectively build value in their practices.
For these hybrid advisers, the top two routes within the independent space have been either becoming an investment adviser representative of a corporate RIA firm owned by their chosen broker-dealer, or joining an independent RIA (sometimes called a “hybrid RIA” if the firm does both fee- and commission-based work). In the second instance, the RIA entity is usually adviser-owned and sometimes consists of an independent adviser group (a term sometimes conflated with “independent producer group” or “super-OSJ”), with each adviser maintaining the ability to process commission-related business through the group's relationship with a broker-dealer.
With that said, there is no question that for these advisers, establishing one's own independent hybrid RIA firm has also emerged as a very popular option. But is this the right step for every fee-and-commission-based adviser seeking to build their independent practice? The short answer is no.
The independent, or hybrid RIA model can be very rewarding under the right circumstances, but each adviser's business is different. When evaluating this decision, advisers should carefully consider their clientele and book of business, especially with respect to the following:
Do I have the size to have my own RIA?
Although there is no hard-and-fast rule in terms of book size, part of your decision inevitably must come down to the basic numbers: Roughly speaking, if you don't have at least $100 million of assets under management, it probably doesn't make sense to attempt to have your own RIA. Apart from the expense of hiring someone to constantly maintain ADV, agreements and manual, RIA firms with less than $100 million in AUM generally fall under the direct oversight of state securities regulators. Especially if they have clients in multiple states, these firms are subject to more frequent audits, inconsistent regulations and requirements, and additional filing fees than SEC-registered RIAs. Given the rising costs and complexities involved, advisers with below $100 million in AUM would generally be better served doing business as an IAR under a broker-dealer's corporate RIA or joining an existing hybrid RIA group.
What is my service model?
Even if your practice is large enough, based on the numbers, running your own RIA firm may not be what you want to do, given the significantly higher back- and middle-office workload, compliance oversight responsibilities and asset management work that such firms must typically take on board internally. Many advisers prefer to outsource these tasks and just focus on client acquisition and relationship management — direct revenue-generative aspects of the business — and leave routine, nonstrategic functions to a trusted partner. Remember, there are just so many hours in the day.
The bottom line? If you want to be involved in every aspect of your business — day-to-day asset management, back-office documentation, internal regulatory compliance — then running your own RIA firm might be attractive and would allow you to keep more of your revenue.
Do I want multi-custodial flexibility?
While not by any means required under this business model, having one's own RIA firm provides advisers who want it the option of being “multicustodial,” or having the ability to select and maintain multiple custodial relationships at once. Sometimes, this is because advisers want the security of diversifying the institutions where they hold client assets in custody. Or these advisers may see service value in presenting a menu of custodian options to their clients. Another popular reason can be the desire to benefit from the greater aggregate business support resources that having multiple custodians can theoretically offer.
That said, the adviser's asset size and staff comes into play here, too. For smaller independent practices, dealing with a multiplicity of platforms and systems under a multicustodial approach may create greater back- and middle-office burdens, such as financial reporting reconciliation, that may outweigh the benefits. Indeed, many hybrid advisers who have an independent RIA firm take advantage of their broker-dealer's advisory platform, thereby maintaining one custodial relationship for all of their fee-based assets without losing the ownership benefits associated with having one's own RIA firm.
What is my succession plan?
Naturally, independent advisers want to maintain value for the practice they have built and, for the sake of client service, pass it along in an orderly manner. Increasingly, we have witnessed advisers — most frequently, those who envision retiring in three to seven years — choose to join other RIAs rather than set up their own RIA in order to have a more natural succession plan established. Otherwise, the adviser usually must expend time and resources working to structure and plan for some other arrangement for retirement ... whether this happens at once, or in stages.
Finally, for advisers who have determined that having their own hybrid RIA or RIA firm is the best choice, it's important to remember that affiliating with the right broker-dealer and custodial partner from the perspective of people and relationships is critical.
Discussions of pricing, support platforms and technology aside, culture is still paramount. This continues to be a business where success is driven by the degree to which human interaction between strategic partners is productive and helpful, and successful hybrid RIA firms are no exception to this rule.
Mark C. Mettelman is president, chief executive and co-founder of Triad Advisors Inc. The firm is a wholly owned subsidiary of Ladenburg Thalmann Financial Services.