Within the hybrid adviser space, much of the discussion in recent years has been centered on the importance of independent broker-dealers, or IBDs, remaining business model agnostic. Some hybrid advisers – financial advisers who provide both fee- and commission-based services – see the benefits of having their own independent registered investment adviser firm while doing their commission-based business through a strategic broker-dealer relationship. Other hybrid advisers choose to do business as an investment advisory representative, or IAR under their broker-dealer's corporate RIA.
Whatever the case, IBDs must remain committed to supporting the business model that is unique to the adviser, since ultimately, the adviser knows what works optimally for his business and the clients they serve.
Something that often gets overlooked in this discussion, however, is how the business model can impact the adviser's succession planning considerations. Every adviser must consider a specific set of succession planning issues before choosing the model – hybrid RIA firm or hybrid adviser working as an IAR under a corporate RIA – that best works for her.
Make no mistake: Advisers under a corporate RIA might have succession planning considerations vastly different from advisers who manage their own RIA, and vice versa. In fact, given these two diverging business models within the hybrid advisory space, one could argue that it's even more important for hybrid advisers to understand the implications of their business model choices within the context of succession planning.
Here are three key succession planning considerations when choosing between starting your own hybrid RIA firm, versus working through an IBD's corporate RIA:
1) Default ownership of account relationships – It's especially important for advisers under an IBD's corporate RIA to have a buy-sell or some other advanced agreement in place. Absent this, if the adviser should pass away or become disabled, the corporate RIA usually takes ownership of the accounts. And while the corporate RIA or affiliated IBD might have an internal mechanism to monetize these accounts (for example, selling the accounts to other in-network advisers), this can often result in a reduced valuation of assets and a delay in when the adviser's beneficiaries will receive compensation.
Meanwhile, for advisers who have their own RIA, the issue of account ownership is clearly defined. Since the RIA owns the client relationship, there is a seamless transition to the surviving partners. Moreover, the RIA firm structure provides a clearer pathway for heirs to derive financial benefit in the absence of a buy-sell agreement. Usually in the RIA structure, partnership agreements allocating ownership between advisers in an RIA firm will usually have some direct or indirect provision for solving the issues that death and/or disability of a partner may bring.
2) Branding – In an IAR structure, clients tend to identify with the individual adviser, versus the corporate RIA entity. This adviser represents the brand and becomes the primary focus of the relationship. Clients tend to feel a closer individual connection with their adviser in this business model, versus working with a broader entity.
While there's no denying that advisers who have their own RIA maintain strong client relationships, the dynamic can be somewhat different, especially for big RIA firms that employ large staffs and have a deep roster of professionals.
In this case, clients are more likely drawn to the collective culture of the RIA firm, where advisers tend to be like-minded with similar expertise, goals and thought processes. If an adviser dies or becomes disabled in this scenario, it may potentially be easier for RIA firms to retain client relationships, since changes are, at least in theory, much less likely from a business structure continuity standpoint.
3) Funding – A corporate RIA structure can often provide advisers working as IARs access to capital funding resources to facilitate succession planning. It's no secret that IBDs want to retain end-client assets in the event of an adviser's death, disability or planned retirement, and will invariably go to great lengths to offer the necessary financing support to potential acquirers from within the same IBD network to make that happen.
For advisers who have their own RIA firms, funding a succession plan may be more difficult, in that the options are frequently more limited. There is not as clear and straightforward a pathway for an independent broker-dealer to provide transaction financing for another adviser to purchase the RIA's client relationships. Only some, but not all, broker-dealers have the means or, perhaps more importantly, the experience to fund and facilitate M&A transactions between RIA firms that utilize their platforms. Hybrid advisers who are looking at establishing their own RIA structures therefore need to choose their independent broker-dealer partner very carefully.
Again, within the hybrid advisory space, one business model is not inherently better than the other, and independent advisers have leveraged both RIA and IAR structures with great success.
The most effective and supportive independent broker-dealers are not merely business model agnostic, they are focused on making a true commitment to both the independent RIA and the IAR under a corporate RIA structure during both their growth cycle and throughout the implementation of a succession plan.
As part of this commitment, it is absolutely incumbent on independent broker-dealers to make sure that hybrid advisers have upfront a very clear understanding of the key succession planning differences inherent to each model.
Jeffrey Rosenthal is executive vice president and chief marketing officer of Triad Advisors, a hybrid RIA-focused independent broker-dealer.