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Going independent: Which business model is right for you?

Wealth managers making the transition need to pick the model that's appropriate to their needs and best serves their clients

Jun 18, 2018 @ 1:20 pm

By Ben Harrison

As wealth managers consider a move to independence, they come to Pershing with questions about the economics of different business models. And rightfully so, because of all the issues advisers have to address in a transition, nothing comes close to the importance of deciding on the business model.

Over and over again, we find that owning a business is uncharted territory for many advisers. Making the transition involves careful self-reflection, research, and planning. As such, we work with advisers to assess the scale of their practice and client needs, risk tolerance, ideal client experience, and level of autonomy they can afford to help them pick the right model for their needs.

For example, if an adviser wants full independence — starting their own firm from scratch and having full control — they need to have both an entrepreneurial mindset and the willingness to take responsibility for every single decision. This is a highly popular option among transitioning advisers, as it affords full control over business and creates total ownership of future value creation.

On the other end of the spectrum is joining an existing independent registered investment adviser as an employee. Here, advisers benefit from existing talent as well as the technology and compliance infrastructure of the firm. However, they agree to forfeit ownership — until they become an equity owner in the firm. For this model to work, advisers need to consider the values and service philosophy of the firm they are joining.

In between these two extremes are starting an independent RIA with a partner or joining a strategic acquiring firm.

Starting a RIA with a partner can be a good option for those who like the idea of independence but lack the initial capital. This structure gives advisors the ability to generate income up to 100% of the revenue minus the fees to be paid to the partner for services such as technology, products and compliance. In fact, according to Cerulli data from 2015, starting a firm with a partner is the choice of a quarter of transitioning advisors — second only to full independence.

Moving down on the independence scale is the option to join a strategic acquiring firm, which allows the adviser to establish an independent office within the acquiring firm. Compared to joining an independent RIA, this model affords the adviser greater freedom to impact the direction of the office he or she leads and allows for more flexibility in product and technology choices.

Increasingly, we are also working with clients who want to transition to an RIA model but maintain a portion of their transaction-oriented business. Moving into a corporate RIA, or hybrid, model is proving to be an appealing choice for many advisers who want to maintain affiliation with a broker-dealer for transactional business. While this model is less flexible in terms of autonomy, it is proving popular with those who want scalability and access to both solutions, as well as the ability to serve clients holistically.

MORE INDEPENDENT
LESS INDEPENDENT
Independent RIA (from scratch)
  • Become an owner = have vision, drive and the entrepreneurial mindset
  • Complete control and flexibility over client composition
  • Freedom to choose own products and vendors
  • Responsibility of compliance and oversight
Independent RIA (with partner)
  • Upfront financing
  • Complete control and flexibility over client composition
  • Leverage partner infrastructure (tech and products)
  • Leverage partner compliance and oversight relationships
Join a Strategic Acquiring Firm
  • New office of an established firm
  • Choose an RIA with a similar client profile and service philosophy
  • Products and technology selection may be flexible, but firm will have established providers
  • Compliance and oversight typically provided by strategic acquirer
Join an Existing Independent RIA
  • Become partner or employee of an existing RIA firm
  • Choose an RIA with a similar client profile and service philosophy
  • Products may be flexible but technology platform will be available through the firm
  • Compliance and oversight typically provided by strategic acquirer
Join an IBD with a Corporate RIA
  • Become employee or contractor of an independent broker-dealer
  • Best fit for those who want to keep significant commissioned business
  • Limited range of products; technology platform provided
  • Compliance and oversight provided

As with any major change, there are critical decisions to make on the road to independence. The good news is that there has never been a better time for financial professionals looking to explore the independent path.

With an ever-growing network of support and consulting services and more business model choices, financial professionals can transform and grow their businesses how they see fit and in the way that best serves their clients.

Ben Harrison is head of business development at BNY Mellon's Pershing Advisor Solutions.

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