Good reasons to have a broker-dealer

After years of witnessing a rise in the number of financial advisers leaving their broker-dealers to start registered…

After years of witnessing a rise in the number of financial advisers leaving their broker-dealers to start registered investment advisory firms, we are seeing a reverse trend toward returning to affiliation with an independent broker-dealer and choosing to become a hybrid adviser.

Although many RIA firms don't see the value in giving up a percentage of revenue for association with a broker-dealer, the complicated regulatory environment has brought this value to light for an increasing number of advisers. More advisers are recognizing that being registered with a broker-dealer is a small cost to pay to have a partner and is equivalent to an extra insurance policy on their businesses.

CONSIDER THE BENEFITS

There are many reasons for advisers who either are considering breaking away or have already broken away from their broker-dealer to hold on or return to that relationship.

Among those many benefits are:

Oversight. Many broker-dealer compliance departments provide not only oversight but help with state and Securities and Exchange Commission audits and website reviews, along with clarity on regulatory changes and issues.

Shared liability and backing. Affiliation with a broker-dealer means sharing liability, as well as the possibility of sharing the costs associated with a client complaint. If something were to go wrong, the broker-dealer's errors-and-omissions insurance policy, in many cases, would cover both the adviser's commission and RIA business.

Ability to maximize firm revenue. Some advisers maintain their broker-dealer affiliation so as not to limit their business possibilities, including mutual fund trails, variable annuities and alternative investments. For many advisers, managed business can come as a package deal with non-fee-based business. For example, I recently worked with an adviser facing the prospect of handling a large fee-based account. The client also wanted to set up a Section 529 college savings account for his grandson. For this adviser, it was highly advantageous and a wise business decision to cultivate a broker-dealer relationship to be able to serve all the client's needs beyond the fee-based account.

Value proposition. Quality broker-dealers offer a value proposition: access to all those things that advisers can't get on their own without spending inordinate amounts of money, such as practice management tools, marketing, technology platforms, etc. With the right broker-dealer backing, advisers receive individual attention and resources for assistance in handling complicated situations.

BROKER-DEALER COSTS

Providing value to advisers comes with high costs for the broker-dealer, many of which hit deeper than some advisers realize:

Liability. Ultimately, broker-dealers have responsibility for advisers' fee-based and commission business. When an adviser faces a customer complaint, the broker-dealer most likely will be named and may take on significant costs, not only on the adviser's behalf but on its own. Attorneys typically go after the deepest pockets, and in cases where advisers face complaints, the broker-dealer could face costs associated with those complaints.

Technology for supervision. Quality supervision of transactions to protect advisers requires significant technology investment. Consider that broker-dealers that are supervising their advisers appropriately will pull information for accounts held with third-party custodians. To evaluate that information, broker-dealers use either third-party or proprietary software to interpret the data and ensure that there are no red flags and that all investments are deemed suitable.

Extra staff. In addition to costs incurred for supervision, broker-dealers absorb costs to provide ancillary services including marketing, practice management, information technology, operations, etc. Advisers may benefit significantly from having this broker-dealer support rather than doing business by themselves.

Although many advisers look at an RIA-only structure as a means to maximize revenue and avoid extra regulation, we look at affiliation with the right broker-dealer as a valuable partnership that offers a wealth of benefits and protections. Although keeping a broker-dealer relationship may not be valuable or necessary for every RIA, it can offer the best of both worlds for those who value that partnership.

Jodie Papike is executive vice president of Cross-Search, a third-party independent-broker-dealer adviser and executive placement firm.