Is it better for a breakaway broker to operate his or her own registered investment advisory firm or to become a dually registered adviser and use a broker-dealer's RIA?
That's a question many advisers ask themselves when exploring new broker-dealer relationships, especially in light of today's tougher regulatory environment.
While having your own RIA can be appealing for many reasons, including greater independence and control, it can open a can of worms with regard to compliance and resources, and the inherent costs of each. As regulations become increasingly complicated and advisers seek to ease their burden and expenses, more and more are giving up their RIAs in lieu of using their broker-dealer's. Determining the right answer for you and your business involves a host of considerations.
The first factor to consider is whether you have the internal compliance experience and/or external resources, such as a compliance consultant, in place. For most breakaways, it takes a minimum of five years as an adviser to build the experience and develop the instincts to manage compliance for your business successfully. For those who haven't acquired that level of experience, it's important to hire outside resources, which can be highly efficient but often costly.
Another consideration is whether you have the resources, operational and personnel savvy, and infrastructure in place to support your own RIA, all of which are tied directly to costs. Many advisers don't realize that having their own RIA involves far more than filing an ADV and other regulatory forms. Tasks include establishing workbooks for policies and procedures, business continuity, data security and compliance so that your preparedness in all these areas is documented.
If you are a sole adviser with no staff, having your own RIA probably doesn't make sense; creating and managing the enterprise will leave you with little time for clients. Larger, more complex RIAs typically need one to two staff members dedicated solely to administration. Additional costs for setting up and maintaining an RIA range from $2,500 to $50,000 per year, depending on size and other factors.
To support the cost of having your own RIA, you'll need to have an appropriate level of assets under management. For benefits to outweigh costs, many recommend having at least $50 million in assets.
Determining your break-even point involves many factors, including the extent of your financial planning business. Since advisers will have to give up about 10% of the revenue of that business to their broker-dealer's RIA if they go that route, advisers doing a significant planning business can benefit from having their own RIA.
SEC JURISDICTION
To further complicate matters, the Securities and Exchange Commission now mandates that advisers who have above $100 million in assets under management fall under its supervision. If the assets you manage are below $100 million, you fall under the supervision of state regulators (as of June 28) — potentially in multiple states, if you do business in more than one.
While costs are usually at the top of the list for advisers making the breakaway decision, your long-term business model and needs should be your primary considerations.
For example, if you are looking to build your brand with the long-term objective of being solely an RIA, if you have the assets under management to support such a goal, and you do a lot of financial planning and want a higher payout on those plans, it might make sense from a business standpoint to go the independent route. However, if your main motivation is to relieve yourself of regulatory headaches, then having your own RIA may not provide the level of autonomy you have in mind.
The bottom line, according to Lisa Roth, chief executive of Keystone Capital Corp., a retail and institutional brokerage firm, is that it's important to make the decision “based on what is truly best for your business, not on trying to escape a compliance burden.”
In today's tough regulatory environment, it often makes good business sense to use a broker-dealer's RIA, a move many advisers are making. Consider the decision carefully and be sure it's the best business decision for you and your practice.
Jodie Papike ([email protected]) is executive vice president of Cross-Search, an independent- broker-dealer adviser and executive placement firm.
