Should You Drop Your Broker-Dealer Status?

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The more I talk to dual-registered advisors, the more I hear that many of them are looking to get out of the brokerage business entirely and operate as a fee-only RIA firm. If this is something that has crossed your mind, here are the pros and cons and what you should consider.

Quant vs Traditional Investors
By Andyhill8 (Andy Hill) [Public domain], via Wikimedia Commons

The money, honey

Whenever an advisor tells me he or she is considering “going the fee-only route,” as they commonly put it, my first question is about the finances. So many advisors would love to be an independent RIA firm, but who wants to leave a trailing revenue stream of $500k or more?

This is especially true for advisors who have been in the business for decades. It’s hard to walk away unless you have a compelling reason to believe that you’ll be able to replace the lost revenue by finding new business elsewhere.

The question then becomes how much stronger your firm becomes as an independent RIA. Is the freedom worth the price?

Let freedom reign…or maybe not

Operating as a pure RIA Firm has huge advantages for your marketing. As someone who makes her living talking to advisors, I can tell you that there’s no comparison between RIA and broker-dealer compliance. In extreme cases such as Merrill Lynch or UBS, you can forget about having any individuality or distinctiveness in your marketing.

No, let me correct myself. You can get some customized marketing, but you’ll have to engage in vigorous combat for it. And that’s because it is entirely in the interest of these big brands to preserve their own brand name. They’re trying to protect their image. It’s their image first and yours second. You have the advantage of working for a household name that everyone knows.

But you pay the price.

They’ve structured the compliance process so that it’s so time consuming for the advisor that most of them naturally give up. Smaller broker-dealers tend to allow more flexibility.

In most RIA firms, external compliance is rarely used. The compliance process consists of the president or chief operations officer scanning the document for flagrant compliance trigger words such as “always” or “guarantee” and then calling it a day.

They do tend to get away with saying some pretty loaded claims that would never get through a broker-dealer compliance program. For example, I’ve seen a firm claim that its performance was better because it was an RIA. Most RIAs won’t face any regulatory headwinds because the government has its hands full trying to catch the criminals. There are tens of thousands of RIA firms and they can’t go after everybody.

Read the full article here by Sara Grillo, Advisor Perspectives