RIAs are free to charge their own fees and manage money as they see fit. Broker/Dealer representatives are bound by the rules of their employer or Broker/Dealer, but they have a wider variety of financial products to offer to their clients. Which of these is the right choice for you?
In this article, we’ve outlined the pros and cons of RIAs and Broker/Dealers for advisors. We’ve also included a section on independent broker dealers (IBDs), an increasingly popular choice that offers a combination of both worlds. With 2021 on the horizon, this is a good time to review your options.
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RIA Pros & Cons for Advisors
Registered Investment Advisors (RIAs) are required to register with the SEC (or state) and are held to a fiduciary standard of care for their clients’ financial well-being. This means that they work for the client, not for an employer. All of the decisions an RIA makes need to be framed in that context.
For advisors, the primary advantage of being an RIA is independence. RIAs can choose their own fee structure, run their business as they see fit, and can expand their reach beyond specific geographical areas. This is a big advantage in an ever-expanding digital landscape.
Of course, owning your own business comes with additional responsibilities. There’s overhead and software costs to consider. RIAs are required to pay for their own licensing and compliance assistance. Marketing costs are not subsidized by an employer either.
RIAs are also limited in their financial product offerings. They cannot sell commission-based products such as variable annuities and other insurance products. This eliminates a potentially lucrative revenue stream that affiliation with a broker dealer could otherwise offer.
Broker Dealer Pros & Cons for Advisors
Many new advisors begin their career as a Registered Representative (RR) at a broker dealer. This is essentially a job, rather than a business. Though RRs interact with clients and build their own book, those client relationships belong to the broker dealer. You may lose them if you leave.
The advantages of being an RR include a diverse product selection and the security of having an employer cover your overhead and marketing expenses. Licensing is typically sponsored by the broker dealer and compliance is in-house, so you will not need to pay any additional fees personally for those.
On the downside, that security comes with a price tag. RRs are employees, so they’re subject to guidelines set forth by their employer. These often include restricted product selection and non-compete agreements that prevent clients from going with you if you leave.
Independent Broker Dealer Pros & Cons for Advisors
The Independent Broker Dealer (IBD) route has become increasingly popular in recent years, because it offers independence with the diverse product selection that a broker dealer can offer. Most advisors who choose this path are-dual registered as RIAs and registered representatives with their broker dealer.
There are some clear benefits of this type of arrangement. Being an RIA, for instance, gives you the freedom to do fee-only or aum-based billing. You’re not obligated to push insurance products on your clients, but you have the option of making them available if they’re a good fit.
Technology may be a sticking point. Though most IBDs are agnostic when it comes to fintech, many require compliance reviews before allowing you to use certain financial planning or performance reporting tools. Their advisors may be obligated to use proprietary systems.
Marketing and compliance boundaries are another issue. IBDs typically offer marketing programs and support, but its branded to their specifications. There also may be limitations around compliance as they will manage to the masses. Pure RIAs don’t have to be concerned about that.
There are important considerations when choosing between RIA vs Broker/Dealer. If you would like to discuss your options in more detail or explore available opportunities, contact Bridgemark Strategies today. We work with financial advisors and advisory teams to help you evaluate your next transition. Whether you’re changing broker-dealers, breaking away to start an RIA, or selling your business, we can help.