Practice Insights | by Simon Hoyle
A Recruiter's Independent RIA Diligence Checklist
April 15, 2025
By Simon Hoyle, Citywire
If you are an advisor considering a new RIA relationship, you are in good company.
Independent RIAs (IRIAs) with a recruiting mindset — also called tuck-in or turnkey RIAs — are rapidly drawing talent from broker-dealers as advisors are increasingly unwilling to give up revenue and autonomy in exchange for outdated infrastructure and excess administrative work.
Research firm Cerulli Associates reported there were 18,700 SEC-registered advisory firms as of 2024, up from 16,000 just a year prior, meaning advisors today face a vast and growing menu of RIA options.
It is easy to feel overwhelmed. But selecting the right partner does not have to be daunting. Simplify the process by focusing on three core pillars: flexibility, financials, and ownership. Shared values in these areas can make or break your long-term satisfaction after making a move.
Flexibility
Compliance rules the roost, greatly impacting your day-to-day productivity while affecting future client wins. Start by aligning your business needs with an IRIA’s offerings and vision. Eliminate mismatches early and focus your time on firms where you see a real chance of alignment.
Evaluate your need for a broker-dealer. Some BDs allow you to ‘hand off’ legacy commission business while maintaining client relationships. A few offer consulting fees to non-registered reps who complete annual client reviews—paid from account-based fees. But be careful: some buyers of commission trails have solicited advisory assets behind sellers’ backs. It is yet another reason to retain the full client relationship, if you can.
RIAs will assess your revenue streams, service model and growth strategy—do the same with them. Look for red flags from firms trying to squeeze revenue via questionable tactics, like cash sweep programs or high-fee in-house models disguised as index strategies.
Investment fees are a major margin lever. Do not let ‘low’ fees elsewhere distract from the real costs. Run a pro forma for your practice, as excessive client fees loom large for regulators. Know where the money is coming from—and going.
Moreover, client fees significantly fund advisors’ forgivable loans. How else can advisors’ 95% payouts, when combined with notably low advisor fees, still provide capital for 40%+ forgivable advisor loans?
Compliance missteps by you or the RIA can choke flexibility and dampen growth funding. Do your homework. FINRA BrokerCheck can shed light on a firm’s track record. Do product offerings match your comfort level? Keep in mind higher-risk IRIAs offer conservative advisors less benefit through unnecessary risk.
Finally, custodians typically reward AUM growth with better pricing. A quality RIA should pass that through. Custodian breakpoints are not just for the home office — they should benefit you, too.
Financials
Look to join a financially sound firm.
Approach this like you would an investment. Dig into the RIA’s AUM, growth history, core services, niche markets and three to five years of financial performance. A stagnant or shrinking firm may lack the scale to support you long-term, especially if your practice is growing fast.
Compare client-facing costs like trading fees, investment platform and third-party manager fees. Pay special attention to cash sweeps and advisory related platform fees (I call them ‘access fees’ if no manual work occurs). No one should pay for that.
Moreover, compensation models are breaking the mold. Newer IRIAs are innovating with flat-fee models that unbundle pricing. Think 100% payout minus a $20,000 affiliation fee and modest administrative fee — a very compelling proposition, especially for large, fast-growing firms looking to maximize margins.
This structure even appeals to practices with $200M or more in client assets (which will likely consider registering their own RIA firm) because they can leverage preferred pricing and support while preserving economics. While some practices are tempted to start their own RIA, many opt to outsource and tap into better technology, better service, and more efficient processes.
As this model gains traction, IRIAs with streamlined, scalable pricing will continue to draw top-tier advisors.
Ownership
Think about long-term value, as well as your stake in it.
RIA ownership models vary widely. Many firms are still privately held by founders, team members and staff — a draw for advisors concerned about private equity pressure. While PE firms have built successful RIA roll-ups, not every advisor wants outside investors steering the ship.
Some of the savvier IRIA structures limit individual partner ownership stakes to 49%, ensuring no single person controls the firm. One example would be a four-partner firm split into 40%, 25%, 25% and 10% shares, with buy-sell mechanics in place to protect the balance during a succession event. When a partner plans to exit, changes can be made to ensure stakeholders maintain relative stock.
Why go it alone?
IRIAs and platform partners should enhance your growth, not hold it back. Without the right support, even great practices can stall. Ask about succession planning, client-facing services and how firms address advisor feedback. Sharing your top three ‘likes’ and one or two ‘not-so-much’s of your current affiliation structure can spark real dialogue and illuminate cultural fit.
In today’s environment, RIA affiliations offer a much-needed reset for many advisors. Clean, cost-effective models paired with higher net revenue can transform your business and your quality of life.
Keep it simple. Find a firm that shares your values and let independence open new avenues for you.
Yes, but they may have to execute their own transition for a change
October 24, 2023
By Simon Hoyle, Wealth Management
RIA models attract advisors at a troubling pace for many broker/dealers. Will broker/dealer revitalization efforts fall short or too late to sway advisor interest? Can they effectively stem fleeting allegiance? Amidst the growing number of independent RIAs and new genre of innovative IBDs, financial advisors flourish with stronger fiduciary partners, out of the box technology and more effective work flows.
To earn advisor loyalty, the route is clear: reduce fees, foster institutional custodial relationships, avoid a "one size fits all" mentality and help advisors succeed, both personally and professionally. But instead of embracing a fiduciary mentality, broker/dealers still vie to buy business through alluring advisor retention contracts, which are ultimately funded by practice generated revenues.
It is now imperative for broker/dealers to make a choice: reinvent, reinvest, rebrand—or rust.
With a heightened sense of urgency, some broker/dealers have promoted their RIA registration while downplaying legacy B/D ownership. But is branding as a national RIA more than just a clever marketing strategy?
IBDs with corporate RIAs have been registered nationally for decades. However, the phrase national RIA hints at the RIA-only model (no broker/dealer ownership), commonly viewed as the premier best-interest model and aligned with industry movement. Although promotional claims may provide early mover advantages, B/Ds must first fit the independent RIA mold.
Ownership influence / PE Churn and Burn
The broker/dealer dilemma: cling to cash cows, such as advisory and access fees, or transform business models to meet changing industry preferences to benefit advisors and clients alike. Many B/D-RIAs have been slow to adapt or have not even started. Why? Reliance on high fees and extra revenue streams (common private equity directives), such as external platform access fees, for example, which may hamper competitive efforts. In fact, PE’s ability to generate plum returns may be diminishing in an era of waning profitability. Their potential return on investment may lower over time as previous buyers harvest the more profitable, lower hanging fruit. Not only does a heavier fee environment risk increased advisor attrition, but also remains a bigger regulatory target because lower cost options are available to the clients, who participate in these fee structures.
PE now finds itself middle-aged, having enjoyed success in a marketplace of typically sticky investment assets. A 2021 Harvard Business Review commentary offered this perspective:
"There’s trouble on the horizon for private equity. As the 50-year-old industry matures, investment returns are falling. In fact, for the past three decades, average buyout performance—the return a buyout firm generates from buying, improving, and then selling a company—has been on a downward trend."
This begs the question, is there more efficiency and scale that further investment capital can meaningfully amplify? Broker/dealers with high advisory account fees (often multiples of independent RIAs’) ultimately brought about an ultra-competitive level of IBDs, who’ve been winning with niche markets, pricing and service advantages. Advisors take note when back-office support integration provides a simpler, more effective and less costly platform. Furthermore, prospective IBD buyers (likely another PE firm), should weigh the mounting challenges of potentially lower profit margins against the benefits of repositioning, likely requiring a substantial effort and outlay. Effectively, you might say, broker/dealers are bought for their parts—advisors and their clients.
It's yet another reason “stay money” is hot again—advisors holding loans are less inclined to leave. PE’s incremental cycles of enhancement functioned effectively for an extensive period: purchase a broker/dealer, introduce and raise fees (a fast but risky way to increase profits), trim expenditures by reducing back-office to advisor staffing ratios, augment advisor headcount—often through substantial forgivable loans—and ultimately sell within a 5-to-7-year window. But how might narratives shift on bumpy roads?
Rebrand or Reposition?
In times of major change, a fresh image may provide an edge. And when strategy doesn’t meet expectation, rebranding may get the nod. Reshaping business perception, resulting in a new or improved image is the intent. Updating names, logos, taglines and graphics, particularly for firms bearing tired or outdated names, or tarnished reputations, can be effective. When innovative solutions emerge and competitive bars are raised, rebranding is an unlikely stand-alone. Change conveyed today may remain tomorrow’s promise.
Repositioning, however, enables a tailor-made approach, more effectively targeting markets by influencing customers' preferences around their needs. Independent RIAs and innovative IBDs (who adopt RIA characteristics) are succeeding by effectively offering lower overhead and better service to lure prospective advisors, not only dialing in institutional custodiansfor speed and efficiency, but also improving accuracy and reducing administrative burdens of the chain. While some IBDs may emphasize their scale advantage, it may be smaller regulatory partners, increasingly aligned with trends, who continue to experience steady, incremental, advisor-valued growth.
In addition to independent RIAs, smaller broker/dealers have saddled entrepreneurial spirit to strategically experiment and ride to incremental success. One of our mid-size B/D relationships offer remote tech support and account servicing until 12a.m. weekdays, with home office specialists. Delivering valuable services not only cultivates stronger relationships, but also reduces the inconsistencies of third-party call centers. Smaller communities, therefore, may be poised to better identify offerings to advance practices’ success while extending a more personal touch.
Summary
Apprehensive IBDs may hand out "loyalty loans" and deliver new branded advisor swag to stoke hype trains, while they pony-up loans as much as 1% of practices’ select assets, tied to 10-year affiliation commitments. And, though private equity investment durations have trended downward, retention packages and expectations for prolonged advisor affiliation remain high. Consolidation- induced transition work can be negligible—if there’s no change in client account numbers, account registrations or even the requirement of fresh client signatures—but this hasn't dampened financial attempts to secure advisors long term. It may, however, impact critical enhancement spends. While loans attempt to tie up advisors, they may prove less effective if merely cosmetic, such as name and logo changes.
Innovation is more likely to usher in success for those with an independent RIA blood type, earning advisors a deeper, more loyal customer base. Can IBDs go the distance? Yes, but they may have to execute their own transition for a change.
Is Bigger Better in the Broker Dealer Space
January 24, 2023
By Simon Hoyle, Financial Advisor Magazine
Most large broker-dealers hope to lure advisors into their ranks (or hold onto them) by boasting about their size. They warn reps that there are perils to going to a small B-D—that smaller firms lack scale and will likely be run out of the business, and that even midsize firms are finding their viability challenged.
But big broker-dealers come with their own disadvantages. One of those is that they must appeal to the masses. That makes it hard for them to support hyper-focused practices, especially when it comes to compliance issues. Broker-dealers with expanded ranks must often paint with a broad brush to curb reps’ wrongdoings or missteps, and that can hamper many advisors’ flexibility. If the environment is too rigid, the advisors there may find it hard to build a niche business.
At our recruiting firm, we encounter advisors who are drawn to the idea of greater independence and better financial opportunities—and they also may shy away from onerous compliance and inflexible support. That’s one of the reasons the RIA channel is growing, as are the number of “fiduciary acting” broker-dealers who have added RIA businesses.
Still, the largest-broker dealers push myths to frighten their advisors about the impracticality of joining smaller firms. Here are some that ought to be debunked.
Myth 1: Advisors Need Advantages Of Scale
Large broker-dealers say their scale helps them charge advisors lower fees while offering inclusive practice management support and other resources. They say that size is essential for survival, and that being small is impractical these days. Yet most of the large companies are not sharing cost benefits in a way that deserves advisors’ loyalty.
The big companies have big cost centers—what they pay to service debt (perhaps after expensive acquisitions), to hire staff, to cover legal fees and to build. When they do pursue expensive acquisitions, it can force transitions on advisors, and the high-risk debt they sometimes incur can make them more vulnerable.
Small shops, on the other hand, can be nimbler and bootstrap in a way that empowers their advisors—cutting costs where possible, for instance, or operating with lower margins and helping their advisors capture revenue sources beyond asset management to better meet clients’ changing needs.
Indeed, advisors are flourishing at smaller broker-dealers and independent RIAs with the help of custodians such as Fidelity Institutional and Schwab, which have lowered their fees and helped smaller advisors with their profit margins. Moreover, the extra flexibility lets advisors conduct more business, provide additional client solutions, grow their client base faster and be more competitive overall.
A company achieves scale, of course, when its revenue increases faster than its costs. But even smaller broker-dealers have advantages. For instance, they can negotiate favorable institutional custodial pricing contracts that reduce the disadvantages of their size. Moreover, there are other ways for smaller firms to save money—by outsourcing technology and support to third parties. That helps make them more efficient.
Is scale a critical factor for financial practices? Yes, advisors benefit from it, but maybe not as much as you think. In smaller broker-dealer relationships, advisors can retain much more practice net revenue. Advisory fee billing and performance reporting costs are often paid by advisors at large B-Ds (10 to 15 basis points is a common range for advisor managed client assets. Advisors may pay a B-D around 5 to 10 basis points to directly access (with a broker-dealer’s approval) Schwab or Fidelity Institutional. These two fees can wipe out 20% of rep-managed advisory revenue. Furthermore, advisors have the flexibility to pay for what they want and need with smaller firms.
It’s à la carte versus bundled pricing—choose what you want instead of having it chosen for you (including services you may never use). Clients can benefit too, from lower administrative account-related costs, including better cash management pricing, for example.
Myth 2: Merger And Acquisition Activity Is Wreaking Havoc On Smaller B-Ds
M&A is normal in most business environments, but broker-dealers have been more aggressively looking to capture advisory assets in a fight for lucrative advisory fees and head count retention as fewer advisors join the industry. By buying a competitor, they can replace lost revenue and increase the advisor count. But big B-Ds frequently overextend their back office by lumping hundreds of new advisors, via acquisitions, into service troughs, which means the advisors’ service can suffer, sometimes for years. RIAs, meanwhile, are enjoying the wide and expanding bandwidths of investment and insurance products in fee-based formats, which have helped them grow. Although the big broker-dealers now have corporate RIAs, they are often expensive for both advisors and clients.
Myth 3: A Big Broker-Dealer Is More Like A Wealth Manager
Big broker-dealers have begun to position themselves as wealth managers—companies that, like fee-only RIAs, provide tax-friendly solutions to maximize financial results for their clients, especially high-net-worth clients. But is it the companies themselves, the advisors, the technology, or some combination of the three that embodies wealth management?
Accounting, tax planning and estate planning services are increasingly software-driven. A broker-dealer can indeed help advisors in these tech spaces by providing support like education, training and general guidance. But what advisors really need in this space is the help of third-party providers, which can help them with specific advice. And broker-dealers are famous for limiting how much advisors work with third parties, given that they come with legal liabilities the B-Ds would prefer to avoid.
The upshot is that innovative and broader client investment solutions require flexible working environments.
We find that smaller broker-dealers can give advisors more product choices. Take, for example, Delaware statutory trusts, entities that allow “like-kind” real estate swaps for 1031 exchange purposes (such exchanges allow you to swap similar investments without taking capital gains for the sale of one). This entity is designed to allow clients to defer taxes while getting price appreciation for their property and enjoying investment diversification at the same time.
In our experience, such offerings at big broker-dealers can pale in comparison to those offered by small ones (where it’s a specialty). We’ve seen a common range of 15 to 25 offerings recently from smaller alts-friendly broker-dealers, while several of our alts-focused partners say the big broker-dealers’ offerings are smaller.
This may seem counterintuitive, but it’s because big broker-dealers are bigger legal targets (they have deeper pockets), so they have limited product availability, and when the subscription windows are shorter and you have more clients trying to get into a nuanced product (as you would at a larger broker-dealer) you might find there are more challenges and they might be less suitable than they would be at a smaller firm where the more complicated products would get more care.
We believe smaller, specialized B-Ds can better accommodate investors by considering their entire financial profile. Conversely, the compliance departments at larger firms may take a harder line, likely because of their firms’ past regulatory missteps (a problem that typically increases when they have more advisors). That crimps their flexibility to offer new investment opportunities.
Be Nimble
The Titanic was a big ship, some may say too big to get out of its own way. Smaller broker-dealers, like smaller ships, can change direction faster than big ones. That’s important at a time when the big broker-dealers are facing a near-term challenge—to find the right balance between the fees they are charging to advisors and clients and the services they are offering. They may wind up encouraging advisor activity that’s better for the broker-dealer than the advisors and clients. And if they don’t materially share the financial benefits of their scale with advisors, that could prompt advisors to leave.
If scale is the golden goose, how are smaller broker-dealers and RIAs succeeding? By catering to advisors’ needs, building on relationships, and adding new ones in the effort to continually simplify business processes for the advisors and themselves. That makes them more efficient, too.
5 Steps to Boosting Your Independence — Today
October 26, 2022
By Simon Hoyle, Think Advisor
Many advisors have lost that loving feeling of being independent. Broker-dealer service shortfalls and tiresome business processing are testing advisor patience.
Independent registered independent advisor models are paving the way by creating the ideal working climate and answering advisor wishes in the process. They provide varied focuses and expertise for significant practice upside. Vetting them, though, takes considerable time, and the numerous opportunities that are available make the process quite cumbersome.
For advisors considering the leap to an RIA, taking some time to evaluate the options and to consider their own goals can help make the change less intimidating.
1. Embrace breaking away from the sea of sameness.
For too long, BDs have been seen as the path of least resistance for advisors, whose plans to move on are influenced by the comfort and familiarity of what's worked before. However, a new element is in play: the anxious excitement of advisors wanting a better and more meaningful way to work.
Opportunities for positive change are synonymous with indie RIAs, but some recruiters may remain loyal to their favorite BDs. The bigger BDs are capable (and more likely) to provide advisors with head-turning forgivable notes, high recruiting payouts and volume bonuses.
This makes them hard to abandon. Plus, if advisors are supposed to differentiate by specializing their practices, is it best to do that under the uniformity offered by dated norms at some BDs?
2. Get expert input.
Like top financial practices, independent RIAs have specialties and expertise. They compete mostly on price (already the industry's lowest) and service.
They provide essential functions like BDs do, including compliance, supervision, account processing, technology, etc., so you can plug and play your business. Their appealing upside and unrivaled flexibility helps you run your business more your way.
The benefits of joining an RIA firm include the best pricing for your practice (low client and advisor administrative costs), markedly higher net revenue, fiduciary safeguards and numerous options to align business interests.
Let's say your client subscription fees generate substantial revenue. You could join an RIA firm that allows you to keep 100% of these fees through your own firm as long as they participate in your asset management revenue.
In another case, the advisor runs her/his own advisory models and wants to retire in five years, but feels his adult child successor would be more successful handing off that responsibility. Joining an RIA firm with in-house investment models run by their Chartered Financial Analysts could be a good fit.
With an abundance of options, the due-diligence process becomes more time-intensive and important. This is where recruiters can be invaluable.
While it's important to review potential firms' financial and regulatory status, your success and happiness lean on a good personal fit, too. Ask your recruiter how they vet relationships (not just how their recruiting process works) to learn of their expertise and support. What's the size and number of affiliates they work with and how will your practice directly benefit?
Ultimately you may decide to register your own RIA, but at least you're now in the driver's seat. Your options are only limited by the number of quality introductions you engage — but watch for competing interests.
3. Understand your best interest and that of your clients.
BD administrative fees, especially advisory ones, are charged to advisors; clients significantly fund these enticements, which may crossover to client complaints. Work with someone who wants to reduce your practice fees to new standards.
Your reward is the win/win world of RIAs where reduction of costs for you and your clients can pay you more and safety-net your practice too.
BDs generally haven't adopted a real fiduciary environment, as shown by the number and type of revenue sources most employ. Platform access fees and oversized participation in money market fees lead to substantial profits, often with little to no work done that can give "gross revenue" a bad name.
Frustration can grow when BDs shelve FA pain points while making BD purchases, which adds complexity and tends to dilute staff effectiveness.
4. Pick your path and then choose your vehicle.
When shopping around, it's important to think of where you're going. Work with someone who really gets what's important to you.
Advisor needs are increasing as they look to add services and collect revenue beyond asset management fees as client expectations go wide. Your biggest financial decision, however, may be your practice's sale.
Advisors have been encouraged to transition to BDs, often bigger ones, where they might more easily sell their books. This has merit, coupled with potential drawbacks.
First, it's a lateral BD move, which may not be in your practice's best interest. Plus, the buyer likely assumes the remainder of your forgiveness schedule (time cuffs) and therefore loses business flexibility.
Advisor practices are poised to stay in high demand; also, clients are used to virtual meetings and are interested in the "right" advisor more than the "nearby" advisor. Enjoy the benefits of an RIA firm now. When you sell, the transfer should be easier if client accounts are already with institutional custodians.
Lastly, advisors move. Oftentimes, moving to another BD for a planned succession doesn't materialize for many reasons, including advisors moving to greener pastures or finding a better buyer profile, etc.
5. Take the next steps.
This is the best time in decades for advisors to upgrade and strategically position their practices. Recruiters play a fundamentally important role in our vast environment — one you could benefit from.
Education is key. Advisors who say they don't want to "go RIA" often misperceive the phrase's meaning. They picture leaving the comfort of the BD world and literally starting over, handling everything themselves. But that's not the only option. Like any unknown, it can take time to learn, but could also be one of your best investments.
A 10-minute conversation with a good recruiter may have you thinking RIA also stands for "Really Independent Advisor." Interest grows quickly around lowering practice levied fees, gaining more independence, flexibility and retaining substantially more revenue while doing the right thing for clients, effectively installing regulatory bumpers.
Wirehouse breakaways are now common, and the already-independent breakaway model is just beginning. Focus on the right model, be more productive and rest easier.
May you find your path… and as we say in Texas, happy trails to you.
Another Way to Breakaway as an RIA
July 20, 2022
By Simon Hoyle, Financial Advisor Magazine
Many financial advisors want to leave the broker-dealer world and join RIAs. But they don’t necessarily want to register their own firms.
One obvious choice is to turn to what’s called “turnkey RIAs.” These are independent RIA firms (in many cases owned and managed by advisors) that offer support to those advisors wanting to piggyback their practice onto a firm for business essentials and often much more.
Advisors are increasingly turning to this model, and away from the dated broker-dealer model, because turnkey RIA firms still offer them the help they would otherwise need with compliance, client billing, account performance reporting, etc. Turnkey RIAs also offer advisors the basic technology to run their business (their “tech stack”) because, like broker-dealers, these firms can vet the assorted applications advisors will need, ranging from CRM programs to financial planning applications. Moreover, turnkeys often accommodate an advisor’s request to use a particular technology not available on the standard menu, something B-Ds are hesitant to do.
Basically, a turnkey RIA allows you to come as close as you want to “being your own RIA” and to “plug and play” with an existing firm—but without going all the way and running an RIA yourself. The latter choice requires you to register with the Securities and Exchange Commission (or your state if you don’t meet a certain asset threshold). Running your own RIA also means essentially running two businesses at the same time: one in which you work with clients and one in which you operate a regulatory/ administrative entity that puts you in charge of all compliance matters, technology matters and other things. That’s a huge undertaking.
Many advisors looking to be recruited out of other channels are drawn to this model (the ones I work with are mostly coming from independent broker-dealers, though advisors from other channels such as the wirehouses are also attracted to it). Why? The model of broker-dealers is dated when it comes to the fees they charge for services like business processing, compliance help, marketing support and website creation. Advisors are likely going to find the prices more compelling in the turnkey RIA space, where they can increase their net revenue while lowering their clients’ administrative fees.
At the same time, advisors in this space are better positioned to work as fiduciaries. As regulators exert more pressure and best interest requirements become a bigger problem for broker-dealers, those problems loom for the broker-dealer reps too (especially if clients lodge complaints against them). That’s why attorneys preach so much about advisor liability at FPA chapter lunch meetings. Given those problems, it’s no wonder the head count is shrinking in the B-D world.
There are four key advantages turnkey RIAs offer:
Financial advantages. Say you have an advisor who manages about $40 million in advisory assets and also serves clients with 403(b) accounts. Like many advisors, she might be considering leaving the broker-dealer mold for RIA models.
Say she did a cost-benefit analysis and considered going solo and registering an RIA of her own. She realizes her service could be affected if she were a stand-alone client of institutional custodians like Fidelity IWS, Pershing Advisor Solutions or Schwab. She would forfeit better pricing and other enterprise benefits and might be pigeonholed in a category that gets her only those companies’ most basic support. Moreover, her compliance and technical support costs would eat into her net monetary gain. And she would not likely want to take on her own responsibilities for compliance, technology and a long list of other things.
Ultimately, it might be an easy decision for her to affiliate with a turnkey RIA instead.
Many advisors assume that if they have more than $100 million in assets under management that they should be registering their own RIA, but that’s not the case. Advisors with more in assets and revenue can still benefit from a group scale and enjoy break-point asset pricing going with a turnkey advisory (the costs decline at higher asset tiers).
Also, at turnkey firms, the advisor payouts are typically 100%, minus the all-in pricing for assets under management charged to affiliates (which are around 8 to 12 basis points). Many advisors are also increasingly wanting to charge their clients financial planning and subscription fees in addition to AUM fees. It’s important to remember that few turnkey RIA firms would allow their investment advisor representatives to retain 100% of those fixed fees. Some collect several basis points from their reps for these fees while others apply the higher AUM based fees mentioned before.
Independence advantages. Like clients, advisors want better service, pricing and the ability to move assets to new platforms, something that’s easier to do when they have direct relationships with RIA custodians. Better access to multiple custodians can give an advisor more flexibility and allow him or her to take advantage of the best of the custodians’ features.
Many reps with broker-dealers, meanwhile, have seen their service deteriorate as the B-Ds struggle with a weak economy and attendant staffing issues (many firms are poaching one another’s employees). By going with a turnkey RIA instead, they could minimize the heavy hand of the home office in business processing, save more time and deal with fewer mistakes, and it would be much easier to move client accounts. In fact, if clients stay with their custodians when a rep moves from one RIA to another, the clients can keep their account numbers, which is convenient and comforting for everyone if you ever need to change firms again.
Advisors can expect inclusive and robust tech stack offerings at an RIA firm as well as better compliance and customer support (offerings that are often better than those at a broker-dealer and can be more quickly implemented). Affiliate advisors with RIAs can also add fintech applications to complement their standard platforms (for a reasonable out-of-pocket expense).
When affiliating with any firm, you will want partners who support your brand, marketing, investment offerings, website, etc. You should be able to market your own firm’s name and beware those companies that only want you to support theirs.
Some advisors who move to the RIA world would like to retain at least some commission accounts, (because they feel that offering both fees and commissions will provide the best client solutions). Advisors can keep their commission business and revenue by adding an external (and usually smaller) B-D relationship.
Compliance advantages. When you affiliate with a firm, you’re going to want to know its compliance mentality and culture. A lot of partnerships fail when a rep and their RIA are not on the same page. So you should learn step by step how your business will be processed. How will the RIA firm handle those things you currently find most challenging? Where does it make its money? What’s its revenue mix, including the contribution of higher risk products like alternatives? How many of its advisors have run into trouble with compliance?
The good news is that an established RIA can provide a buffer between you and regulators. Smaller RIAs can provide better compliance help because they will know you better, something that’s lost at many larger broker-dealers.
Partnership advantages. Many turnkey RIA firms have fewer than 100 advisors, so they foster more personal relationships.
But it’s important, if you want to join one of these firms, to learn about their roots and the owners’ backgrounds. How long have they been in business? Are they planning to sell in 10 years? Are family members the succession plan? What’s their end game? Are they running business as you would, or even better? Some of these RIA owner-advisors stay grounded by servicing a short client list while running their firms.
You can also benefit by working with these firms’ chartered financial analysts, who can review your investment strategies. Turnkey RIAs also likely offer competitive in-house investment advisory models that allow you more time with clients.
Independent-Minded Advisors
Turnkey RIAs are increasingly attracting independent-minded advisors, including those who might even already have an RIA of their own but want to simplify their lives and do what they enjoy more—helping others.
So there’s never been a better time to consider an RIA-centered model like this one. It lowers client expenses dramatically. The net revenue is better for advisors. And it’s fiduciary friendly.
A wide spectrum of options await. It can be a short-term challenge, but the rewards are plentifu
Think Twice About Broker-Dealers' Forgivable Loan Offers
February 3, 2022
By Simon Hoyle, FA Magazine
Financial advisors have come to expect certain incentives from the firms trying to recruit them, and one of the biggest carrots is forgivable loans. But those loans, as common as they are, might become another casualty of the times. In fact, it might even be to advisors’ advantage in the future to simply turn them down.
Part of that has to do with the regulatory, fiduciary and competitive pressures driving change in the
industry. Regulators are looking closely at what clients are being charged, and in the future, broker-dealers’ administrative fees could be low-hanging fruit for examiners. The structures of these fees are often opaque, the disclosures scant. Some fees provide no value to clients at all, while others show no reflection of what’s being charged elsewhere in the industry. And when it’s a client account funding a broker-dealer’s incentive loan to an advisor, regulators may seize on it.
When regulators put admin fees in their cross-hairs, broker-dealers and RIAs will likely see their revenue curtailed—which could also blunt the size of the loans to transitioning advisors.
Broker-dealers are seeing their fees come under pressure from technological advances as well. More
efficient technology could give RIA firms (and their independent advisor reps) a fee advantage that
puts pressure on B-Ds to lower advisors’ portfolio management platform fees—something typically
paid for by clients. When it’s advisors paying for the related ticket charges, which is less common, regulators will want to ensure that these advisors are trading on the actual merits of the investments
they’re choosing—not just trying to save themselves overhead.
One type of fee contributing to an advisor’s forgivable loan is the structure known as the “rep as
portfolio manager” model (or “RAPM”) in which the advisor personally manages the portfolios.
This model has b ecome more popular with the advent of direct indexing and ticket-charge-free ETFs and funds. As the model becomes more widespread, the aggregate client costs across the regulatory channels are going to be monumental.
Other client advisory account types also make big fund contributions to broker-dealer incentive loans, in some cases more so than RAPM admin fees. Consider broker-dealer administrative fees for
advisory accounts, turnkey asset management programs (or TAMPs), institutional custodians and
third-party managers.
The fees from these revenue centers have been golden for years, but many financial planners don’t know whether their clients are subject to tacked-on fees from these programs. What value does a client receive from additional AUM fees charged expressly to access third-partymanag ers? These fees can be 25 basis points, and the markups can be as high as 50 basis points for separately managed and unified managed accounts.
Trying to break down a platform's total expense canb e a big challenge. And not knowing can put the financial advisor in a precarious situation: It’s never been more important to know exactly what your clients are paying and why.
Consider what advisor clients pay at independent RIA firms. They might pay $50 per account per year for similar rep-as-portfolio-manager account services on a platform like Orion’s, which would
include fee billing, rebalancing, reporting and more.
Compare that with a $500,000 RAPM account at a broker-dealer with a 12 basis point client admin
fee, which results in a $600 annual platform fee, excluding ticket charges. (Not all firms require clients to pay tickets, and most advisors now use no-transaction-fee ETFs and funds). The difference
is $550 per year. Imagine the compounded growth for a client who saved that much over 10 years.
The Relationship Between Loans And Advisory Revenue
Forgivable loans are purposely constructed by issuers to collect back every dollar of the loan during
its schedule, and often well before. It’s not to a broker-dealer’s advantage to offer a $100,000 loan
to a rep over six years and leave it till the end of that time to break even. The loans are often paid back while there are still years left on the notes, which is understandable for any business that wants
profitable relationships. More recently we've seen independent broker-dealer loans stretch into the
10-year range, which is an eternity in our industry.
For B-Ds to continue offering large notes, they must continue to earn large margins years into the rep relationship. But don't expect a clause in the loan agreement contract saying that existing fees can't be raised or that new ones can't be levied. Fee compression is real.
Plus, it's expensive to provide big transition packages. In fact, to protect their investments, some
B-Ds have bought life insurance policies on financial planners with forgivable loans of $100,000 or more. There are also financial risks in loans that are based on time and the associated interest.
These problems shed light on the obvious conflicts of interest in forgivable notes, conflicts that become more acute when a recruit brings new advisory client assets over during their first year with a firm, triggering bonuses and calculation adjustments after the fact (adjustments known as “true-ups.”)
Financial advisors are systemically encouraged to funnel advisory assets onto these platforms, which,
again, will likely grab the wrong kind of attention. It could also be that advisors will be required to disclose to clients their forgivable loan amounts —and their sources—at some point, and the PPP loans taken out during the Covid-19 crisis may end up being the spark that gets this started.
For these reasons, more advisors may reject the forgivable loans and seek out firms with lower advisor and client costs. Or they might otherwise take smaller notes or grants to cover only the actual hard-dollar costs of a move.
Such alternatives allow broker-dealers and RIAs to provide a better long-term financial partnership
with advisors, offering higher payouts and/or reduced fees in which the advisor nets more over
time while acting in a fiduciary manner.
If the relationships with the broker-dealers are stronger for all this, it’s more likely the advisors will
stay with their firms, an advantage the B-Ds will appreciate at a time when firms like Vanguard are
trying to capture their retail financial advice clients. These better arrangements would also make it
easier for advisors to move, and ease the cost of moving their clients (depending on the custodial
relationships).
Advisors shouldn’t have to worry about looking over their shoulders to see which regulators are watching them. One chief compliance officer I spoke with on the topic of a questionable business practice put it this way: Just because something's allowed today doesn't mean it won't haunt you later.
As the big broker-dealers do battle, the big compensation packages are still being offered to woo advisors away. But it’s these large transition packages that contribute to the debt mattress much of the industry is sleeping on.
Will all be forgiven? Time will tell.