For advisors who want to go independent and join RIAs, maintaining a broker-dealer is part of the cost of doing business, according to a new survey from Charles Schwab.
Around 75% of 152 financial advisors surveyed by the RIA custodian and brokerage house said that the ability for their new platform to simultaneously support fee-based and commission revenue was important to them as they chose a new platform or firm. The advisors self-reported their data to Schwab in May and April of 2018 after previously indicating they were considering moving to an independent RIA firm.
Though the concept of an RIA acting as a fiduciary to their clients simultaneously maintaining a brokerage business may cause some advisors’ hearts to skip a beat, the reasoning makes sense, according to Ryan Marcus, a managing director at Rockaway, N.J.-based Aurora Private Wealth.
His firm oversees around $4 billion through its RIA and a separate broker-dealer arm, which it dubs ‘RIA-friendly.’
‘The trend is continuing where advisors are looking to get rid of most –if not all—of their commission-based business because of the inherent conflicts and they want to truly act as a fiduciary. I think, though, that there are many cases, particularly with the wirehouses, where that advisor still does enough commission-based business to warrant maintaining a relationship with a broker-dealer,’ he said.
‘That could be something as simple as a client that has a concentrated stock position that can’t do anything about it. Or a client loves a mutual fund that has a trail and it’s not worthwhile to convert it and change the share class.’
Most independent RIAs shed their commission-based revenue streams as they acclimate to their new life, said Schwab Advisor Services senior managing director Tim Oden.
Though over 50% of the firms who go independent with Schwab maintain some sort of broker-dealer affiliation, only around one third still do after two years of independence.
‘They want to be able to facilitate the transition into the independent model and then over time, they transition the assets that they’re using and the types of securities they’re using to a more fee-based model,’ Oden said.
‘There are a lot of RIA-friendly broker-dealers out there that are making it easier for an advisor to retain that registered representative affiliation just in case they have new clients coming over [from broker-dealers].’
One theme that’s clear among independent advisors, regardless of their business model of choice, is a yearning for ownership.
Just under half of the advisors surveyed by Schwab (44%), said they would go independently to gain more control over their business and have more freedom, more than double the next-closest response.
‘The idea that if we all have an equity interest in the company, we’ll all want to see that company grow and prosper together, but then through that equity ownership have a true voice in what’s driving the company, how we’re dealing with clients [was important to me],’ said David Jumper, a partner at HPM Partners, a $10 billion RIA with six offices. Jumper left Deutsche Bank after 15 years in 2014.
For advisors who do ultimately make the leap, Schwab found that advisors who chose to join a platform valued simplicity. Around 55% said they viewed having a turnkey office setup as important.
‘Advisors that are looking to join as opposed to looking to hang up their own shingle are more or less looking to focus on revenue-producing opportunity,’ Marcus said.
‘Typically, what we see happen is that in some circumstances where advisors are going fully independent on their own, they have to manage compliance, back-office, customer support, and to a certain extent, under most circumstances, that is considered non-revenue-producing.’
For advisors who chose to leave a wirehouse or broker-dealer to pursue independence, it doesn’t appear that the broker protocol is playing a major role in their thinking.
Though wirehouses UBS and Morgan Stanley abandoned the protocol in 2017, 68% of advisors surveyed by Schwab said that changes to the protocol had no effect on their interest in independence and 73% said it had no effect in the timing of their move to independence.
Broker Protocol has had largely neutral impact on the move to independence
‘I think that the protocol has been less of an issue than people really make out of it,’ Marcus said. ‘Advisors have been transitioning way before the document even existed and advisors will continue to leave firms that are non-protocol and join firms that are non-protocol. ’
