Independent Broker Dealer vs. RIA

Which option is right for you?

The definition of Independence in the Financial Services industry has changed significantly over the years. Advisors are looking at what level of Independence suits them and their business best. While there is frequent discussion about advisors setting up their own RIA, that model is not suitable or advantageous for most advisors I come into contact with. There are several misconceptions I discuss with advisors that frequently lead to advisors realizing they don’t want to set up their own RIA. The two I hear most frequently are:

  1. Avoiding Finra. While many advisors desire the idea of avoiding Finra’s supervision of their business, there is no way to get around their rules and regulations unless you plan on dropping your securities licenses altogether. The number one misconception I hear is thinking you avoid Finra rules once you have an RIA set up. The truth is, if you have a securities license and run business through a broker dealer, that firm is required to supervise your advisory business even if it’s through your own RIA. Also keep in mind, not every broker dealer allows outside RIA’s.
  2. Higher compensation. The allure of receiving a 100% payout gets plenty of attention from financial advisors. When looking at the RIA model, it’s easy to over simplify and be intrigued by the fact that a broker dealer doesn’t take an override on that business. The problem is, that one-dimensional assessment doesn’t tell the entire story. The first thing to explore is the expense of setting up the RIA.  This can range significantly based on who you use and the scope of your practice. There are also ongoing costs for compliance once the RIA is set up.  The second major financial factor is the cost of a technology stack. Depending on the vendors you use, this can also be a substantial expense that needs to be factored in. The other major misconception is the fee for broker dealer oversight. If you still need a broker dealer, having an RIA doesn’t necessarily mean a broker dealer will not be receiving an override to supervise the advisory side of the business. Broker dealers are required to supervise advisory business, regardless of which RIA is used, if the advisor has a securities license with them. There are exceptions in the industry, but most firms take an override for the cost and risk of supervising that business. Once you factor in the cost of setting up and maintaining an RIA with the cost of technology and the override a broker dealer still receives, I find the financial benefit of setting up an RIA doesn’t make sense until an advisor has significant assets.

Without a doubt, there are many other things to consider when choosing which form of independence makes the most sense for you. By no means does cost and regulatory oversight tell the entire picture, but these two factors, when accurately evaluated, may make the decision clearer.

Jodie Papike is the CEO of Cross-Search, a third-party, independent broker dealer/RIA recruiting firm that connects advisors with the right broker dealers and RIAs.  For more information visit www.Cross-Search.com

Jodie Papike

Jodie Papike is the CEO & Managing Partner of Cross-Search, the first third-party, independent broker dealer advisor and executive placement firm. Since joining Cross-Search in 1997, Jodie has been consulting with financial advisors transitioning to new independent broker dealers, guiding them through the entire process of identifying their most appropriate options, negotiating a deal and transitioning clients. Jodie has an intricate knowledge of the securities industry and a deep understanding of each of the major independent broker dealer firms, enabling her to help advisors find and transition to a broker-dealer that best suits their needs. Cross Search has placed thousands of advisors, producing more than 375 mill. in gross dealer concessions. Jodie takes the utmost pride in finding a firm for an advisor that will not only better their career, but will also be a good home for them for years to come. Jodie is a frequent speaker at industry conferences, is regularly quoted and published in publications such as Investment News, Registered Rep, Financial Planning, Life Insurance Selling and Advisor One. Jodie earned a Bachelor of Arts degree from San Diego State, graduating with honors.

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