THE BEST OF BOTH WORLDS

Have you bought into the myth that the Independent RIA business model is inherently superior, more virtuous, than the Dually Registered Broker Dealer model? 

It's easy to do.  We've been told that RIAs are superior to Broker Dealers in pretty much every way.  And that if we really want to "go pro" we should join or start an RIA. 

I believed the hype myself until I started to look behind the curtain and compare the business models objectively.  Suddenly the RIA route seemed less inevitable for my practice.   

There is a case to be made that the Dually Registered Broker Dealer model might actually benefit both the client and the advisor in many circumstances.  The decision is nuanced and no one answer is right for everyone, despite what we have been told! 

Let's start with a couple of definitions.  

ORGANIZATIONS  

Registered Investment Advisor (RIA)- An RIA is a company that provides investment advisory services for a fee to clients and is registered with either state agencies or the SEC.  

Broker Dealer (BD)- A BD is a company that engages in the business of training securities for it's customers and is registered with the SEC and a member of FINRA. 

PEOPLE 

Investment Advisor Representative (IAR) - An IRA is an individual that works for an RIA giving investment and financial advice to clients.  IARs are held to the fiduciary standard of care.  IARs are generally paid via fees (flat, tiered, hourly etc.) 

Registered Representative (RR)- A RR is an individual that works for an BD giving investment and financial advice to clients.  RRs are held to the suitability standard of care.  RRs are generally paid via commissions. 

Dually Registered Advisor (DRA)- A DRA is an individual that is registered as both a RR of a broker dealer and an IAR of an RIA.  

I am sure you are reading through those definitions and thinking…snooze fest!   I know that it's not sexy to drop a bunch of definitions in a blog, but there are many advisors who don't really understand what they are and how that differs from others in the industry.  

I was recently asked to weigh in on a situation where an advisor lost a potential client to an RIA because the client thought the RIA fiduciary standard of care was higher than the advisor affiliated with a BD.  The advisor is dually registered!  He is held the exact same standard of care as the IAR with the RIA!!!   

The advisor lost the potential client because he didn't really understand where he fell in the overall industry landscape.  He bought the hype that being associated with an independent RIA is superior to being affiliated with a broker dealer and their RIA.    

I am going to make the case that a dually registered advisor may actually be the best of both worlds and provide a superior client experience with the same high standard of care.  

We are going to compare the three Ps: Protections, Payout and Products and how they affect you the advisor and the client.  

PROTECTIONS 

Let me start by saying that it is very likely much easier to do business as an IAR of an independent RIA.  Why?  Because the compliance bar is much lower!   But is that a good thing from the client's perspective?  RIAs have fewer restrictions on what you say and what you do.  They have fewer inspections and less monitoring.  This makes doing business easy, but does it necessarily protect the client better? 

A dually registered advisor is held to the same fiduciary standard of conduct AND they have significantly more compliance oversight from the broker dealer.  I describe my broker dealer as the Bernie Madoff Prevention Program.  Their ongoing review and auditing make it much harder for me to make a mistake or someone on our team to commit fraud.  DRAs are actually held to higher compliance standards by operating in both worlds.   

Let's talk about your protections as an advisor.  If you start your own RIA, do you REALLY have the ability to match the compliance resources of a broker dealer or large-scale RIA?  Compared to a small RIA, advisors working with BDs have significantly more robust compliance resources.  What if you make a mistake or your client sues you for a perceived mistake?  Can a small RIA match the compliance and review processes and the legal resources to defend that kind of a case? 

PAYOUT 

Sometimes, it's all about the money!  Independent dually registered advisors give up around 10% to 20% of their revenue to a broker dealer, depending on their production level.  It is tempting to say, I'll start an RIA and keep it all!  Let me point out that unless you have a significant multi-million dollar annual revenue, there is no way you can replicate the robust compliance program and other resources you get from a BD.   

You might say, I get the math…I will just join an RIA.   Every situation is different, but from what I have seen, IARs on average make less at an RIA than with a BD.  It's not unheard of for an RIA to keep 30%-40% of the revenue.  For many advisors, the math doesn't work. 

You could say that clients don't care about payout, but they should!  The more an advisor makes, the lower the account minimums can be.  The more an advisor keeps, the fewer client he/she has to serve to make a good living.  This should lead to a better client experience because the advisor isn't stretched so thin.  

PRODUCTS 

The idea that RIAs are somehow more virtuous and less conflicted because they only offer money management for a fee is crazy!  Many RIA firms are just asset gathering machines with high minimums and a focus on selling their own proprietary investment strategies.  Many don't have a true financial planning component at all.  They are just investment salespeople, no better or worse than any other. 

A dually registered advisor has access to a broad array of investment solutions.  They have all of the managed money solutions available to their RIA and they have other commission-based options on the BD side of the house.  Managed investments are a great tool, but they are not the one-sized fits all solution for all investing scenarios.  There are times when a commission-based investment may serve the client better.  A true fiduciary should recommend what is in the best interest to the client, not just what is available within the RIA fee-based universe. 

The media and the industry have convinced us and clients that independent RIAs are better than advisors associated with BDs.  It's just not true.  A great advisor can serve their clients even better as a dually registered advisor.  And a bad advisor in either model can act as a self-serving predator. 

As an Advice-based Financial Advisor, I believe in advice first and products as needed.  I would add in this context that advisors who can help their clients with more financial solutions can often serve their clients better.  This includes commission-based and insurance products. 

For my dually registered advisor friends out there, I hope that this blog gives you some confidence in your next competitive situation.  You aren't less for being associated with a BD, you are more because you have the best of both worlds! 

With Purpose, 

-Lucila 

The fiduciary standard is a legal standard of care, it doesn't automatically make you a better advisor.  We can hold ourselves to the highest standards regardless of which legal standard applies to us in any given situation.  You can be a great advisor at an RIA, BD or both!  It's about your values and your care for the client!