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Hearing the latest reports on growing number of breakaways and the rise of the advisory business model would make you think that there is a sudden revolution in the industry. This couldn’t be further from reality.
While the fiduciary rule has certainly accelerated the move to RIAs, the migration has been underway for some time and is indicative of a broader shift in the industry. Financial professionals are transitioning from being professional sellers to being professional buyers, away from being product advocates to being client advocates, away from a commission structure to a fee structure and, overall, away from a suitability standard toward a fiduciary standard.
The progression to fiduciary advisory is here to stay. Cerulli Associates estimates that by 2020 approximately 28% of investor assets will be managed by registered investment advisors (RIAs)) – up from 23% in 2015. But while the benefits of the advisory model are well-established, the decision to adopt a whole new business model is not one to be taken lightly.
What triggers the move?
Benefits of the RIA model include greater autonomy, better economics, the opportunity to create the optimal client experience and work in the best interest of clients. The economics of the full ownership model offer significant upside potential for advisors looking to define their own unique culture and client experience.
In fact, this desire to focus on providing the best possible client service, facilitated by the growing breed of technology and investment solutions available to advisors, is one of the main drivers of the move to independence.
Transitioning from being an employee to being an employer
Determining your own path, while freeing in many respects, also brings a number of new responsibilities. First and foremost, it requires advisors to manage a business – not just clients. Along with business ownership comes the responsibility of managing and forecasting financials, overseeing administrative and operational tasks, and implementing new technologies, as well as hiring and developing the talent needed to run the business.
Meeting these new challenges effectively requires establishing clear processes and standards, a solid culture that assists in hiring, developing and retaining talent, as well as familiarizing yourself with the technology solutions available in the marketplace.
Ultimately, it is the owner’s responsibility to develop a framework and team structure that will ensure seamless and consistent client service, critical to long-term success.
Planning for day one
When advisors break away to form their own advisory firms, they become entrepreneurs. But unlike other entrepreneurs who are given time to build their business, advisors are expected to have their businesses up and running day one to continue to serve their clients.
From the onset, advisors need to have a clear vision for the kind of client they are attempting to cater to and the kind of experience they are looking to provide. Often, this requires them to work with multiple partners so they have a business plan to execute upon day one.
The role of a custodian or industry consultant can be particularly crucial in the process, as they provide guidance through all stages of plan development: from identifying the right model – e.g., going fully independent versus joining a strategic acquiring firm versus joining an existing independent RIA – to developing a strategic vision and the ideal client profile, as well as helping with technology decisions and building a marketing and talent strategy.
Having access to experienced managers and a dedicated implementation team can make all the difference not only in terms of readiness on day one, but also in terms of reducing and/or removing transition issues going forward.
Compliance and regulatory issues
Another crucial difference between being an employer and being an employee of a broker-dealer is increased responsibility for oversight and compliance. As an employer, the independent RIA has the full responsibility to remain in compliance with relevant regulations, including the necessary licensing, registration and compliance requirements in their state and at the federal level, among others. Working with industry experts can help navigate the complex regulatory landscape, which is crucial for success and maintaining trust and goodwill with clients and regulatory authorities.
Making the leap
It takes an experienced, dedicated transition team to ensure that advisors hit the ground running with a full business plan designed to retain and enhance their existing client relationships. The good news is the road is well traveled and advisors are often surprised by the degree of client excitement and support for their move. In fact, when we talk to RIAs who have made the transition, the biggest question we get is: “Why didn’t I do this sooner?”
Ben Harrison is head of business development at BNY Mellon’s Pershing Advisor Solutions.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
