Ask Brad: Are Broker/Dealers Dead?
This is the latest installment of a regular column to answer questions from advisors who are considering transitioning to an RIA model. To see Brad’s previous articles, click here. To submit your question, please email Brad here.
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Elon Musk is the planet’s leading proponent of “driverless cars.” But for all his forward-thinking genius, it’s surprising he would ever utter that phrase.
After all, how silly is it that early automobiles were called “horseless carriages?”
Or consider the last time you used a “wireless phone.”
The day will assuredly come that we travel in “cars” that coincidentally have no driver.
Why then do we still refer to so many firms in the advisory profession as broker/dealers?
We have wirehouse broker/dealers, regional broker/dealers, independent broker/dealers.
While there are niche firms that are the exception, most “broker/dealers,” in the sense of how we commonly use the phrase, are no longer primarily broker/dealers at all.
Consider any of the larger W2 or 1099 “broker/dealer” firms. Each is paired with a “corporate” RIA, under which their affiliated advisors can offer both commission solutions (under the B/D) and fee-based solutions (under the RIA.)
Debating this “dual hat” structure goes well beyond the scope of this article. But it is the norm, not the exception.
Most of the large broker/dealers originally started solely as a broker/dealer. This enabled their registered representatives to distribute product solutions to their clients in return for a commission.
As time progressed and the industry evolved, a growing demand for fee-based advisory solutions forced these broker/dealers to introduce an RIA option for their brokers to utilize. Licensed as “investment advisor representatives” of the RIA, these advisors could now offer both commission solutions and fee-based solutions.
For most of these firms' histories, they were primarily broker/dealers that also had a corporate RIA as well. Hence, the long tradition of calling such firms “broker/dealers.”
This made sense, as most of the firm’s client assets were in commission accounts, with only a minority in adjoining advisory accounts.
The wind has shifted.
Pick any of the large broker/dealer firms and most of their client assets are in advisory, not commission accounts. Why do we still refer to these firms as broker/dealers? Shouldn’t we be calling them RIAs that happen to also have a broker/dealer alongside?
Is the broker/dealer now a horseless carriage?
This continued shift will affect the industry in several ways.
The large broker/dealer firms are built upon decades of legacy technology and operational infrastructure to serve the commissioned broker. As the wind has shifted, these firms have had to adjust their foundation to accommodate the nuances of the advisory model.
This is attuned to building a single-story house, only to, decades later, try to add a second story to it, when it was never structurally built to accommodate additional floors. To further the analogy, the second floor is also becoming increasingly larger than the first floor.
But there are now a wide range of solutions that were purposely built to serve the advisory model. These firms either have no accompanying broker/dealer solution, or if they do, it is fittingly an accommodation alongside the larger advisory platform and not the other way around.
Consider the firm you are affiliated with. Is it built upon a foundation laden in the commission world, or were its roots born from the RIA model from the start?
If your practice aligns with the continued industry shift to fee-based accounts, which type of firm is positioned to provide you with the best two-story house going forward? The heavily modified inverted pyramid house or the modern advisory house with poured concrete?
A related industry shift playing out is the future of FINRA. As the regulator of broker/dealers, its clientele continues to shrink.
Each passing year, the number of member-paying broker/dealer firms declines. Among the firms that remain, the shift towards fee-based accounts reduces FINRA’s footprint further.
I predict two paths forward for FINRA. It resizes dramatically to align with the diminished future of the broker/dealer marketplace. Or it reinvents itself as the regulator of RIAs. I don’t foresee a smooth glide path for either.
- What percent of my practice will be under a broker/dealer in the future, if at all?
- Is my current firm/affiliation model built to accommodate that future state? Do better alternatives exist?
- With the shifting regulatory landscape, which pathway provides the most flexibility for me to adapt my practice as needed?
I can’t predict the future, but the changing tide is picking up speed. As you travel down the road of the future, will you be driving an automobile or a horseless carriage?
Brad Wales is the founder of Transition To RIA, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about WHY and HOW to transition their practice to the RIA model. Brad utilizes his nearly 20 years of industry experience, including direct RIA related roles in compliance, finance and business development to provide independent advice regarding how advisors can benefit from the advantages of the RIA model.