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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You can’t have your cake and eat it too.
According to the scribes at Wikipedia, that declaration was first uttered in the early 1500s and has been repeated ever since.
Within our industry, a fitting application is when brokerage firms prefer (require?) their branch managers to have a producing book for themselves.
I am referring to branch managers in W2-affiliation models, and, as I will explain, it applies to indie-B/D platforms.
The perceived benefit to a brokerage firm of having producing branch managers is that the broker is performing the responsibilities of a branch manager. By being a revenue producer themselves, they help offset the expense of their own branch manager position.
As the saying goes, you can’t have your cake and eat it too.
Consider a chance encounter I had recently with a producing branch manager. He knew who I was and how I help advisors (understanding why and how to transition their practices to the RIA model).
Having been in the W2 model his entire career, he was intrigued and picked my brain on the RIA model.
We discussed the increased flexibility, better economics, and the additional responsibilities that come with the RIA model (versus a W2 affiliation).
Readers of my column know I paint both sides of the picture. Depending on your practice profile, the RIA model can be very advantageous. However, it also comes with additional responsibilities you likely don’t have now.
It’s important to understand the pros and cons of any affiliation model you might consider.
Here is where things get inconvenient for brokerage firms employing producing branch managers.
Additional responsibilities of your own RIA include managing your own profit and loss statement (“P&L”), hiring/managing employees, overseeing the practice, etc.
As I explained this to the producing branch manager, he reached the necessary conclusions without me needing to do it for him.
It occurred to him that if he was already able and willing to handle such responsibilities (which, as a branch manager, he was), and he had his own producing client book (he did), the advantages of the RIA model far outweigh any remaining disadvantages.
He could have more flexibility and better economics (both in current income and the enterprise value of his practice) while performing the managerial tasks he was already willing to do.
Brokerage firms allowing (forcing?) branch managers to produce are inadvertently creating RIAs in waiting.
Turns out, you can’t have your cake and eat it too. The brokerage firms don’t benefit from their branch managers being revenue producers without setting them up perfectly for the next chapter in their careers.
Likewise, this same phenomenon is in the independent broker/dealer ranks but on a far larger scale.
Independent broker/dealer advisors with their own OSJ are already responsible for their local P&L. They already manage their own team members, and they already run an independent practice. Armed with a principal’s license, they too are producing branch managers.
As these advisors become increasingly fee-based with their client base, they ask the same question the W2 producing branch manager asked. If I’m already willing to take on the additional responsibilities of an independent practice, why not go full RIA and gain the advantages as well?
To be sure, the RIA model is not for everyone. Some advisors do not have the skill set or desire for additional responsibilities. I respect that. Likewise, the W2 affiliation model will always exist, as it is a fit for many advisors.
The rewards can be tremendous for those willing to take on the additional responsibilities.
To the brokerage firms that require their branch managers have their own production, did you really think you’d be the first in nearly 500 years to find a way to have your cake and eat it too?
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.
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