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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We use a lot of jargon in our profession. It is not just investment jargon, but mumble jumble to describe how advisor practices are structured: broker/dealer, registered investment advisor, registered representative, investment advisor representative, custodian, hybrid, etc.
Let’s not forget the acronyms: RIA, BD, OSJ, SEC, and FINRA, to name a few.
Your clients and prospects likely understand little to none of this.
I am often asked by advisors considering the RIA model how they should explain to their clients why they are transitioning their practice to an RIA. (The same lesson applies to existing RIAs, explaining to prospective clients what an RIA is and why it is beneficial.)
While there are significant advantages for advisors to make the transition, which I opine on frequently in this column, how does it benefit the client? And how can it be explained without relying on confusing jargon that won’t be understood?
I recently spoke to an advisor nearing the two-year anniversary of his RIA. He had been with a traditional W2 broker/dealer model. I asked him how he explained the transition to his clients. He gave one of the better responses I’ve heard.
He communicated to his clients that for him to provide truly unconflicted advice required separating the function of custody from who is giving the advice. If those are married, as they are at self-clearing traditional broker/dealers, there is always the pressure (whether direct or implicit) to provide non-fiduciary advice and investment solutions to clients.
By separating the two, the advice giver is free of that conflict.
This requires explaining what a registered investment advisor (RIA) and a custodian are, but it is an illustrative way to describe the structure of the practice and its advantages.
While not as nice of a packaged soundbite, the following are additional talking points for explaining to clients the benefits of moving your practice, because the RIA model provides the following:
- Access to a broader set of investment solutions and services to offer clients. Examples: additional mutual funds or ETFs not approved on a broker/dealer’s platform, a broader set of alternative investment solutions, wider availability and choice of lending solutions, additional managed money solutions, trust providers, insurance providers, etc.
- More flexibility to adopt new technologies at a faster pace. Technology enables advisors to provide additional services in a more efficient manner. Examples: There are dozens of available fintech solutions, most of which are not approved for use at traditional broker/dealers. Productivity tools, such as client scheduling applications like Calendly, are also commonly unapproved for use at traditional firms.
- Access to less expensive mutual fund share classes often unavailable on a broker/dealer platform, thus reducing investment costs.
- More flexibility in how fees can be charged (hourly, retainer, subscription, etc.). Whether via an AUM fee model or an alternative approach, an RIA has the flexibility to apply fees as warranted.
- More flexibility to expand the service offering beyond what a broker/dealer might be able or willing to approve. Examples: insurance, mortgages, tax planning, etc.
The RIA model is not a fit for all advisors. But when it is, the advantages are immense for the advisor and their clients. Articulating the client's advantages is essential.
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.
Read more articles by Brad Wales
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.
