5 Paths in the Advisor World

By Mary Ann Buchanan, CEO, RIA Match on Thursday, November 6th, 2014

Should you change channels in the advisory world? Are you thinking about becoming an advisor?  It’s important to be able to compare and contrast the choices. Most investors and many advisors can’t distinguish between the advisory channels. Each channel is a silo with its own firms, terms and choices. Sometimes you can combine two paths like belonging to an independent broker dealer and also an independent RIA.  It can be complicated. 

The 5 advisory paths are wirehouse broker dealers, independent broker dealers (IBDs), insurance companies, banks and Registered Investment Advisors (RIAs.)

There are some common traits between the advisory paths. For example, if you work for a wirehouse, bank or insurance company, you are an employee of that firm and they own any clients that you develop. There is no opportunity in the future to be controlling partner or owner in the firm. You may be a stockholder of Bank of America but that will not give you any say in what happens to your book of business at Merrill Lynch. 

At any investment firm, your goals could be to grow your client base as measured by the number of clients and the amount of assets you gather. If you are an employee with no potential to be an owner, you are building up a corporation’s value, not your own business value or enterprise value.  You retire with a gold watch and no ongoing business value. This is the root cause of the trend toward independence as defined by the movement away from the wirehouses, insurance companies and to a lesser extent banks and towards Independent broker dealers and RIAs.  

Risk and reward vary between the paths.

At an employee based wirehouse, bank or insurance company, the firm is assuming the bricks and mortar risk. The firm provides the buildings, offices, technology, support staff, compliance, product due diligence and product platform. The advisor pays for these services and operations management from his commissions or fees. An employee’s payout maybe 40% of his gross commission or fees; it might be lower.

As an independent contractor at most IBDs and RIAs, the bricks and mortar risk is carried by the advisor or RIA and consequently their payout is much higher maybe even 90% to reflect the advisors role in assuming these risks.  If you have a brokerage license at a broker dealer, they are responsible for compliance risk. RIAs are responsible for their own compliance.

It is common for wirehouses, banks and insurance companies to create investment products and distribute them through their advisory sales force. Commissions from the proprietary products increase the firm’s profits but put the advisor in a compromising spot if she is pressured or incentivized to sell proprietary products. So while the advisor may start out with an investment plan for the client, she has to navigate the conflicts of interest if she is compensated by commissions.

Commission vs Fee: What’s the Differences?

As an independent contractor or RIA there is likely more focus on the investment process versus the investment product. Compensation is in the form of fees based on the assets under management not commissions generated from product sales. A firm’s emphasis on investment process will be evident by the number of advisors in the firm that hold the Certified Financial Planning (CFP) designation. When the clients are charged a fee for services instead of a commission for products, the conflict of interest is removed and the advisor can serve the client more fully.

The chart below included provides an overview of the advisory paths. Notice in the Independent Broker Dealer column “it depends” appears frequently. As a rule of thumb, if the IBD is very large it will run more like a wirehouse and the advisor will have less control over their business. By getting answers to each of the characteristics listed in the chart you will gain insight into the advisors’ ability to control her practice and its potential value within an IBD.

There is not a right or a wrong path; you just need to gather the information so you travel the right path for you. 

Mary Ann Buchanan is CEO of RIA Match, a website that offers financial advisors solutions for succession planning and growth. The website matches financial advisors with other financial advisors who want to buy, sell, merge or join practices. The advisors and RIAs can search for free and pay to connect anonymously and securely. Mary Ann can be reach at maryann.buchanan@riamatch.com or 571-252-3247.


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