Historically, the broker-dealer model has dominated the investment advisor industry. In recent years, however, the RIA or registered investment advisor model has become increasingly popular with both advisors and investors. The approximately 14,800 RIA firms in the U.S. stands as a testament to that popularity.
That has also led many who currently work under the broker-dealer model to reconsider their options. While the broker-dealer model does offer the opportunity for experience, many advisors see the RIA model as aligning better with their own goals and approaches.
If you’re considering starting an RIA, keep reading for five key benefits that the RIA model can offer you.
1. Autonomy
One of the biggest benefits of starting an RIA from the advisor perspective is that you get substantially more autonomy than you get under the broker-dealer model. When you work for a broker-dealer, you must adhere to their business model and their in-house rules, in addition to following the standard rules and regulations set out for financial advisors.
With the RIA model, you eliminate the bureaucratic overhead you normally see with broker-dealer models, including spoken or unspoken rules about which kinds of products and services to promote. That lets you tailor the kinds of services you offer to best reflect your strengths and interests.
Playing to your own strengths and interests come with the predictable side effect of letting you offer better service and likely better results in those areas. Better service and better results mean happier clients.
2. Fee-Based Pricing
The old standard in financial advising was a commission-based structure. Of course, that structure often served as something of a smokescreen for wide-ranging hidden fees and costs that boosted the firm’s profitability at the expense of the clients. Not surprisingly, that’s a model that many advisors found distasteful.
When you work as an advisor under the RIA model, you can embrace a fee-based structure. These structures are far more transparent for both you and your clients.
Your clients specifically benefit because they always know exactly what they’re paying. Beyond that, they always know exactly what they paid for when the bill arrives.
For the financial advisor, you benefit by always knowing what you’re getting for your services. Under the commission model, your revenue stream always remains at least partly at the mercy of the markets.
If the markets take a big hit, your bottom line can take a big hit as well. While you won’t see the kind of soaring profits bull markets create, you also avoid the inevitable crashes of bear markets.
This approach also makes it easier for you to operate as a financial planner, not just an investment advisor.
3. It Appeals to a Different Demographic
As with many other businesses, preferences change as demographics shift. Many from the Baby Boomer generation and Generation X prefer the commission-based model of the broker-dealer, in large part because it was the option that they worked with for years.
These days, millennials have become the primary target for investment advisors. Advisor firms must account for the differences in how millennials approach their lifestyles and investments.
Millennials largely grew up with computers, the internet, and internet-based services. They’re used to dealing with companies and services that provide a specific fee schedule for services. That makes many of them less interested in dealing with the often complex rules that govern the commission-based approach of the broker-dealer model.
The fee-based structures and secondary services they can get from an RIA, like financial planning, make an RIA a more appealing option.
4. Keep More Revenue
While the RIA model may not necessarily make you as much money, at first glance, it does let you keep more of the money that you do make. For example, you might only get half or less of what you make under a broker-dealer model.
With the RIA model, all of the revenue that comes in belongs to you. You don’t split it with a broker-dealer or a wirehouse. Of course, that does come with a catch.
While you won’t split the revenue, the services that you normally get from a broker-dealer, such as marketing support or technology, come out of your pocket. On the whole, most people who start an RIA find that a more than acceptable trade-off.
If you think that you might see more revenue from a broker-dealer approach, not all is lost. You can still offer those kinds of services by partnering with an independent broker-dealer. That lets you cater to both those who prefer a fee-based approach and those who prefer a commission-based approach.
5. Technological Flexibility
When you work for a broker-dealer, you work with the tools that they provide you. While those tools are often industry-standard, it doesn’t make them ideal for your needs or your clients’ needs. Just as importantly, broker-dealers will view new technologies with a somewhat jaundiced eye.
If it’s just for you, you’ll find yourself doing a lot of fast talking to try to convince them. If you suggest it as an upgrade for the whole firm, you’ll run up against organizational resistance.
Other advisors won’t relish the idea of learning new tools on top of their responsibilities. Higher-ups will see it as an unwanted expense. Plus, whoever is in charge of IT will likely bemoan the extra work.
With an RIA, you can make the call on whether a specific tool will benefit you in terms of efficiency and providing better client services. Just make sure it has the necessary security features to meet regulatory requirements for client data protection.
Is Starting an RIA for You?
Starting an RIA is a big decision for a financial advisor, but it’s an option that brings a lot of benefits to the table. For one, you get far more freedom about what services you offer and even to whom you offer them.
It lets you embrace fee-based pricing, which you and many clients may prefer. You get technological flexibility. Plus, you can keep more of what you earn.
SimplyRIA provides services to help you launch your own RIA. For more information about our offerings, contact SimplyRIA today.
