Ask Brad: Will the Independent Broker-Dealer Model Survive?
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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I attended an industry gathering recently where each participant was asked to share observations for the future of the industry.
I was one of the last to share.
Having not been mentioned by anyone else, I proclaimed the pending demise of the independent broker-dealer (IBD) model.
Let me explain.
I predict either the IBD model will eventually cease to exist, or at a minimum, we will no longer refer to it as such.
I will explain my reasoning, but I am not predicting the demise of the W2 employee broker/dealer model (wirehouse, regional, etc.).
Those channels will continue to bleed headcount to independent offerings, but a subset of advisors will always be attracted to the employee model.
I have spoken to W2 advisors who understand that a move to independence would result in better economics, more flexibility, and a higher enterprise value for their practice. Some of those same advisors, though, have no desire to take on additional responsibilities with their practice. They are willing to forgo the upside for less responsibility. I respect their decision.
Contrast this to advisors in IBD channels. These advisors have already shown a willingness and competency to handle the “local” responsibilities and expenses of running an independent practice.
As these advisors become increasingly fee-based with their practice, they will question the utility of staying with a broker/dealer. Further, the RIA ecosystem provides several ways to accommodate remaining “legacy” commission assets in a more advisor-friendly way.
Why, then, stay with an IBD?
Many are not.
Ask any multi-channel firm where the “internal” advisor movement is occurring. Most if not all firms will not divulge this information publicly, but the river only runs in one direction.
As the wave of large advisors/teams, with their attractive recurring revenues, continues to decamp for the RIA model, coupled with a similar exodus of “super-OSJ” firms, how will IBDs survive?
The solution relates to my other declaration that these firms will no longer call themselves IBDs.
Most IBDs began life as a broker/dealer. As demand for fiduciary fee-based relationships grew, broker/dealers added their own registered investment advisor. Often they referred to it as a “corporate RIA.”
This created the now-common “dual hat” scenario most IBD advisors fall under where they wear the hat of a registered representative under the broker/dealer, as well as the hat of an investment advisor representative under the RIA.
With the growth of fee-based client relationships, most large IBDs have more client assets under their RIA (advisory assets) than under their broker/dealer (commission assets.)
Put differently, these are no longer broker/dealers that happen to also have an RIA. These are RIAs that happen to have a broker/dealer.
Why do we still refer to such firms as IBDs?
They are (very large) RIAs who, when needed, can also accommodate an advisor’s commission business via their broker/dealer.
For similar reasons, we should start referring to wirehouse firms primarily as RIAs as well. I digress and will save that for another article.
This brings us back to how an IBD firm can survive.
Stop referring to yourself as a broker/dealer. Most of your client assets are in advisory accounts. Think of yourself as the RIA you are.
Don’t benchmark your value proposition against broker/dealers. You are an RIA. You need to compare your service offering and fee structure to other RIAs, as well as how your offering compares to what an advisor can achieve with their own RIA.
Forward-thinking IBD firms are starting to adapt. They refer to their offering as their “corporate RIA” channel.
A name change is nice, but a willingness to adapt determines their fate.
Some of these firms have decades of technology and institutional knowledge framed around the broker/dealer model. The marketplace is comprised of competing RIA firms that were purpose-built from the start to accommodate the needs of advisory-focused advisors.
Will the legacy providers adapt? Will they offer technology on par with RIA-specific offerings? Will they reset their approach to compliance to an RIA mindset? Will they provide economics that are competitive with an advisor starting their own RIA, or joining a competing RIA offering?
I live in Florida, where hurricanes are part of life. The good news with hurricanes is they don’t sneak up on you. You see them coming. The bad news is that if they hit you, it can be catastrophic. If IBDs don’t heed the warning of the storm clouds on the horizon, their fate will be sealed.
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.