The beginning of a new year provides an opportunity for advisors to evaluate the overall success of their business strategy and establish new goals and objectives for their firm. The financial industry is undergoing unprecedented change in both business and regulation that will ultimately require advisors adapt, evolve or exit altogether. With the pending implementation of the Department of Labor Fiduciary Rule, now may be the time for advisors to evaluate their existing broker/dealer and RIA structures and determine whether their current partners can effectively deliver the solutions to effectively support their business objectives and future growth goals.
These significant shifts in the industry not only include upcoming regulations, but also the continued consolidation and ownership changes affecting many b/d's and RIAs. As the landscape of the industry continues its shift towards holistic planning and wealth management, these unanticipated events are forcing advisors to adapt to a new business environment and their business must evolve accordingly.
Whatever circumstances may prompt a hybrid advisory firm to consider a transition to a new b/d, there are several key items they must first consider before making a long-term business decision. The following are five key considerations for advisors as they explore a potential new b/d partnership.
1. What is the culture and long-term vision of the b/d? In many ways the IBD model has become highly commoditized and, for the most part, leading b/d's offer similar payouts, products, clearing and transition support. The key differences are most often intangible and involve the business model, culture and vision of a particular firm. It is important to identify b/d's that have a high concentration of hybrid RIAs (over 50 percent) and have an established infrastructure of compliance resources, technology and practice management to support hybrid firms.
2. Does the b/d offer a multi-custodial clearing platform? Many advisors opt for a multi-custodial model because it provides them maximum choice and flexibility in selecting the best possible clearing and technology solutions for their business. Having direct access to leading RIA clearing firms, including Fidelity, Schwab and TD Ameritrade will help to build scale, create business efficiency and ultimately drive the enterprise value of the firm. For advisors who are growing through merger or acquisition, having access to multiple clearing solutions can significantly facilitate business conversion and client retention.
3. Is the compliance team experienced in the hybrid RIA model? As the regulatory landscape continues to tighten and business margins compress, advisors need a compliance department that has the personnel, experiences and infrastructure to help them manage and protect their business. Some b/d's provide ongoing regulatory consulting for their RIAs along with E&O coverage that extends to the RIA business. This may not only result in significant cost savings, but provide the RIA with a strategic compliance resource to help them manage compliance more effectively and efficiently.
4. Is the b/d financially stable and can they weather a storm? Over the past few years we have seen a large number of b/d's sell, merge or exit the business altogether. Margin compression is real and the DOL and other regulatory changes will only accelerate this. This will likely prove especially challenging for many of the small, “RIA-friendly” b/d's that typically compete based solely on payout. Capital and critical mass are key drivers and should be carefully considered before making a decision.
5. Can the b/d support the lifecycle of a advisory firm? An IBD should not only support an advisor's current practice, but the future of that business as well. The ability of a b/d to help an advisor grow through select recruiting, merger and potential acquisition should be carefully considered. A strategic b/d can serve as an indispensable partner in future transitions and can deliver key resources, from capital to technology, that can significantly “move the needle” for an advisor’s business.
Advisors owe it to their clients, and themselves, to align with a b/d partner that can provide flexible resources, tools and solutions that will strengthen client relationships and drive the long-term success of their business. Every b/d is unique and offers a different value proposition. As you explore a hybrid RIA model, consider these questions, take your time and find the b/d whose culture, vision and platform are most similar to your own.
Nathan Stibbs is Executive Vice President, Business Development of Triad Advisors (www.triad-advisors.com), the hybrid advisor-focused independent broker/dealer.