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flying independent

Defining the Fully Independent Model for Financial Advisors

It’s not just a function of employment status, it’s also about ownership and control.

In the wealth management industry, ambiguity around the definition of “independence” can lead advisors down the wrong road for a potential loss of time, money and effort.

Primarily, the term “independent RIA” distinguishes advisors who own “registered investment advisors” — from advisors who areW-2” employees of a broker-dealer. “Wirehouse” firms like Merrill Lynch and Morgan Stanley directly employ advisors in this way.

There’s Confusion About “Independence”

But in wealth industry jargon, the label “independent” also applies to non-W-2 affiliates of broker-dealers like LPL and Raymond James. As the lack of a W-2 filing implies, these advisors operate as contract employees, with the1099” as the relevant IRS tax form. Some of these non-employee advisors increase the appearance of independence by working out of DBAs whose branding takes precedence over the underlying broker-dealer. However, these advisors aren’t truly independent.

Another take on nominal independence involves firms that engage advisors who run their books of business through centralized “corporate” RIAs. For these advisors, independence is hobbled by the needs, priorities and preferences of the home office.

Consequently, of the four main advisor models—RIA owner, broker-dealer employee, broker-dealer affiliate and RIA affiliate—only “RIA owner,” confers full independence. This is a consideration of first importance to advisors who are entrepreneurial by nature.

Still, some advisors mistakenly take the label “independent” at face value and end up at firms that don’t confer true autonomy. Still others, aware of these limitations, consider the move to quasi-independence as a safe interim transition, perhaps as part of a long-term plan for achieving real independence.

It’s All About the ADV

So what is it about owning an RIA that allows for more independence than any other model available to financial advisors?

It comes down to ownership of the ADV.

The ADV outlines how the RIA is organized, conducts business, and engages with its clients. It includes a blank-box firm for information on the RIA's ownership, clients, employees, business practices, affiliations and, broadly, the types of clients it serves. The ADV also requires “plain English” descriptions of business practices, fees, conflicts of interest and disciplinary information.

The implication is definitive: no advisor without control or immediate influence over his or her ADV is fully independent. As a result, advisors whose “independence” stems from affiliation with broker-dealers or corporate RIAs are effectively still “captive” in many respects. They don't have full control and must do business as the house dictates.

There’s a reason many advisors directly employed by big-name broker-dealers chafe under some of the rules imposed on them. These advisors may operate within the strictest compliance guidelines possible with little room for compliant alternatives.

Who Benefits from True Full Independence?

These considerations beg a stark question: Which model is likeliest to benefit clients?  Owning an RIA allows for an advisor to act as a true fiduciary for his or her clients.

Do you work in a niche or specialty? True independence lets you tailor your sales and marketing efforts to the demographic you serve.

A truly independent advisor isn’t stuck with monolithic technology, investing and lending platforms designed for the lowest common denominator. Rather, they have less limits on access to solutions for their clients. This holds true for ancillary services such as tax preparation, estate planning, insurance and concierge services.

An independent RIA can also be designed from the outset for maximum profitability. In terms of adding or extracting value via M&A, a fully autonomous RIA can be built and managed to secure the best terms either as a buyer or a seller.

Boiled down, an accurate understanding of independence in the context of wealth management, and the fact of ownership of the ADV in question gives advisors the freedom to meet their clients’ real needs, direct their own marketing initiatives and maximize the market value of the RIA.

John F. Sullivan is head of Network Development at Dynasty Financial Partners.

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