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Don’t Give up Your FINRA License

Don’t Give up Your FINRA License

Lately, registered representatives at FINRA registered broker dealer firms seem to be quickly heading for the doors to join RIA firms.

Has holding a FINRA license become passé?

Lately, registered representatives at FINRA registered broker dealer firms seem to be quickly heading for the doors to join RIA firms.  In doing so they are abandoning their broker dealer heritage with the intention of exclusively offering to their clients a managed money platform. This exodus seems to be occurring at a record pace. 

In spite of the media buzz surrounding the hybrid model—the ability for an advisor to offer both commission and managed money—to date, the magnitude of the advisors’ migration does not appear to be of significant proportions.  What I have noticed instead is advisors wanting to give up their FINRA broker dealer license to become an investment advisor representative (IAR), so to be able to offer to their clients solely a fee based platform. 

What is driving advisors to implement such a choice? In my opinion, there are both right and wrong reasons. Let’s take a close look at them beginning with the right ones:


  1. Ability to offer high-net-worth clients professionally managed portfolios and access to TAMPs (Turnkey Asset Management Programs)—The advisor can personally manage client assets and also be able to select a third party money manager to manage those assets.  Because, ordinarily, clients cannot directly engage these independent money managers, access to these investment professionals becomes highly valuable, particularly to those clients seeking to have multiple managers under one account umbrella. 
  2. Access to multiple custodial relationships—The ability to offer clients a multiple choice of asset custodians, such as Charles Schwab, TD Ameritrade and Pershing enables advisors to save both time and resources.  For a client with an already established custodial relationship (as it is often the case), the relationships remain intact and the advisor steps right in to manage the funds. This saves the advisor precious time and resources that would be otherwise allocated to changing account numbers or transferring the client account to a new firm.
  3. Client performance and advisor compensation are aligned--It is no secret that the pay of a registered representative at a broker dealer is a direct function of account movements, such as a buy or sell transactions.  In an advisory relationship the client generally pays a flat fee, which is based solely upon the value of assets in the account.  This inherently incentivizes the advisor for peak performance.
  4. Thorough performance reporting--A traditional brokerage account will provide the client with a clear statement. However, it will probably not feature returns compared to specific benchmarks and take into consideration any monies going in or out of the account. With a fee-based agreement, clients can be provided with impressive quarterly performance reporting statements that clearly describe the account performance.


Now, let’s take a look at the wrong reasons:


  1. Less compliance—Simply stated: that’s a misnomer. The SEC is cracking its whip.  Pick up any trade publication or even major newspapers and it is nearly impossible to miss an article about SEC enforcements in the investment advisory space.  Historically, the investment advisory industry was notorious for being weak on compliance and the SEC is making it known that it is watching in full force. 
  2. My job will be easier –Not really! The fiduciary responsibility that comes with joining a RIA should make it harder.  While a registered representative has a suitability obligation, an investment advisor’s responsibilities go much farther.  The latter has a fiduciary responsibility to act in the best interests of the client, which entails undivided loyalty and the utmost faith to their clients.  Ultimately, the degree of knowledge and research that goes into managing a client relationship is much more challenging for a registered investment advisor representative. 
  3. Going after “big” clients only –The desire to embrace a RIA to chase exclusively big clients often causes an advisor to leave behind precious referrals or prospects willing to try to establish a relationship.  This is especially true for those advisors making the switch from the broker dealer space into the RIA world.  Not too many clients are willing to give an advisor 100% of their assets from the onset of the relationship. Some may elect to open a brokerage account with a limited amount of funds and once they feel comfortable with the advisor’s investment style and recommendations they may decide to transfer the rest of their assets. 
  4. Consistent revenue stream—Revenue consistency may require that all clients’ funds be managed even if there is no need for it. This raises the flag for reverse churning! Some clients don’t want or need an actively managed portfolio. In the SEC’s annual list of exam priorities it is specifically referenced that investors may be overpaying in fee-based accounts.  Reverse churning occurs when fees are charged for advisory services that are not warranted by the activity or investment goals of the client. 


Having clarified the right and wrong reasons for an advisor to join a RIA, let’s also analyze the three key problems associated with such a decision. First--and the most obvious one--is that not every client fits into a cookie cutter portfolio model. Second, the fee-based model is simply not the best solution for all clients. Third, depending on a client’s needs and investment objectives, commission-based products may be more appropriate for various stages of a client’s life cycle. 

So, what is then the best option for an advisor? Keep your registered representative license by maintaining an affiliation with a broker dealer.  The optimal way to do this is to affiliate with a firm that can hold both your investment advisory license and your broker dealer license.  A firm that doesn’t offer the flexibility to hold both licenses will most likely experience compliance challenges surrounding supervision.  Ultimately, an advisor should be able to service the entire client relationship by offering both a fee-based service- and commission-based business.


Wendy Lanton is Chief Compliance Officer at Melville, NY-based Lantern Investments.

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