Affiliating with an Independent Broker Dealer: Evaluating Your Options – Part 2

Affiliating with an Independent Broker Dealer: Evaluating Your Options – Part 2


Affiliating with an Independent Broker Dealer: Evaluation Your Options – Part 2

By: Charlie Latimer, Director of National Recruiting
Published December 19, 2018

Continuing on the theme from part one of our blog series, I previously described the three options advisors have when affiliating with an Independent Broker Dealer (IBD), including starting an RIA (most difficult), affiliating with the IBD’s Corporate RIA (where the advisor can choose between home office supervision and OSJ supervision) and lastly, affiliating directly with a hybrid RIA/OSJ within the IBD’s umbrella. In researching a relationship with an OSJ or RIA/OSJ, I further proposed five best practices advisors should consider in evaluating such support entities.

All About Flexibility

Following the theme that all RIA/OSJ’s are not created equal, advisors have to understand that there exists broad, structural distinctions from firm to firm, and even more nuanced ones. In the broadest sense, some RIA/OSJ’s provide a-la-carte services while maximizing choice and payout, while others provide more structured offerings that in many cases cannot accommodate all shapes and sizes of advisors. Advisors in the independent space tend to appreciate the flexibility of being able to build their practices in their own unique way, reflecting their image and vision, rather than “square-pegging” into a rigid structure. Consistent with my experience, independent advisors tend to gravitate towards flexible support models where they can adapt their practices to internal and external influences of all kinds, or at a minimum have the option to do so (it’s ok to dream!). Rigidity, on the other hand, comes in various forms, including one-size-fits-all models where structural requirements force advisors to pay for technology, services, etc., that are not necessarily wanted or needed; not having the option to leave the OSJ to reaffiliate with another OSJ within the same IBD umbrella; or, being forced into unfamiliar pricing models like asset-based pricing, and so-on.

Uncovering Red Flags with an RIA/OSJ

So, what are other areas of due diligence advisors need to consider in evaluating an RIA/OSJ? While the list is seemingly endless, here are five additional major points of interest to explore:

  1. What investments in process automation and compliance technology has the RIA/OSJ made?
    The scalability of an RIA/OSJ has much more to do with data management and process automation than anything else. While additional support staff is required as an RIA/OSJ grows, a truly automated compliance regime should be able to handle a massive influx of advisors and related account activity at any point in time, without disrupting existing and transitioning advisors. An RIA/OSJ supervising hundreds of advisors that does not have an advanced data management capability is a red flag. In protecting their advisors, OSJs need BIG DATA to zero in on advisor activities (or lack thereof) outside of the bell curve that require attention. RIA/OSJs that can easily adjust their data management, workflow automation and exception reporting processes are at a competitive advantage to those who cannot. Without question, the former also provides for much more robust handling of SEC audits.
  2. Does the RIA/OSJ allow advisors to freely sever the relationship and re-affiliate elsewhere?
    Some RIA/OSJs do a great job recruiting and in the blissful courtship process, advisors almost never ask the RIA/OSJ whether the advisor will perpetually be captive to the RIA/OSJ. In other words, should the advisor seek to re-affiliate with another RIA/OSJ at a later point (for any number of reasons), will the RIA/OSJ “release” them? While some RIA/OSJ’s are very open about allowing their advisors to sever the relationship at will (non-captive), others are not (= red flag). Make sure to ask the RIA/OSJ you are joining whether they will “release” you and to put that in writing. The RIA/OSJ’s branch agreement with the IBD gives them the power to manage this as they please. If an RIA/OSJ does not release, then the only option for the advisor is to stay where they are or transition to a different broker-dealer altogether. Avoid the trap!
  3. Does the RIA/OSJ have processes in place to ensure their advisors have a positive ongoing service experience?
    Because humans are involved, service quality can be a hostage to variability. Advisors, in general, are accustomed to experiencing the full spectrum of service quality from their BDs. Outside of the good experiences, the typical laggards include long hold times, slow turn-around time, inaccurate answers, different responses from different people, etc. Advisors and their staff hate wasting time on service issues as it inevitably reflects poorly on them with their end clients, regardless of where the breakdown is. This is where the RIA/OSJ needs to have a vested interest and involvement in maintaining consistent service levels. Does the RIA/OSJ have ongoing review/update calls with their service team management? Does the RIA/OSJ monitor quantitative metrics and patterns with NIGO’s, and share ongoing feedback from their advisors with the service team’s management? Does the RIA identify training opportunities to educate their advisors on handling certain processing workflows? The positive impact of open and regular communication with a service team cannot be underestimated as it creates a constructive feedback loop and sense of accountability.
  4. What transition support services does the hybrid RIA offer?
    The fear of transitioning clients to a new BD is one of the greatest obstacles preventing advisors from considering a move in the first place. While the vast majority of transitions to independence prove to be successful, not all transitions are equal and there is a wide range of experiences. To minimize anxiety and surprises, advisors need a comprehensive understanding of the resources their future RIA/OSJ has in place to assist them transitioning from another BD, RIA, OSJ, etc. The repapering process should be highly automated allowing for immediate turnaround and tracking, including data population and prefilling forms by household. There should also be an experienced, dedicated transition support specialist overseeing all aspects of the transition, from initial planning to final execution and everything in between. An absence of the above represents a red flag.
  5. What is the general culture and personality of the RIA/OSJ?
    Identifying a culture of compliance is a given in evaluating an RIA/OSJ. However, in a more subtle sense, the firm’s overall attitude and personality reveals itself in various ways. One red flag is the inverse relationship between staff turnover and staff tenure. Of course, you will want to partner with a firm that has highly tenured staff who feel a sense of ownership and passion about their firm, and at the same time, low turnover, especially in important functional roles such as the Chief Compliance Officer. It is advised to visit the RIA/OSJs home office and be sure to meet a variety of personnel across different functions and to “walk the floor” if possible. Why not ask for a list of all employees and their start dates!

In final thoughts, advisors need to be exposed to all of their affiliation options in order to make the best decision. The reason why several options exist in the first place is to accommodate varying needs from advisor to advisor. The path of affiliating directly with a hybrid RIA/OSJ creates an additional level of analysis as advisors have options as to which RIA/OSJ to partner with. Linking back to the opening of this piece, make sure to understand an RIA/OSJ’s overall support model and the balance between flexibility and rigidity. As for home office visits, this is a must – jump on that plane! That said, it may be a good idea to send your due diligence questions in advance to make for a more productive visit. Lastly, be sure to ask for three to five references and take notice how each one responds to the same questions. Don’t forget, I’m always here to help! Thanks and may you truly have a wonderful holiday season!