Published October 26, 2016
You have had a great run with your career to this point – and things don’t necessarily have to change –but you know something is knocking at the door: the independent model. Within this model, advisors can either opt to join an independent broker-dealer, start their own RIA or join an existing RIA. The case for joining an existing RIA (especially a hybrid one) is especially strong in that it gives advisors a high degree of flexibility while allowing them to outsource central back-office operations. In the second of our four-part series (see part one) on factors to consider during your due diligence process, we look at some of these outsourced services offered by leading hybrid RIAs in the industry. Please remember to share it if you find anything of value here.
PART 2: Look Under the Hood of the Car
Strong Ongoing Compliance Support
Compliance is one of the main reasons you would want to join an existing RIA. To quantify what is otherwise unquantifiable, and to bring certainty and consistency to what is otherwise complicated. If your time is truly going to be liberated by the RIA’s compliance supervision, then that firm has a core competency that you should not overlook, especially in the face of competing options that pay 1 or 2% more in payout. Buyer beware! In other words, you’re going to get what you pay for if you only chase the money. You want to understand how the RIA has managed under times of severe duress like market corrections, FINRA exams, SEC audits, etc.
Pristine Compliance Record and ADV
Get busy on BrokerCheck and look at management’s disclosable events, as well as those of the top advisors and newer advisors joining the firm. Then cross-check your findings with the firm’s ADV. You want to be in a culture and advisor community that projects an image that looks and feels like “you.” Don’t settle, because there are definitely firms out there with which you can be proud to affiliate.
Affordable E&O Insurance
The cost of compliance is going up for RIAs, and scale is very important. One of the line item costs independent advisors can expect to increase is E&O insurance. Point in fact, you probably heard that the DOL will allow for litigation to settle disputes versus lower cost arbitration. Well, that cost will be felt by the insurance companies defending advisors. They will be sensitive to raising their rates in anticipation of the legal risk of adverse court rulings and awards. Again, look for consistency as it relates to the cost history of the RIA’s E&O plan. What are the deductibles (e.g., $50k), and can the advisor pay a little extra to “buy down” those deductibles (to say $5k)?
Operational Efficiency and Scalability
Efficiency is the result of using systems and automation to create repeatable workflows, which in turn lead to predictable, consistent outcomes. Again, size matters, because efficiency is determined by the confluence of infrastructure investment and human capital operating in harmony. A firm is truly scalable if it can grow (add advisors) without incurring the incremental variable costs of servicing new advisors. Indeed, at some point it may need to incrementally hire and train new people. But when the RIA runs mean and lean, the economics are always better for the advisor. The RIA is in effect leveraging that efficiency to pass through more savings and thus competitive economics to the advisor.
Are you looking to join a hybrid RIA? If so, you need to make sure you understand the broker-dealer that will be handling the commission side of your practice. Such firms are otherwise known as “friendly broker-dealers” because in addition to holding your security licenses, they are also “friendly” to you holding assets off-platform, at say TD Ameritrade. Who are they? Are they self-clearing? (This is actually a good thing if you don’t want your clients to have multiple statements from multiple custodians.) What is the size of this friendly broker-dealer? How many advisors do they support? Again, size matters in the broker-dealer world, probably more than anywhere else in the financial services industry. This is exactly where the forces at play in the industry, stressed by the regulatory environment, come to a head and force abrupt change. Are they investing heavily in their technology and service delivery? Only the largest will survive as the world moves away from commission business in a post-DOL world, and power will consolidate with those that are most efficient.
Strong Legal Team
Does the firm have an attorney on staff? Do they use an outside law firm or combination of both? Firms that use both are probably the best positioned to support you. They can leverage their in-house attorney for faster turnaround on less complicated legal negotiations and questions and then engage outside counsel for litigation.
Stay tuned for Part 3: Free to Be You and Me, coming next Wednesday