What Should Financial Advisors Know About Transitioning from a Broker-Dealer to an RIA?

Transitioning from a broker-dealer to an RIA means moving from earning a commission for buying and selling products to a fee-based professional advice model.

There are two ways to form a full-service RIA:

• Large firms can register under the Securities and Exchange Commission (SEC).
• Small firms can register with their home state.

Traditionally, these financial advisor services would require a Series 6 or Series 7 license to transact in those securities and earn a commission. Instead, the advisor would get a Series 65 or Series 66 license or a professional designation like a Certified Financial Planner to become a representative of the full-service RIA.

What Factors Should Advisors Consider When leaving Their Broker-Dealer?

Higher consumer demand for advisors transitioning from a broker-dealer to an RIA has proven there are solutions for financial advisors.

Registered Investment Advisors offer more flexibility and allow customization of their services and client relationships, but broker-dealers provide firms with a structure and a network of products.

Almost every broker-dealer in the country has an RIA opportunity. Most broker-dealers are looking at attaining dual licensure to take advantage of that platform.

When transitioning from to an RIA from a broker-dealer, you must remember that if you leave your broker-dealer, you have a five-year window to find another broker-dealer without taking the Series 6 or Series 7 again.

Most brokers do not want to walk away from their licensure because they are difficult to obtain. If your license expires, you must complete the examinations again.

Another reason advisors choose to leave their broker-dealer and migrate to the Registered Investment Advisor model is because many don’t allow any tax management advice, even if it is in the client’s best interest.

Updating Your Business Practices to be an RIA

In the 1970s and 1980s, most clients worked with a stockbroker who would buy and sell stocks on their behalf. To do that, they needed to align with a broker-dealer to facilitate the transaction.

If you buy and sell an investment: stocks, bonds, variable annuities, mutual funds, or alternative assets, and you are going to earn a commission, you need to affiliate with a broker-dealer who can facilitate the transaction and pay out the commission.

As far as financial advisor compliance goes, broker-dealers follow the suitability standard, and RIAs follow the fiduciary standard. Regarding the advisor’s obligation to make recommendations in the client’s best interests, the suitability standard is less stringent than the fiduciary standard.

Alternatively, RIAs work within financial advisor compliance rules to develop fee structures that keep the advisor aligned with the client’s needs.

• Flat Fee Model
• Hourly Rate
• Percentage of AUM

You will also need to update your financial advisor marketing strategy, plan, materials, etc., to reflect the changes within your practice.

Click here for a free advisor guide: 11 Digital Marketing Tips for Financial Advisors

Is Their a Way to Transition to an RIA Without Leaving Behind Trailing Income?

Suppose most of the business is on the Registered Investment Advisor platform. Why do some advisors choose to maintain their broker-dealer licenses instead of alternative solutions for financial advisors like streamlining offers through the SEC?

When you contemplate transitioning from a broker-dealer to an RIA, you probably don’t want to walk away from any prospective revenue that is embedded into your business model:

• Variable Annuities
• Alternative Investments
• Mutual Funds
• C Share Funds
• Variable Universal Life Insurance
• 1031 Real Estate Transactions

When considering different solutions for financial advisors, there is a legacy part of the business. Perhaps they built it up over decades with transactional registered products, like commissionable variable annuities, or alternative investments like non-traded Real Estate Investment Trusts (REITs) or oil and gas investments. They would lose the corresponding trail revenue if they did not maintain that relationship.

This could be hundreds of thousands of dollars they would abandon if they leave their broker-dealer. This handcuffs them to the broker-dealer because they still have to service those clients, even though the future of the business is advisory.

The good news is there is a simple way to migrate your business if you choose to move to an RIA.

Some Registered Investment Advisors have a broker-dealer partner that manages the asset transition program. This allows advisors to shift all their broker-dealer business over without losing out on income and starting from scratch.

At Prosperity Capital Advisors, we provide an asset transition program that allows advisors to move their business like 529s, mutual funds, or variable annuities over to the broker-dealer, who then puts a home office employee as the agent of record on that account. Prosperity Capital Advisors is then hired as the Registered Investment Advisor, and the advisor becomes the broker representative, so they don’t lose any trail revenue.

Please book a FREE call with one of our business development representatives to learn more about the different solutions for financial advisors.

Is a Transition to an RIA Model right for you?

When contemplating a transition from a broker-dealer to an RIA, there are several important factors to consider beyond the initial structural changes:

Recognizing Signs It’s Time for a Change

Alanah Phillips, MBA, an advisor advocate and matchmaker in the financial services industry, spoke on this topic of broker-dealers transitioning to RIA models in an episode of The Rainmaker Multiplier On-Demand podcast. She believes that being aware of certain indicators can help you decide if it’s time to explore other options.

These signs can include:

• Feeling undervalued or uncelebrated in your current firm
• Experiencing excessive control over your time and financial decisions
• Having limited opportunities for professional growth
• Facing pressure or fear tactics discouraging exploration of alternatives

Developing a Clear Vision

Before making any transitions, it’s crucial to define your ideal working scenario. Consider how you want to structure client relationships, envision your ideal day-to-day operations, and identify current pain points that could be addressed by a change. This vision will guide your decision-making process and help you evaluate potential RIA opportunities.

Evaluating Your Current Situation

A thorough assessment of your present circumstances is essential. This includes considering the timing of a potential move, examining existing team dynamics and professional relationships, addressing any financial obligations such as outstanding notes or practice purchase agreements, and identifying non-portable products in your book of business that may need attention.

Finding the Right Fit

When exploring RIA options, it’s important to find a solution that aligns with your risk tolerance and capacity, long-term professional goals, and desired level of autonomy and support. This may involve researching different RIA models and speaking with advisors who have made similar transitions.

Understanding the Transition Timeline

The process of transitioning from a broker-dealer to an RIA can vary significantly. While some situations may require a quick transition due to external factors, in many cases, a more measured approach allows for better preparation. Transition timelines can range from a few months to several years, depending on the complexity of your practice and the chosen RIA model.

Industry Trends to Consider

As you contemplate a move, be aware of ongoing shifts in the financial services landscape. Many independent broker-dealers are evolving to offer more RIA-like services, while insurance-owned broker-dealers may face unique challenges in keeping pace with technology and regulatory changes. Understanding these trends can help you make a more informed decision about your future business model.

Maintaining a Growth Mindset

As you consider your options, stay open to learning about different business models and regularly assess whether your current situation aligns with your professional goals. Remember that exploring options is part of fulfilling your fiduciary duty to clients, ensuring that you’re in the best position to serve their needs.

By carefully considering these factors, advisors can make more informed decisions about whether transitioning from a broker-dealer to an RIA aligns with their professional goals and client service model.

See what we can do for you at C2P to help further educate you on the differences of working with an RIA over a broker-dealer or RIA, or about our TAMP offerings. Book a call with our Advisor Growth Specialist today!

Financial Professional Use Only

The information provided in this presentation is not intended as investment advice or legal advice. The information provided is for informational and training purposes only. The information in this presentation was accurate as of the time of the material was created. Tax laws and rulings can frequently change. Please discuss the client’s current situation with an accountant or tax advisor.