Transitioning From a Broker-Dealer to an RIA: What Advisors Should Know

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:

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?

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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 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.

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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:

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.