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Independent RIAs on the Rise. What’s Driving The Trend?

So what’s driving the growing trend of independent advisors either joining an existing RIA firm as an Independent Advisor Representative (IAR) or starting their own RIA firm? Four factors are at play:

1.      The brand (name) of large Brokerage firms has lost its client appeal.

2.      The level of payout at these firms is being questioned by producers.

3.      There is a growing client need for alternative models of advice not always available at larger B/Ds.

4.      Advisors want to control their own destiny – many have a latent entrepreneurial spirit that, given the current environment, is surfacing.

All of these trend drivers have merit. However, I would like to concentrate on the last one – controlling one’s own destiny thanks to an entrepreneurial spirit.

Let’s map the career path of a good many Advisors who have built a solid practice and are in their late 40s or early 50s.

  • A great majority started in one of two places: either in another profession which lent itself to client advisory work (e,g. accounting, law, life insurance) ) or in a registered representative training program at a wirehouse.
  • Most started as commission based Registered Reps and after learning the ropes of the business they, under the umbrella of the firm, operated on their own, developing a “business franchise,” i.e. their book.
  • When commission rates began to decrease and the fee-based model started to build momentum, many of these Advisors became interested in moving their practices in the “hybrid” advisor direction (being compensated  by both commission and fee).
  • They found that the independent B/Ds were providing the venue for establishing themselves as that “hybrid” through their corporate RIAs.

o   They were able to charge a fee for planning and giving advice as well as sell financial products (still on a commission basis) or get a fee for AUM.

o   In most cases, all that was required was to pass the Series 65 and (for a few B/Ds) go through some firm sponsored training.

  • For most of this cohort, this business model has served them well, and they have stayed with it; others have used it as a stepping stone to create their own Registered Investment Advisor firm.

It is quite evident that if someone selects the financial advisory field as his or her profession, a critical element for success is the person’s desire to build a business. The business’s origin has always been “compensation as you go” – normally salaries were low, if they existed at all. That fact alone sets the stage.

All of this leads me back to the original premise – controlling one’s destiny and the entrepreneurial spirit. The current environment has created a window of opportunity for wirehouse advisors and capitive agents who have an entrepreneurial spirit.

Thanks to the recent financial meltdown on Wall Street, the once stellar image of larger firms, like Goldman Sachs, has now been tarnished. Advisors with an entrepreneurial spirit can take advantage of this environment by going independent and showing their clients they’re not part of the status quo. And once these Advisors taste independence, they often realize controlling one’s own destiny has many rewards.

For the Advisor who is anxious about the transition, , we have this to say: With the proper planning and preparation and use of the resources available to them, the transition can be  efficient and quite seamless.

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