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GOINGINDIE BLOG

Broker/Dealer Affiliated IAR Or Independent RIA: The Facts Please

Deciding which direction to take your practice in can be a daunting task. After all, going independent means that the way you do your business will change — from the way you hold yourself out to clients and prospects to the way your business is regulated and administered.

Much has been written about making the transition, but before you get to the “how to’s”, make sure you completely understand the different paths you can take so you can make an informed choice.

Here are three specific areas to keep in mind as you make your decision:

• Descriptions

• Implications

• Questions

Descriptions

Familiarize yourself with these descriptions:

• A Registered Investment Advisor (RIA) is generally a business entity (but can be an individual), that, among other things:

o   Provides advice or analysis on securities and makes recommendations directly or indirectly to its clients

o   Receives compensation in any form for the advice provided

o   Engages in a regular business of providing advice on securities

An RIA is registered and/or licensed in either one or more states or with the Securities and Exchange Commission (SEC). RIAs who manage assets valued at more than $25 million are required to register with the SEC. Those managing less may be registered at the state level instead.

• An Investment Advisor Representative (IAR) is an individual who performs services on behalf of the RIA and receives compensation in the form of a fee. The RIA holds their required registration or license(s).

o    Note that the RIA can be independent from, or part of, a Broker/Dealer. It will be explained shortly why this is an important distinction.

• A Registered Representative is an individual who typically works for a securities broker/dealer and is licensed by FINRA (Financial Industry Regulatory Authority) to trade investment products, such as stocks, bonds, and mutual funds for his or her clients. He/she is generally compensated through commissions and cannot charge a fee for providing financial advice.

The Registered Representative who wants to perform more of an advisory role, i.e. becoming partially or completely fee-based, has mainly three options:

1. Form an independent RIA firm and become an IAR (an owner-operator) of that firm

OR

2. Join a nonBroker/Dealer-owned RIA firm and become an IAR of that firm

OR

3. Affiliate with a Broker/Dealer-owned RIA and become an IAR of it.

Implications

Clearly, the common characteristic of becoming an RIA or IAR is that you can be compensated for providing advice, allowing you to create an additional revenue stream. However, there are positive and negative implications of both that you must to be aware of.

Being an “Owner/Operator” of an independent RIA:

• Brings with it just that, complete independence!  You set your own fee structure and retain 100% of the fees you collect and write.  But you must enforce and be accountable for your own rules and methods of doing business.

• You are free to bring additional IARs into the firm as you see fit (but you must supervise them).

• You will have an upfront expense to set up the RIA and will be subject to greater regulatory scrutiny. Your administrative responsibilities will increase.

As an independent RIA (or IAR of same), you will need to determine if you need to maintain your FINRA licenses and be registered with a B/D, or whether you give up your FINRA licenses and the ability to sell most commission based investment products.

Being an IAR affiliated with a B/D-owned RIA:

• You can hold yourself out with a more professional image (as is also the case with an independent RIA).

• Through this affiliation, the process of entering the fee-based arena can be relatively quick (subject to obtaining the required FINRA licenses and fulfilling internal B/D prerequisites) and you will be able to register your other FINRA licenses with the B/D, allowing you to do commission as well as fee-based business.

• You will have to conform to the business methods/policies of the B/D but will not have to be concerned with the administration of maintaining an RIA registration (e.g. keeping your ADV and state filings current).

• You will have to comply with the B/D’s fees structure.

• The B/D will retain a percentage of the fees you generate.

Some Questions You Must Ask Yourself

Before you embark on the options outlined above, there are introspective questions you need to ask yourself. They are not quiz questions — there are no right or wrong answers. They do, however, have to be answered honestly and directly. I am very confident that going through this exercise will assist you in the decision-making process:

• Am I passionate and committed to the future as a financial advisory professional?

• Is owning my own business an essential element of my long-term career goals?

• Do I want to play the primary role in deciding the services and products I offer clients?

• Am I comfortable and self-disciplined enough to work on my own?

• Do I completely understand the financial resources needed to start and grow my independent practice – especially in the first 3 years?

• Does my spouse (significant other/partner) share that understanding?

• Do I have the energy and organization/time management skills required to handle the multiple demands of managing a business and an advisory practice?

• Am I an optimistic person who likes to create positive outcomes?

If you would like more information on Going Independent and options available and/or would like to discuss your situation in confidence, please feel call us toll free at 1-855-GO4-INDI (855-464-4634) to schedule a consultation or email Victoria Bowen at vbowen@goingindie.com.

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