Some financial recruiters consider it a natural career progression, but there are various reasons why advisors are moving to the RIA world. For instance, one common excuse for moving that we hear from advisors with independent broker-dealers is that they feel like they’ve plateaued and outgrown the space they’re currently in. Thus, many advisors are attracted to the RIA world because it grants them more freedom, customization, and perks. Here are some of the main reasons why financial planners leave broker-dealers to become registered investment advisors.
Align Financial Interests
A significant advantage that the RIA world has over independent broker-dealers is an ability better to align financial interests with clients via fee-based planning. Since IBDs are traditionally based on the commission-based planning model, advisors are typically pressured to generate sufficient revenue by trading excessively. A growing number of financial planners are also moving to the RIA world because of the positive publicity that it gets from the media. Registered Independent Advisors are being referred to as a trustworthy option for uneducated consumers that want to avoid Ponzi schemes that have defrauded people out of their retirement savings in the past. Finally, planners working in the RIA world have more time to service clients and expand their businesses since broker-dealers have to spend more time staying in compliance with regulators.
RIAs are True Fiduciaries
Although some IBD advisors might act like fiduciaries, they aren’t bound to the Investment Advisers Act of 1940 like RIAs are. The law dictates fiduciaries must ensure that all investment advice is accurate and complete, avoid and disclose potential conflicts of interest, clearly detail all fees and commissions, and only make investment recommendations that are consistent with the goals, risk tolerance, and objectives of clients. That is why a growing number of financial planners are migrating to the RIA world because they are free to recommend investment products that are in the best interest of their clients, versus working at IBDs where they were pressured to recommend products based upon the highest commissions.
What’s Holding Some Advisors Back?
But, the RIA world might not be the best fit for everybody, and there are valid reasons why some advisors are choosing to remain with IBDs for now. For instance, being a business owner can be intimidating to those lacking an entrepreneurial spirit and vision. And, for those that stand to leave behind more unvested deferred comp than can be gained by going independent, staying with the dealer usually makes more financial sense. This is when the book portability rate has to be considered and whether or not the long-term gains are worth the short-term losses of leaving some business behind. Still, building an independent firm and competing with established brands requires a high level of risk tolerance that many advisors may not be ready to take.
It takes courage to leave the support system provided by an IBD behind and become an RIA. The opportunity to leave commissions behind and open fee-only practices is one of the main reasons why financial planners choose to open new firms. Then, there are some leaving broker-dealers because they can access and recommend more investment products that align with the interest of their clients. Advisors are encouraged to consider these pros and cons before making any final decisions.