The future is true independence

For the past decade, the independent channel has represented the fastest-growing segment of the wealth management industry. According to McKinsey, more than 700 independent RIA firms launch annually. Advisors seek out greener pastures for a multitude of reasons—the freedom to provide clients with the best advice and investment solutions or the ability to grow a team that matches your values. Regardless of the reason, technological advances have allowed more advisors to fulfill their personal and professional goals.    

But while many advisors may want to break free of the big banks, independent broker-dealers (IBDs), and wirehouses, they may feel overwhelmed by the options.

Should you form a pure or hybrid RIA with state and/or Securities and Exchange Commission (SEC) oversight, or go hybrid with a broker-dealer relationship and FINRA as an added regulatory layer. Then you have to consider the how – do you join an existing firm, which allows you to focus more on client service but may have limited flexibility, or start the business from scratch and assume all the operational requirements that come with it? There are lots of options.

As advisors wrestle with these questions and others, one thing is clear: the independent RIA model represents the future of wealth management. As a collective channel, pure and hybrid RIAs rank as the second largest channel ($7.2 trillion) by advisor-managed asset, behind only the four major wirehouses’ ($9.2 trillion), according to Cerulli. Most impressively, the RIA channel’s annualized growth rate of 10.7% over the past decade is twice the growth rate achieved by the wirehouse channel (5.3%), and it’s projected that pure and hybrid RIAs will control nearly one-third of intermediary assets by 2027.

Though every advisor is different, wealth management professionals who decide to break out on their own should carefully weigh these five questions before making the transition:

1. Which RIA model makes the most sense? One of the most important decisions an advisor leaving a bank, wirehouse, or IBD will make is whether to register their firm as an RIA, which covers only fee-based assets, or as a hybrid RIA, allowing them to hold both fee-and commission-based assets. Many advisors view hybrid RIAs as a good bridge between wirehouse/bank and pure RIA, providing continuity to their existing clients as they begin phasing out commission-based products. Though operating as a hybrid RIA gives advisors the best of both worlds, it can also add a layer of complexity since they must adhere to two sets of regulatory standards. As an alternative to maintaining the FINRA designation, advisors should check with their custodian to see if they partner with a third-party platform that will allow them to keep their clients’ variable annuities—and even add other commission-based products—without having to be dually registered. Custodians are providing more solutions than ever before, and many offer unique solutions that aren’t available through the IBD channel, such as cash management solutions, along with further support for services, including compliance, marketing, research and more. Additionally, it’s easier than ever to bifurcate assets, allowing advisors to present a singular branded statement, even when using separate custodians for commission and fee-based products, which simplifies the auditing process. 

• Do you really want to run a business? Though many advisors want to leave a bank or wirehouse to better service their clients, they may be unprepared for becoming an entrepreneur. Business owners must make countless decisions and take on mountains of work to run their firms smoothly, everything from hiring staff to selecting new technology and providing back-office support. If this doesn’t sound exciting or realistic, it might make more sense to join an existing RIA rather than build one from scratch. Your custodian is a good source to tap for help in this scenario, as they can help make introductions to RIAs who are actively looking to add advisors or acquire other firms. By joining an existing firm, you may also solve another common problem for solo practitioners: succession planning.

• What’s the longer-term plan? From my experience, hybrid firms typically transition into a pure RIA by the five-year mark. At that time, RIAs generally have converted all their assets and don’t see the value in keeping two regulatory frameworks. It’s important to note that if you’re considering becoming an aggregator and acquiring other wealth management practices, you may want to keep the hybrid designation indefinitely. Fortunately for advisors, the industry has evolved over the past 10 years to make the transition from hybrid to pure RIA seamless. Additionally, as the industry trends toward a pure RIA model, asset managers increasingly offer low-cost, fee-only products, making it easy for advisors to find suitable alternatives to commission-based products. Think about your long-term partners and who can best support you as you grow. You may want to consider going multi-custodial, which allows you to offer clients greater flexibility and choice in keeping with your fiduciary obligation.  

• What’s the message to clients? While newly independent advisors know that they must decide how to structure their new firm, they often don’t take the time to figure out an equally important element: how to message the move. When leaving a bank, IBD, or wirehouse, breakaway advisors typically lose one-fifth of their assets, so use this as an opportunity to reinforce your commitment to your clients and explain your value proposition effectively.  Reinforce your commitment to your client base. Explain how you’re evolving and that it will allow you to offer a new and expanded service offering and improved fee structure.  

• How will you differentiate your firm? As the independent wealth channel grows, so does the number of financial professionals obtaining their Certified Financial Planning (CFP™) designation. As of December 31, 2023, the number of CFP™ professionals reached an all-time high of 98,875, an increase of 3.9% over 2022 numbers. The Accredited Investment Fiduciary (AIF®) designation, which has fewer requirements, is also gaining popularity. With increased competition, advisors should look at ways to stand out and add value. Clients are increasingly more interested in holistic planning than S&P performance, so advisors might want to add complementary services such as estate planning, banking/cash management services, and health and wellness services or cater their practices to a specific niche clientele. And don’t forget: if you’re transitioning from hybrid to RIA, you should revisit your messaging to ensure that it remains relevant and accurate.

The decision to break from an IBD, wirehouse, or bank is exciting but can also be fraught with complexity and risk. Before jumping into unknown waters, develop a detailed plan for the immediate and long term. Lean on your professional partners for support and look beyond the household names. Custodians regularly help advisors transition from hybrid to pure RIA, and they can be a good resource for making connections and helping to solve problems. Talk to other advisors who have successfully transitioned, and, most importantly, select partners who align with your values and can grow with you.  Whether you operate as a hybrid or pure RIA, as a stand-alone firm, or as part of a larger RIA or IBD firm, the future is independent. As the great wealth transfer continues, millennials and Gen Z clients will seek out holistic financial planners and advisors who set themselves up to serve this growing industry segment and will be well-positioned for long-term success.

Gino DeRango is SVP, national sales manager at Axos Advisor Services, an RIA custodian that delivers individualized attention, intuitive technology, and knowledgeable consulting support.