From the July 2007 issue of Boomer Market Advisor • Subscribe!

Independence. Freedom. Flexibility. Choice.

The world of financial services has grown increasingly complex. For investment advisors in particular, there are options on everything from fundamental structural issues to detailed practice management and operational problems. So when researching a broker/dealer for a potential partnership, there are a number of critical issues to keep top of mind.


The advisor must choose to either be an employee or an entrepreneur. Will he work for an investment advisor or go independent? Buying computers, furnishing an office, managing staff, creating the required infrastructure and operating in compliant fashion -- while simultaneously serving clients -- is a challenge for even the most skilled advisor.

The decision is best left to a time when the advisor reaches a comfortable experience level and a limit on the number of clients he can effectively handle. Even then, the advisor can better serve his practice and his clients by outsourcing day-to-day functions.

Consequently, the advisor should work with an independent broker/dealer that provides complete portfolio management systems along with turnkey billing and performance reporting on a fully outsourced basis. He can then stay focused on asset gathering, portfolio management and client retention.


An advisor should decide whether or not to register under their own RIA, or operate under a parent company's corporate RIA. Once again, it's based on experience level and the number of clients. In my opinion, an advisor should operate under a parent organization until he gathers $30 million in assets under management. Once he exceeds this level, he'll have the necessary size and experience to register directly with the SEC.

As an independent RIA, an advisor can establish a brand, build a Web site and market his firm's identity. More importantly, the advisory agreement is between the firm and their client - which helps build value. A broker/dealer partner should recognize this critical component and dedicate substantial resources to helping to build value.


Where should the advisor custody client accounts? While many broker/dealers support independent RIAs, many do not offer multiple custodians. A good independent broker/dealer, for example, should allow the RIAs to custody assets with whomever they choose. In addition to flexibility among custodial accounts, the broker/dealer should provide data aggregation, client relationship management support, billing, performance reporting and compliance oversight.


The ability to operate either as an independent RIA or under the corporate umbrella, to choose different custodians, to operate with discretion, to directly manage accounts or to use third-party programs are all important choices available to advisors.

Lastly, consider the costs and the economic arrangements of operating an advisory business. The payout agreement of a potential broker/dealer partnership should be fair, but keep in mind broker/dealers bear liability for the actions of their registered representatives and compliance costs have risen dramatically. However, in order to earn its part of the payout arrangement, the broker/dealer should add value and guarantee superior service. Administrative fees are common. They pay for billing and performance reporting, as well as for compliance oversight. Realize, however, that it doesn't cost much more to bill a $10 million account than it does a $50,000 account. Advisors should look for low administration fees with caps and limits, as well as transaction charges that are low enough to either absorb internally or pass on to clients.

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