Once upon a time, life insurance professionals who wanted to build a fee-based practice would become a registered investment advisor, keep their life insurance license and broker-dealer affiliation until such time as fees alone could support the practice, then dispense with the insurance business. Or so this was the expectation among industry pundits.
No longer. A growing number of advisors are choosing to permanently maintain dual registration–working as FINRA registered reps under the broker-dealer and as investment advisor reps (IAR) under their independent RIA–because it is advantageous for them to do so.
“Variable insurance products and annuities have to be run through a broker-dealer,” says Bob Taylor, CEO of Advisor Alliance, Rogers, Ark. “And product sales are an integral part of our practice. We can’t do this on an RIA-only basis. That’s why we have a broker-dealer affiliation.”
“As an advisor, you have to be dually registered to comprehensively meet the client’s goals and objectives,” adds Morrie Reiff, president and managing director of AFA Financial Group, a Calabasas, Calif.-based broker-dealer. “If you’re only an RIA, this isn’t possible. Also, you risk losing business if the client, needing to shop elsewhere for insurance, gives both the product sale and the fee-based planning to an advisor who is dually registered.”
Taylor and Reiff reflect the views of an expanding community of financial services professionals. According to the first quarter 2010 edition of The Cerulli Edge-Advisor Edition, a publication of Cerulli Associates, Boston, dually registered advisors are projected to total 11.6% of advisors by 2012, up from 7.5% this year and 4.8% in 2008. By 2012, these advisors will also garner 10.5% of assets under management, up from 8.9% and 7.5% in 2010 and 2008, respectively.
What’s fueling the surge? Echoing Taylor’s and Reiff’s comments, Cerulli points to the dually registered advisor’s ability to continue to source insurance products that are not appropriate for a fee-based platform. The advisor can also charge a commission or fee depending on which compensation model is appropriate.
Additionally, Cerulli observes, many broker-dealers have begun to support dual registration by streamlining the dual reporting of trades and by offering both service agent and broker-dealer services. Many B-Ds, have also established an in-house RIA for those registered reps who desire to charge fees and are willing to forgo independence. (Under Cerulli’s definition, however, these IARs do not qualify as dually registered, only those who have an independent RIA.)
The growing involvement of broker-dealers in investment advisory services has, paradoxically, prompted some professionals to question the merits of maintaining an independent RIA. Why invest in technology, processes and staffing to be RIA-compliant when the broker-dealer can do the work for you at potentially a fraction of the cost?
“If I were a new advisor who was thinking of becoming a registered investment advisor, I would use the broker-dealer’s RIA and not form my own because I don’t see the value in it,” says Michael Kusick, a dually registered advisor and a principal of Investmark Financial Services, Stratford, Conn. “The regulatory cost associated with maintaining the RIA can be a real challenge.”
That’s partly because he and other dually registered advisors have to adhere to two sets of regulations: one established for the RIA; and the other for the broker-dealer. By working solely under the broker-dealer’s RIA, says Kusick, he can continue to offer fee-based services, but the compliance burden would be managed by the B-D.
Conversely, says Kusick, his broker-dealer offers tools and resources that he would be hard-pressed to replicate if he were to become an RIA-only firm. Among them is software that allows Kusick to manage all aspects of a client account: asset aggregation, trades, reporting, workflow and coordination with other financial professionals.
To be sure, these services and the oversight provided by affiliating with a broker-dealer come at a cost. The B-D takes a cut of the advisor’s revenue, whether generated through commissions or fees.
When deciding whether to affiliate with B-D, the advisor also has to consider whether the B-D’s services and objectives dovetail with the advisor’s. Otherwise, problems can arise if the advisor and B-D should part ways. One example: disputes regarding ownership of the advisor’s clients.
“The broker-dealer might say, ‘the clients you acquired while you were affiliated are now ours,” says Kusick. “This could also happen if the B-D were to be acquired by another with a different business model. So there is the question about losing control of your independence.”