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Five Things Breakaway Brokers Need to Know

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For the past three years, Dell’Orfano said in an exclusive interview on April 12, he has seen a sizeable uptick in brokers leaving the big broker/dealers (B/Ds) for the registered investment advisor world. He says the independent RIA model “resonates at the consumer level–there’s a lot more awareness” now of the differences between investment advisors and brokers.

Consumers who are aware that investment advisors are fiduciaries and must put their clients’ interests first, as established under the Investment Advisors Act of 1040, can make a choice. Brokers are not required to put client’s interests first, in most cases, and operate under the lower suitability standard. Many brokers want to put clients’ best interests first, and in practice do that, but the fact remains that the regulatory requirements are starkly different for brokers and investment advisors.

Dell’Orfano expects the pattern of broker teams leaving for the RIA world to continue. As he says, the “pipeline is continuing to climb at a pretty rapid rate.” In 2009 these brokers were in “education mode,” and in the first quarter of 2010, they were starting to make their moves.

The result is that in the first quarter of 2010, nearly 50 broker teams left big B/Ds for independence with RIAs or independent B/Ds served by Fidelity Institutional, which provides an assist to those breaking away through matchmaking and other evaluative tools and counseling through the Fidelity Institutional Wealth Services RIA platform and the firm’s brokerage clearing unit, National Financial. The counseling and tools can help the breakaways through the decision process of whether to become an independent RIA, join an existing RIA or affiliate with an independent B/D. Of the first-quarter breakaway broker teams, 36 went to the RIA side of the business: 26 to form their own RIA firms and 10 to join already established RIAs. Another 13 breakaway brokers joined independent B/Ds that clear through Fidelity’s National Financial unit.

For broker teams who are thinking about leaving a large B/D and switching to the RIA model–either creating their own RIA or joining an existing RIA, Dell’Orfano advises:

  1. Give yourself “enough time to do a proper level of planning,” and “due diligence” as you set up the new firm.
  2. Even though some breakaway brokers are fearful of giving up the “brand name” of the big bank or wirehouse, most “of the customer base tends to go with” their team to the independent firm.
  3. The RIA model is fiduciary and regulation is principles based rather than rules based. RIAs need to have a fiduciary process in place and need to be prepared in the sense that it is “more flexible.”
  4. Going independent means the new independents, “own a small business…the benefits administration,” Dell’Orfano explains, and “billing and payments.”
  5. Remember that the “size of the team, the number of clients, and depth and breadth” of the investment solutions can make the transition time vary.

Once the transition is through, however, what Dell’Orfano says he typically hears is, “I wish I had done it sooner.”

Comments? Please send them to [email protected]. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.


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