One of the unintended consequences of the Dodd-Frank debate over a fiduciary standard for brokers and the Department of Labor’s initiative to expand an ERISA-like fiduciary standard to brokers who “advise” on rollovers into IRAs has been to encourage a substantial number of independent advisors with a BD affiliation to consider transitioning to a 100% RIA business model.

In conversations we’ve had with some of these advisors, their first—and often, only—question is: “Will becoming a fiduciary RIA significantly boost my business?” 

Our virtually universal response is: “You’re asking the wrong question.” In part, that’s because their question is based on a number of misconceptions about both clients and the advisory business itself. But it’s also based on a fundamental misunderstanding of the financial services business. 

First, let’s talk about the misconceptions. At the top of the list, probably due to the press coverage that Dodd-Frank and the DOL have gotten, most brokers seem to believe that switching to a fee-only fiduciary model will make them look like the “good guys” in the eyes of existing and prospective clients. If you’re one of these, I’m sorry to burst your bubble by telling you it ain’t gonna happen. 

From what we’ve seen, despite the press about the fiduciary issue, there still isn’t one retail investor in a thousand (and that’s probably low) who understands what a fiduciary standard is and why it’s important, or that a broker, when acting as a broker, doesn’t have a fiduciary obligation. Consequently, you’re not likely to get much, if any, marketing bump by making the transition—at least in the short term. And, as I think you’ll quickly see, having a conversation with your existing clients in which you tell them “Now I’ll have to act in your best interest,” probably isn’t going to have a positive effect either.  

The other misconception that registered reps usually have is that a fee-only RIA firm is more efficient (more profitable) than their current independent advisory firm (or in-house brokerage team). The short answer is that they aren’t—again, at least not in the short term—and you don’t have to be Warren Buffett to figure out why.

Wirehouse brokers and, to a lesser degree, independent brokers get a lot of support from their BDs: from technology and back office, to business consulting and management and sales training. And for good reason: those BDs usually keep a significant portion of each rep’s commissions and AUM fees, so they want their reps to spend as much time selling as possible. 

While the custodians that work with RIAs do offer some services, they aren’t getting a piece of their RIAs’ revenues—so they aren’t as motivated to offer business support services. Consequently, independent RIA firms tend to have lower profit margins, as well as lower cash flows, and lower take-home pay for their owners. At least at first. And our experience is that big-producing brokers running their own teams usually make more money over their careers than even partners in the biggest independent RIA firms (including their built-up equity in their businesses). 

The bottom line is that if you’re only in it for the money, you’ll probably be happier if you stay with your BD. However, if acting in the best interest of your clients (in your judgment), being your own boss, managing your employees as you see fit, and creating strong relationships with your clients based on their trust is more important to you than money, then becoming an independent RIA is by far your best alternative. 

What’s more, even though you may never make as much money as a “big-producing” broker, over time, the low turnover, high referrals and substantial asset accumulation created by the strength of those fiduciary client relationships can provide a pretty darn good living, and a great lifestyle while you’re doing it. And the value created in the business you build (or help to build) can fund a pretty darn comfortable retirement as well. 

So don’t worry so much about the money: build an independent business that takes the best care of your clients’ needs that you possibly can. In return, those clients and that business will take care of you.