It’s not surprising that the RIA space often garners the lion’s share of attention in the press and with advisors considering the next chapter of their careers.
Who can dismiss the excitement around the ongoing growth — fueled by what seems to be a constant flow of big teams breaking away from the brokerage world to build their own independent firms as either hybrid or fee-only RIAs?
While the momentum towards independence seems to have been focused on the RIA world over the past few years, the reality is that independent broker-dealers have been working stealthily and making significant changes to their operating models and strategies.
Historically, of course, IBDs were the obvious choice for advisors interested in independence but who lacked the desire to build an RIA infrastructure from scratch.
The turnkey platform, compliance, technology, in-house support, ability to conduct both advisory and brokerage business under one umbrella, and appealing transition economics were all features that resonated with this group.
Over the past few years, though, we’ve seen an absolute proliferation of RIA service providers, 1099 RIA platforms, consultancies, capital partners and outsourcing partners — each making the operation of an existing RIA firm or the launch of a de novo entity significantly easier and more turnkey.
The growth of this cottage industry, coupled with some of the perceived benefits of operating an RIA — like stronger long-term economics, customized technology and an overall higher degree of freedom, flexibility and control — put the IBDs on notice.
That is, the old school playbook needed to be amended so firms could retain a competitive edge in the fierce recruiting wars and maintain their current slate of advisors.
As a result, IBDs have taken steps to evolve their business models. And with the recent run of consolidation, the largest and most well-known IBDs are demonstrating their staying power and ability to use scale, resources, capital and recruiting aptitude to reenter the conversation as legitimate competitors to firms in the RIA space.
IBDs have made five key changes that are resonating with advisors:
1. Better economics
IBDs largely make money by capturing override revenue on total production, assessing administrative and platform fees on advisory assets, ticket charges and, of course, net interest margin and revenue sharing arrangements with product providers.
While IBDs add immense value to their affiliated advisors, there has always been a delta between the economics of operating on an IBD platform vs. in the RIA space — where advisors capture a 100% payout and often avoid the costly administrative and platform fees.
Of late, we’ve seen the IBDs lower their admin and platform fees considerably, rollout a large swath of no- transaction fee (NTF) funds — thus closing the gap between the net economics of operating an RIA and running a practice at an IBD.
As a result of the DOL Fiduciary Rule, some BDs have even gone so far as to “bundle” their internal charges into one easy-to-understand number for advisors (to include grid override, admin fees, platform fees and ticket charges).
2. The ability to start an RIA and work with multiple custodians
Most IBDs are self-clearing or use a third-party clearing platform such as Fidelity or Pershing. When an advisor joins an IBD, he is agreeing to “remain on platform” for custody/clearing, compliance, investment solutions and products.