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Industry Spotlight > RIAs

Thinking of Starting an RIA? Think Carefully

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What You Need to Know

  • The history of the broker-dealer business may be a lesson for RIA wannabes.
  • Larger margins are attractive to those who want to launch RIAs.
  • Beware of enhanced regulation that comes with more competitive business arenas.

A few decades ago, many advisors had their own broker-dealer. At the time, it was relatively simple to do, and because financial services was a sales-driven enterprise, it allowed advisors to stretch their margins and keep more of the revenue they generated for themselves.

Today, of course, it’s not so simple. For better or worse, regulators keep a much closer eye on broker-dealers, which means running one has become much more time-consuming and expensive, leading many to conclude that it’s not worth the effort. In part, that helps explain why the number of broker-dealers has dropped so precipitously over the years.

Since 2005, the industry has shed nearly 1,600 firms, according to FINRA’s most recent data, a decline of roughly 31%. Meanwhile, during this same period, the amount of working registered representatives has remained relatively static, down only about 4%.

Different Space, Same Story

These trends are instructive when considering where the RIA space is today — and where it could be heading. As the industry continues to focus on providing clients advice-based financial planning solutions, a burgeoning number of advisors now have either launched RIAs or have thought about doing so.

The reasoning will sound familiar: Many believe it will allow them to expand their margins, letting them convert more of the revenue they generate into profits. For some, especially those with plentiful resources, that could be true. For most, however, it is not.

There are a host of reasons for this — and they all mirror what has occurred within the independent financial services space over the past decade or so.

The first is that many corporate RIAs now offer top-notch services, products and tech platforms. This hasn’t always been the case. Whereas in the past, it perhaps wasn’t feasible for advisors in growth mode to rely on an outside partner to give them all the tools and flexibility they need to serve clients, today it is.

The second is a failure to appreciate the full scope of the responsibilities involved with running an RIA, including everything from obtaining extra office space, to managing staff, to performing all the product due diligence by themselves.

Interestingly, this isn’t as much a question of money as it is a challenge to find the time and acquire the skill sets to do all these things.

Many advisors get into this business because they are well-suited to serve clients and help people. They can be a CEO or chief compliance officer if they must, but it’s not what they do best. And once the weight of these tasks becomes more evident, many would-be RIA owners will likely opt for another solution.

Regulation Worries

The third — and perhaps most important — issue is related to the regulatory and compliance environment. As advisors who launched broker-dealers during the 1980s and 1990s discovered, the more competition in a particular area, the more intense the regulatory burdens become.

Therefore, anyone who thinks running an RIA today is rife with complexity should wait a few more years — it will eventually become much more costly, time-consuming and difficult.

Ultimately, in today’s landscape — where the priority for many is to deliver advice — the question for most advisors is not whether they need an RIA (they do). Rather, it’s whether they should have their own or someone else’s.

Some corporate RIA platforms are more than capable of serving entrepreneurial-minded advisors well, allowing them to keep their “name on the door” and maintain their brand while taking over many of the costly tasks that can sometimes squeeze margins.

For many advisors, though, there is no doubt that owning and controlling everything remains an attractive prospect, despite the hurdles.

But if we see a shakeout in the RIA space like the one that occurred among broker-dealers, that could make the “my own or someone else’s” decision a bit easier for everyone.

(Image: Shutterstock)

Clive Slovin is president and CEO of SFA Partners, an Atlanta-based shared services provider to a family of companies focused exclusively on empowering independent financial advisors, including The Strategic Financial Alliance (SFA), Strategic Blueprint and SFA Insurance Services.


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