What You Need to Know
- Many of the larger BDs are shutting the door on dual clearing.
- Marketing is easier and paperwork less burdensome on the RIA side.
- The requirement for CFPs to uphold a fiduciary standard will further drive advisors to go RIA.
Two primary threats to independent broker-dealers are advisors retiring or going the RIA/dual-clearing route.
Even though many broker-dealers have become friendly to advisors who to want operate with a hybrid approach, many of the larger BDs have been shutting the door to dual clearing, which generally lets advisors custody advisory assets with the BDs’ own clearing firm(s) and at TD Ameritrade, Schwab, Fidelity Institutional Wealth Services (IWS) or Interactive Brokers.
Broker-dealer profit motives are the primary driver of the split from dual clearing since assets held with their own clearing firm are far more profitable than those held outside of it.
With certified financial planners now required to uphold a fiduciary standard of care for client investments, we see a clash of interests that will further drive advisors to go RIA and hold advisory assets outside of their BDs’ clearing firms. As a recruiting firm evolving deeper into the RIA space, these five factors are what we see as the primary drivers of growth in the RIA/dual-clearing model.
1. Greater Transparency
In a recent conversation with an advisor who’s been considering going RIA, I asked about client costs for the unified managed accounts, or UMAs, he works with. He had no idea what they are and the same is often true when I ask advisors about the administration fees for advisor-directed assets.
Further muddying the waters are broker-dealers charging platform fees, markups on third-party money management fees and markups on mutual fund management fees, for instance.
The RIA world reduces many of these costs and does away with platform fees and markups. Advisor-directed administration fees can run from 10 to 20 basis points on assets in the clearing firm world.
But in the RIA world, a flat $50 to $100 per account annual charge is the norm, which means the cost for clients in this one area drops by up to 90%. Costs for separately managed accounts, or SMAs, and UMAs are similar to wirehouse fees (which tend to be substantially less than at many IBDs). Also, there’s no more mystery when it comes to these expenses; both advisors and clients get full transparency about what they are being charged.
2. Broader Product Choices
Around 2016, driven by proposed regulations at the time, many broker-dealers cut back on the number of money managers they worked with, which resulted in them making more profits on revenue-sharing arrangements via the consolidation of their assets with fewer vendors.
We saw a sharp drop from as many as 200 third-party money managers selling agreements per BD down to a range of 20 to 50. BDs also favored larger managers with long track records.
If you’re an RIA with dual clearing, the world can be your oyster. You’ll have a much broader selection of managers, as well as new, up-and-coming managers with stellar performance histories and/or unique allocations like highly concentrated positions (i.e., an investment with just 15 stocks).
Many manager choices that advisors have access to at Schwab/TD Ameritrade or Fidelity IWS are not available at broker-dealers because the managers may not be large enough or have long enough track records, or the BDs simply don’t want to add more managers to their platforms.
3. More Turnkey Options for Less Money, Time and Liability
Historically, when you wanted to go RIA, you needed to establish and maintain your own RIA with all the setup and ongoing compliance being your responsibility or being outsourced to various vendors.
Over the past few years, there’s been a growing trend of more advisors joining large RIAs, where they save a great deal of time and liability while bringing cost savings to their clients and their businesses thanks to the scale of these big RIAs.
For around 10 basis points, these turnkey RIAs provide compliance, errors and omissions insurance, performance reporting/billing via Black Diamond or Orion software, private banking options and technology.
When you consider the fact that many broker-dealers charge 10 basis points or more for performance reporting and billing alone, you see the real value in affiliating with a large RIA for both advisors and clients. The time savings and reduced liability alone make the turnkey RIA option very attractive.
4. Limited Paperwork
The amount of paperwork needed to transfer and open accounts can be oppressively long at many broker-dealers, who mistakenly believe that the greater length of paperwork will protect their ties to advisors and clients.
One advisor told us that he wants to bring on millennial clients. But when these prospects see the stack of forms that must be reviewed and signed, they are turned off. Paperwork complexity raises red flags to potential clients, eroding trust.