Having been part of the financial services industry for 35 years, I have seen many changes. The arrival of discount brokers, the creation of “no-load” mutual funds, increased market volatility and industry consolidation (where have you gone EF Hutton) to name a few. More recently, I have noted the explosion of the regulatory state which has enveloped all of us. This bureaucracy has stifled productivity, reduced advisor compensation and basically sucked the energy and joy out of a great occupation. Like most of you, I had become frustrated and inefficient. I realized that the old commission based broker-dealer model is, if not dead, certainly dying. So, after being part of the broker-dealer world for over thirty years, I finally saw the light and started to explore other options. This led me to create a hybrid registered investment advisory “RIA” (Key Client Fiduciary Advisors LLC) in Oct of 2018.
So what is an RIA, and why is it better:
The important distinction between an RIA and a broker-dealer is that an RIA receives fees and not commissions (managed money vs transactions). As the graphic below illustrates, the relationship goes from the broker through a broker-dealer to a custodian, while an RIA goes from the broker through the RIA to a custodian. A typical advisory relationship provides less bureaucracy and a better compensation model than a broker-dealer model. A “hybrid” model has supervised persons of the RIA that are registered as investment adviser representatives of the RIA, and are also registered representatives of an unaffiliated broker-dealer. This allows reps to have clients in both places. This is the model that Key Client has adopted.
Most reps today at a wire house or even through an independent BD have something of a hybrid relationship. They have some percentage of their business in managed money (advisory) and also some in transactions (commissions). The concerning and frustrating problem for most reps we speak to is that they have the hybrid relationship with a broker-dealer…a large firm. This creates an environment where they receive the negatives of the broker-dealer relationship (like excessive oversight and bureaucracy) and do not get the benefits of a better compensation model and more flexibility. In other words, if you are a broker-dealer based advisor and do a decent amount of advisory business, you are being drowned in administration and are over paying your broker-dealer for the privilege.
I believe that most reps do not realize the damage that this overwhelmingly negative environment can cause to their performance and revenue. One of the things I have seen since making the change to the RIA world in myself and my cohorts is the benefit of increased freedom. Let’s call it being more entrepreneurial. The ability to get into different areas in the business, the freedom to communicate easier with clients, the ability to manage client assets in a more efficient manner all while being less tormented by clerks, auditors and compliance personnel.
Advisors who thrive in this model are more entrepreneurial and more self-motivated. They believe that they need less support from an entity like a wire house. They have an attitude that shows confidence that they know how to operate successfully and ethically. They also must have a desire to grow and develop their business. With these traits, an advisor can exploit the benefits of an RIA model and return the joy back into their career.
Key Client Fiduciary Advisors, LLC ((“KCFA”) is an SEC-registered investment adviser located in Fairfield, New Jersey. This blog post is limited to the dissemination of general information pertaining to KCFA’s investment advisory services. The information in this blog post should not be construed as personalized individual advice. A copy of our KCFA’s written disclosure statement as set forth on Form ADV, discussing KCFA’s business operations, services and fees is available upon written request.