More advisors and firms are moving to fee-centric affiliation models, dropping their FINRA registrations and focusing on providing investment advice for a fee. What is the driver behind this trend?
I recently spoke with Alex Hansen, SVP of RIA Compliance for Commonwealth Financial Network, to learn more.
Alex joined Commonwealth in September 2021 as senior vice president of RIA compliance. Bringing extensive leadership and expertise in the investment advisory space, he supervises all aspects of RIA compliance at Commonwealth, ensuring Commonwealth stays ahead of all financial industry developments and SEC regulations, while also responding to the evolving needs of its advisors and staff.
Here’s what he had to say.
Tell me about your career path, what led you to Commonwealth Financial Network, and your role there.
After law school, I was interested in the finance industry and in the business financial advisors do. I happened to graduate from a school that was about 10 minutes from Raymond James. I got my first job there and worked in a number of capacities in both compliance and supervision. I had a stint at Citigroup in Tampa as well, learning about the wirehouse model in a consumer bank. Prior to joining Commonwealth, I was the CCO of Dynasty Financial Partners. I've gained a well-rounded view of the various affiliation models and ways advisors can engage with firms in the industry.
In 2021, I had the opportunity to move back from Florida to where I grew up in New England, with Commonwealth, and the opportunity was just too good to pass up. I've been here ever since, and I'm loving my time here.
What is a fee-based advisor and how does that differ from a fee-only advisor? Are they both fiduciaries?
It's a little bit of splitting hairs, but there are several organizations in the industry who use fee-only to describe advisors who only do advisory business for a fee, and do not sell any commission-based products. That's not just broker-dealer products, which fee-based advisors don't sell, but also fixed insurance. When we talk about fee-based advisors, we're talking about advisors who only do fee-based accounts, but they may have outside business activities like fixed insurance that would preclude them from marketing themselves as fee-only. They are both fiduciaries, with respect to their investment practices, but fee-based advisors may offer some commission-based products in ancillary business lines.
What is the most common reason that an advisor would move to a fee-based practice?
It comes down to simplicity. You're dealing in one main regulatory regime. You're acting in the capacity of a fiduciary. You're not considering both the rules from the commission-based side and an investment-advisory side. If you find that your practice is gravitating towards mostly investment-advisory accounts, and fewer and fewer broker-dealer accounts, the next logical step is to look at your practice and determine if the number of broker-dealer accounts justifies the regulatory responsibilities that you have from a FINRA perspective, or if it would be simpler for you and for your practice to move to fee-based or a fee-only practice.
What types of businesses can a fee advisor do? What happens if they drop their FINRA registration?
There is very little that hasn't been replicated on the fee-based advisor side. The insurance companies have started building fee-only annuities where the insurance company serves as the broker-dealer, and then assigns the advisor to manage the subaccounts post-sale. There's fee-based variable universal life (VUL) now. The only thing that you can't do is sell a product that requires a series 7 and pays you a broker-dealer commission. From a product perspective, all the same securities are available to you. Even alternative investments – most of them would have a fee-based option that could be sold in an advisory account. There's very little you lose from a straight-up product perspective.
What might differ is the specific subset of investments that are available to you. Not every annuity that's available on the brokerage side will be available on the fee-only side. You might have to find some different products or different carriers to use. But generally, those investments are there on both sides of the house.
What is the difference between being an investment advisor representative (or IAR) and an RIA?
An investment advisor representative generally would join a larger RIA. In each instance, the advisor, him or herself, is an IAR. It's whether you are, with your practice, joining a larger firm that you are not CEO, CCO of, or if you're starting that entity yourself and wearing those multiple hats, where you're the advisor, the CEO, the CCO, and running the whole show.
A lot of firms have both models, where they'll service RIAs only as a service provider, and IARs only as their registered investment advisor. It's a little bit of alphabet soup. If you throw IRA in the mix, everybody just loses their head. It's basically whether you are running your own firm or are still a representative of a larger firm.
What changes, from a compliance perspective, once someone moves to a fee-based model?
Depending on the model, the changes will vary. I'll start with the RIA only. When you move from a dual, as it's colloquially called, where you're a rep of a broker-dealer and an RIA, to a fee-based model where you are running your own RIA, you lose the compliance coverage of the firm through which you were registered previously. You are responsible for your own compliance program. You register with the state regulator, or if you're over $100 million, the SEC. You are responsible for responding to any inquiries from that regulator. You're responsible for developing a compliance manual, an ADV, a CRS, and monitoring that compliance program on a regular basis. For some people, that's energizing. You own your own ADV, you own your own compliance program, you make the decisions as to what you offer and what you don't offer, and your fee structures, et cetera. For some people, that's terrifying – having the SEC show up on your doorstep and you're the one responsible.
For an IAR, the functional change is you no longer have to keep up with the FINRA side of the house. Now you're still going to be responsive to a firm with a full compliance program. You're going to have to have a code of ethics, you're going to have to report your political contributions, and all those details that you're doing today. But you don't have to do things like FINRA continuing education. The structure of your branch examinations might change slightly. It's just a smaller subset of the compliance responsibilities you have as a dual.
What are the considerations someone needs weigh before they start their own RIA?
The biggest one is capacity. There's a lot of time that's required for your clients. Your clients are probably the most important thing, the lifeblood of your practice. Every incremental responsibility you take on outside of the role of financial advisor is less time that you get to spend on the business and on your clients. Do you have the people in your office who could help you with the compliance responsibilities? Who could help you with running the practice from soup to nuts? Or is your staff running a little lean? Do you have to staff up and add maybe somebody with a compliance background, or somebody with more of an operations background, to help you with some of the things that maybe you don't have experience with?
Typically, what I ask advisors is whether there is something that you're looking to do that an RIA can do, that you can't do with the firm that you're affiliated with today. Those things might be more expansive marketing, whether it be social media or otherwise. There may be access to certain investments that you might not have through your current platform, things like alternatives that maybe aren't available. I call them a “friction point.” Is there something that is making you want to look or go in that direction? Because otherwise, you're taking on all that liability, and all that compliance burden, and all that time away from your clients for nothing. If there isn't something that you can't do that you want to do, or that's core to your practice, you're just taking on a lot of extra work.
Ultimately, it's your business, it's your practice. Do whatever you want. But when someone asks me why someone would go RIA, I typically point to what is it that you can't currently do that would optimize your business or bring you to that next level, that being an RIA would allow you to do. Sometimes they have an immediate answer, and it's perfectly clear and you go, "Yeah, you should go RIA." Other times you say, "You might want to check with your firm, you might be able to do that and save yourself the three to six months of work it takes to stand up an RIA. Save yourself the ongoing headache of having 10 client meetings in a week when the SEC calls and says, ‘Hey, we're going to have a call on Tuesday and your exam's going to start, and your world's turned upside down.”
It's a consideration, and advisors who have questions about the pros and cons should talk to their peers and talk to the resources that they have with their own firm. Talk to Commonwealth, because we could certainly tell you about our affiliation options and how we could help you through that decision. But it is a personal decision. It's what do you value and what do you need for your practice to grow.
For someone who's looking at a three- to six-month ramp up period to start their RIA, tell me what a partner like Commonwealth would add to accelerate in that journey. What are the trade-offs versus just starting their own RIA and being completely independent?
Having a partner saves you so much time. It's a scale move, where we have all of these wonderful subject matter experts (SMEs) that act as an extension of your practice. To navigate the compliance waters, I have a compliance consulting team that helps our Commonwealth advisors stand up their own RIA should they choose to. They don't have to go out and get a third-party compliance consultant. We have an advanced-planning team with an alphabet soup of letters after their names that put mine to shame. They're attorneys, they're CPAs, and they can help with complex planning issues and questions from high-net-worth clients. We've got a retirement plan services group that can help with the 401(k) business. We have a great wealth management group, research, and all these things you would need to cobble together if you didn't have a partner.
If you're going direct to a custodian, the custodians are great. They offer a lot of resources for RIAs. But our curated group of SMEs is what the selling point is. We do a good job supporting our RIAs and IARs. As we look to lean in further to that business, we're always looking for additional ways to add value in that space.
If there's one key takeaway that you would like to leave with our audience of advisors about how they can assess whether they should move to a fee-based model, what would that be?
Take a look at your practice and what's important to you from a capabilities perspective. There's a lot of advisors who I talk to who could never see going fee-only or fee-based because, when they sit down with a client, they want to have the option to offer a commission-based brokerage account or an advisory account. There are other advisors whose client base is heavy planning, and advisory accounts and advisory relationships make sense almost unilaterally across the board. It's those people where they don't necessarily consider brokerage accounts anymore. It’s a legacy hanging on from the way that they started in the business. In that instance, it might make sense. It might be easier to go fee-only or fee-based, and they can hone their message and talk about how they serve their clients in a fiduciary capacity, versus having that dual relationship.
It depends on the story that they want to craft and how they want to hold themselves in the marketplace. But there's still a robust dual-registrant business in the IBD and wirehouse spaces. The trend is toward fee-based and fee-centric, but by all means, the larger segment is still the dual segment. There's a reason for that because there's still a place for both types of business. It comes down to the individual needs of the advisor and their team. If you have legacy products that you have sold to clients that are great, and you want to keep offering those and they're not available on the fee-only side, dual might be the right home for you for a while. But it's always good to pick your head up and look at the options. Do an internal survey of whether you have the things at your fingertips that you need to optimize your business. That's why firms like Commonwealth are here, to have that conversation with you, and try to help you find the right home long-term.
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Robert Huebscher is the founder of Advisor Perspectives and a vice chairman of VettaFi.
Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser, provides financial advisors with holistic, integrated solutions that support business evolution, growth acceleration, and operational efficiency. Privately held since 1979, the firm has headquarters in Waltham, Massachusetts, and San Diego, California. Learn more about how Commonwealth partners with more than 2,000 independent financial advisors nationwide by visiting www.commonwealth.com.
