The advisor business is a broad one, with many types of investor and advisors. Different business models have evolved, to both give the investor a good experience, but also for advisors to be able to choose the model that works best for their personality and their beliefs. There is no “right” firm business model – however, there is the one that is “right for you.” 

In this blog post, I will scratch the surface of these firm business models. 

Compensation models

There is an old joke that the financial services industry is so bad at marketing, it categorizes itself by how its advisors are paid. Advisors are either commission-based or fee-based, so let’s start there:

Commission-based: Compensation comes from commissions from the investment products sold to investors. These commissions can be both front-end (sales) commissions and ongoing back-end (trailing) commissions. There is a broad range of investment products, including mutual funds, annuities and insurance products that can be sold this way. 

Fee-based: The advisor is paid based on the advice services that they offer, not specific products. There is an array of advice services, from investment advice through financial planning and full wealth management. Compensation is mainly assets under management (AUM) or a flat retainer. Many advisors who are fee-based sell insurance (eg term life insurance) as they feel that is part of a full financial plan. A typical AUM fee is tiered, starting at around 100 basis points and modified by account size. A variation of fee-based is fee-only – the advisor is only paid for advice services and commits to not having any commission-based business (including insurance).

These two ways of being compensated are kept separate and are regulated differently. However, the now defunct DOL rule and the new Reg BI rule are intent on closing the gap.

Traditional business models

As the industry has evolved, regulations have been crafted to help ensure that investors are protected. Not only does regulation determine the way that advisors can be compensated, it also determines what services different advisors can provide. This has led to the different business models that advisors use today, and the organizations that have sprung up to support them.

Independent BDs Hybrid RIAs

Independent B/Ds
A B/D-affiliated advisor works with an Independent Broker Dealer (IBD) that provides compliance, a technology platform for commission-based assets, due diligence and approval of other technical products and advisory administration. The IBD holds a corporate RIA, allowing the advisor to deliver fee-based advice under their guidance. In this model, the IBD strictly controls how the advisor manages their assets, as they are responsible for the compliance. The advisor enjoys the support of the other advisors affiliated with the IBD, who provides marketing and practice management support. For these services, the IBD takes a “hair-cut”* from their payout grid, the amount of which depends on the commissions earned, the type of products and the assets under management. The grid payout can vary greatly, from around 86% to 95%. 

IBDs are regulated by FINRA. This model is attractive for advisors who are starting out and need a good guide, or for an advisor who appreciates the community of advisors who operate in a similar manner to themselves. IBD conferences are well attended, as advisors attend to visit with other advisors, as well as to learn from and be guided by their IBD.

Standard Hybrid RIA
In the standard hybrid model, the advisor holds the Registered Investment Advisor (RIA) registration, which gives the advisor more control over the fee-based assets. The IBD provides the platform for the commissionable business. A few IBDs will allow an advisor to use their own RIA for financial planning only. Depending on the IBD, an advisor may or may not be able to choose where they custody their fee-based business. 

For the standard hybrid model, even though the advisor holds the RIA, the IBD often charges some (lower) fee for the oversight of their fee-based business. Their rationale is that to provide effective compliance across a client that includes commissionable and 
fee-based services, they need a holistic view of the client. The hybrid solution is sometimes a transition point between a B/D-affiliated advisor and a fee-only RIA. However, some advisors are of the opinion that they can only do the best job possible for their client if they are able to offer them a full range of products, including annuities and alternative investments. For them, the hybrid model is their forever home.

Independent RIA
An advisor who has registered their own RIA, and has no affiliation with an IBD, has the most independence. They only focus on fee-based business and are considered a full fiduciary – they must act solely in the best interest of the client. A B/D-affiliated advisor needs only to ensure that the products they sell are suitable for the client. An RIA must maintain their own compliance, and does not have the support of an IBD for technical platforms. Smaller RIAs are monitored by state regulators; larger RIAs, by the SEC. Although the RIA has little support (some people joke that RIAs are the industry’s loneliest people), they also have the most control. They are in charge of their own investments and can be creative in the different advice services that they offer. 

New business models

Highest Net Income Lower Business Risk

New Hybrid RIA
As the fee-based RIA model becomes more popular, IBDs are looking for more ways to be attractive to those advisors. The standard hybrid model is one way. Another way is to give the advisor more freedom and less cost for their fee-based business. Some IBDs, such as Commonwealth, are providing platforms to RIAs, even if they conduct no commission-based business. Other IBDs, such as PKS Investments, allow you to run your own RIA, but keep only your commission-based business at the IBD. They have no oversight of the RIA business. These new types of hybrid allow the RIA more flexibility.

Independent RIA (with support)
One of the biggest concerns for RIAs is the lack of support. For larger RIAs, this is not as big a challenge, as they can manage their expenses by paying out fixed fees for technical platforms and managing their own investments. It is much harder for a smaller RIA to create their own infrastructure and support. 

One whole group of platform rollup firms provide this support: Focus Financial, United Capital (now bought by Goldman Sachs), Dynasty Financial Partners and HighTower, to name a few. These firms have different models, from buying out the advisor and converting them to an employee to providing platforms for a percentage of revenue or a tiered flat fee. Other organizations are more network oriented and provide support, whilst allowing the advisor to keep their independence by providing a looser range of services. Examples of this are XY Planning Network and Chalice Financial Network.

SEI is expanding its services for RIAs by rolling out an RIA Business Platform that provides all the business services that a RIA may need, a flexible investment solution and its new technology platform.

Advisor-led panel shares experiences 

There are many more variations and nuances of these business models. I have just provided an outline as a teaser for a broader discussion of what business model is right for you. We thought it was complex enough that we should conduct a webinar with a panel of three expert advisors who each operate in a different model. Our advisors on the panel are:

They will guide us through why they chose the model they are in, and if they think they will change in the future. We hope it offers advisors a guide to help ensure they are in the best model for their clients and their firm.

The webinar is on Wednesday November 6 at 4 p.m. (Eastern). You can register here. We look forward to continuing the conversation with you.

Register Now

Legal Note

1 basis point = 0.01%. Investing involves risk including possible loss of principal.
Mitch Walk, Kathy Troxell and Patrick Tucker are current clients of Independent Advisor Solutions by SEI.
*Taking a haircut is accepting a valuation or return that is less than optimal.


Legal Note

Information provided by Independent Advisor Solutions by SEI, a strategic business unit of SEI Investments Company. The content is for educational purposes only and is not meant to provide investment advice or as a guarantee of any specific outcome. While SEI welcomes comments, SEI is not responsible for, and does not endorse, the opinions, advice, or recommendations posted by third parties. The opinions expressed in comments are the view(s) of the commenter(s), and do not represent the views of SEI or its affiliates. SEI reserves the right to remove any content posted by users of this site in its sole discretion.

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