Two Independent Pathways for Advisors to Consider

When it comes to freedom and control, there are key differences amongst the independent broker dealer (IBD) and registered investment advisor (RIA) spaces that every advisor should be aware of.

It’s natural for advisors to wonder if where they practice is still the best place to build their businesses and serve their clients. Even advisors who are already operating within an independent model might find themselves questioning whether it’s “independent enough,” or provides them with what they need to achieve their goals.

And with an industry landscape that has expanded well-beyond most expectations, there are many exciting options that offer the potential to fully exercise one’s entrepreneurial DNA—each at varying levels of autonomy.

Yet in a world of choice comes confusion, raising the question amongst prospective breakaways and already independent advisors:

“Which is right for my business: the independent broker dealer (IBD) model or the RIA space?”

And it’s an important question to ask, because there are several key differences between the two models that are important for advisors to be aware of:

  1. IBDs offer transition money (upwards of 35% upfront and in some cases as high as 125%) as incentives that RIA custodians and most RIA platforms do not.

To be sure, an advisor can monetize by joining a national RIA firm like Rockefeller Capital Management, but because it’s a W-2 model, that advisor would not be an independent business owner. And there are certain RIAs with deep pockets that may be willing to underwrite recruitment deals for the right teams.

  1. The IBD space offers more “cover” and support for a breakaway broker or already independent advisor.

It tends to feel more familiar and therefore less overwhelming than a move to the RIA space since IBDs handle compliance/supervision, offer turnkey tech stacks and have ready-built investment platforms.

  1. Sophisticated buyers typically look towards the RIA space because they don’t want to be beholden to the IBD’s policies or share of the economics.

Those looking to maximize enterprise value at day’s end will ultimately attract more deep-pocketed buyers (i.e., private equity investors, family offices, large national RIA firms) in the RIA channel as optionality drives valuations. And since advisors joining or leaving an IBD must repaper their businesses, this can turn off a prospective acquisition partner as well.

  1. Although less restrictive than being an employee at a traditional brokerage firm, the IBD space can still feel too limiting for some advisors.

Those advisors looking to build something with complete customization may feel hindered by an IBD. That said, the limitless options in the RIA channel can be daunting for many—which is why a more curated approach via an IBD or supported independent platform which offer turnkey services to build and launch a business may be appealing.

  1. With a FINRA-regulated broker dealer as the underpinning of the IBD model, advisors on these platforms are tied to the IBD’s interpretation and implementation of agency rules, as opposed to RIAs which are regulated by the more “business-friendly” SEC and therefore set their own compliance policies customized to their specific businesses.

For example, advisors in an IBD model have the option to self-brand and market with greater impunity than they could in a traditional firm; however they are often subject to some level of review and oversight. Whereas RIAs have the highest level of autonomy to creatively communicate with existing and prospective clients as well as potential recruits. Likewise, in the case of outside business activities (OBAs) certain business lines are prohibited under a broker dealer but may be allowed as an RIA.

  1. While there are a fair number of top advisors in the IBD world, the average production per advisor is materially less than other industry channels.

IBDs have won their share of large teams, but by and large, the most significant breakaways land in the RIA or RIA hybrid space because of the ability to fully customize and access true open architecture. This is particularly relevant for those practices serving ultra-high net worth clients with more complex needs—they often benefit from limitless options in the areas of asset custody, trust services, alternative investments, SMAs and banking/lending. Conversely, IBD advisors must remain “on platform” and only use what the broker dealer makes available.

  1. Being a business owner can often feel isolated, while there can be a greater sense of community in the IBD space.

Quality IBDs put on numerous conferences, top advisor recognition trips, training seminars, and help to connect likeminded business owners to foster community and idea sharing. That said, advisors should pay careful attention to the makeup of the IBD’s target advisors to ensure they are aligning with the right group. RIA custodians do put on their own set of events and most RIA advisors create their own community of support.

In an evolved landscape, firms traditionally thought of as independent broker dealers have begun to adopt certain “RIA features,” such as more open technology platforms, multiple custodian options, and more turnkey support for those employee advisors looking for assistance in launching a de novo enterprise.

Likewise, the supported independence or hybrid RIA space allows advisors to reap the benefits of business ownership and sovereignty with turnkey platforms, community and support.

While in many cases the lines have been blurred between these two channels – especially as the industry has migrated to a deeper focus on advisory vs. brokerage business – it often comes down to asking yourself a few key questions:

  • How important is complete autonomy?
  • What level of support and community do I need?
  • What level of customization am I after?
  • What types of products and services are my current clients and ideal prospects looking for?
  • What resources will I need to launch and grow my independent business?
  • How important is transition money?

Ultimately, whether choosing the IBD or RIA space, advisors will still have greater freedom and control than in traditional employee models—and with the ever-expanding waterfall of possibilities, the potential to find that right fit is more achievable than ever before.

Related: Emerging Enterprises: Independent Paths for Advisors Managing $100mm or Less