Financial Advisors have a lot of choices when it comes to creating the business model that works best for their lifestyle and business appetite. Work/life balance and upside financial potential, are two of the many reasons financial professionals decide to go independent. Driven by a growing demand for personalized, unbiased financial advice, the number of registered investment advisers (RIAs) has increased steadily since 2000, from over 6,000 advisors to over 15,000 today, according to the U.S. Securities and Exchange Commission. Many of these financial advisors seek greater independence and control over their work, which is why there is also a trend of advisors leaving traditional brokerage firms to start their own independent business or join up with an established RIA firm.
In fact, according to a report by Cerulli Associates, the number of independent RIA firms has grown at a compound annual growth rate (CAGR) of 2.4% over the last decade, while the number of advisors operating at independent RIAs has grown at a CAGR of 5.2% over the same period. Despite this trend, the majority of financial advisors, currently still work for large brokerage houses.
Employee / Advisor at a traditional brokerage house
Working for an established financial services provider – sometimes known as a “wirehouse” –can alleviate some of the pressures of running one’s own business. Other perks include training and mentorship, in-house custodial and compliance services, and a salary and bonus structure that can be relied upon. Some firms also offer lead generation and marketing services to their advisors. The cons, however, can be steep, including the loss of autonomy and control that come with being the captain of your own ship. These advisors also don’t get to choose the products and services they offer to clients and a portion of their commissions will be retained by the firm.
The typical payout percentage for financial products sold by financial advisors at large firms like Merrill Lynch or UBS can vary based on several factors, including the advisor’s level of production, the types of products sold, and the specific compensation plan of the firm. Generally, these payout percentages are part of a structured compensation grid that aligns with the advisor’s revenue generation and length of service.
For example, at UBS, the payout can range within a grid system where advisors might retain a certain percentage of what they raise from customers. The standard grid could include multiple levels, with payout percentages spanning from around 28% to 50%, according to AdvisorHub. These percentages can be influenced by the advisor’s total revenue, with different thresholds set for various levels of production. Similarly, AdvisorHub reports that Merrill Lynch’s compensation plan may offer a cash grid that pays between 34% and 51% of the fees and commissions generated by brokers. Adjustments to these grids can occur annually, reflecting the firm’s strategic focus on growth and productivity. It’s important to note that these figures are indicative and can change over time. Advisors may also receive additional compensation through bonuses, deferred compensation, and other incentives based on their performance and business growth.
Financial advisors considering a move or those just starting out should carefully review the compensation details provided by the firm and consider how the payout structure aligns with their career goals and business model. It’s also advisable to consult with industry peers or a compensation consultant to get a clearer picture of the current standards and practices.
Independent business owner / financial advisor
Many financial advisors choose to work completely independently. They want to maintain total responsibility and control over their business. They also want to choose the products and services they offer their clients and the work/life balance that suits them best. The independent model allows advisors to form strong bonds with their clients and to conduct business in a way that aligns with their personal vision, goals and values. Independent advisors also tend to earn more, because they keep a larger portion of their revenue than they would working for a large brokerage house.
While having total control may be appealing, there are some cons. Being on your own means you are more vulnerable to the pitfalls of a down economy. You are also responsible for all of the operational and compliance burdens of the business, which can eat into the time spent with clients or seeking new ones.
It may be helpful to think of the wirehouse model as the far left end of the barbell, and the fully independent model as the far right end of the barbell. There are, however, some middle-of-the-barbell options that can help advisors strike a balance between reward and risk, aiming to get the best of both worlds.
Quasi independence: Hybrid advisor attached to an IBD
An advisor might decide that a good “happy medium” would be to move from a wirehouse and become a registered representative of an independent broker/dealer (IBD). Compared to the wirehouse world, this option could provide:
- Greater autonomy and flexibility than a wirehouse
- Broader product range than a wirehouse
- Better compensation structure than a wirehouse
- Regulatory compliance and operational support
- Professional development opportunities
- Economies of scale through pooled resources
It’s important for advisors to carefully consider their business goals, client needs, and personal working style when deciding whether to affiliate with an IBD. The right partnership can provide the support and resources needed to build a successful and sustainable practice. While associating with an IBD can offer financial advisors a range of benefits, but there are also potential downsides to consider. For instance:
- Geographic limitations
- Compliance restrictions
- Marketing process lags
- Complexity in building the advisor’s desired brand
- Product restrictions
- Potential for conflicts of interest if the IBD has proprietary products that it encourages advisors to sell
Supported independence: Advisor attached to an established RIA firm
Now that the RIA world has matured and grown, more and more financial advisors are affiliating with an established RIA firm like Crux Wealth Advisors. This model offers the perks of independence, while also providing a support system to the advisor.
- The RIA firm can assist with custodial and compliance services as well as licensing, registrations, bookkeeping and accounting, tech stack, office space, marketing, brand strength, staffing, training, and community.
- The established RIA firm can also provide transition support when the advisor joins them, a continuity plan if ever needed, and a succession plan when the time comes.
- There will be, of course, a revenue share for these services, and depending on the structure of your deal there could be a loss of some control, but many find the pros far outweigh the cons.
Career path plays a role
Each of these three models have their own perks, benefits and challenges. Finding the right fit is often dependent on where an advisor is in their career trajectory. For those making a career change into the field, independence is often sought after. But they may need assistance building their business. That’s why greener advisors often decide to join an existing RIA firm, so they can take advantage of the support needed to launch their new career.
Independent financial advisors who are mid-career, but are having a hard time scaling up their business, may also want to join an existing RIA firm. Doing so allows them to spend less time on middle- and back-office tasks and more on growing their business. Advisors who are eyeing retirement in the near future, often also choose to tuck-in with a larger RIA, adopting their brand and methodologies, so that their clients can get acclimated to the new firm, prior to their advisor gliding out into the sunset.
One thing that’s for sure, the financial advisor field is continuing to grow. Cerulli projects that while the headcount of industry financial advisors will remain relatively flat over the next five years, independent and hybrid advisors are projected to gain the most headcount marketshare. In fact, Cerulli projects that by 2027, those models will control nearly one-third (31.2%) of intermediary asset marketshare.
Contact Travis for a confidential conversation.
Author
Travis Alexander, CRPC®
CHIEF EXECUTIVE OFFICER
Crux Wealth Advisors (www.JoinCruxWealth.com), is a registered investment advisory practice specializing in fiduciary financial planning and investment management. Led by Travis Alexander, MBA, CRPC®, Founder and CEO, the Crux mission is to help advisors and their clients achieve financial independence on their terms. Having affiliated with Raymond James Financial Services, Inc. in 2016 as a four-person team managing approximately $100 million, the firm is now fully independent as an SEC Registered Investment Advisor. Alexander earned an MBA from Gonzaga University, a bachelor’s degree from the Hugh Downs School of Human Communication from Arizona State University, and the Certified Retirement Counselor designation from the College for Financial Planning. With four locations across the USA at the current time, Crux Wealth Advisors is growing rapidly and welcomes inquiries from advisors and advisor teams seeking a supported independence RIA model. Crux specializes in providing financial advisors with continuity and succession plans.
