3 Ways RIAs Without a BD Have an Edge

Some broker-dealer/RIA firms have been trying to transform their identity away from the broker-dealer side of their businesses to the RIA side — essentially saying they’re RIAs that also happen to own broker-dealers.

Marketing maneuvers like this reminded me of a headline I saw last year: “All the Cool Kids Are Going RIA.” On the surface, these broker-dealer/RIAs want to give the appearance of being cool or more sophisticated by being mostly advisory focused while minimizing the broker-dealer side of the uncool fringe.

Of course, a BD/RIA can identify itself however it cares to. In my view, though, it would be more constructive for a BD/RIA to show how it differs from independent RIAs that don’t own broker-dealers in a few key areas.

1. Dual Clearing

All the independent RIAs that Henschen & Associates recruits for offer Fidelity Institutional Wealth Services and/or Schwab as primary advisory custodians. But many BD/RIAs continue to stay away from outside RIA custodians and work only with clearing firms. BD/RIAs seem to resist making these outside custodians available to their advisors for profitability reasons.

Within clearing firms, there are numerous profit centers embedded via markups and platform fees. If advisors are allowed to custody advisory assets at IWS or Schwab, the broker-dealer misses out on substantial profit centers.

These profit centers are usually paid for by advisors’ clients, with one specific BD profit center worth mentioning: money market sweep accounts. These sweep accounts have become major profit centers for BD/RIAs of late thanks to the recent interest rate increases; the BD/RIA pockets most of this revenue and clients get a small percentage.

Fidelity IWS, for example, takes no haircut on money market sweep accounts, and the client gets all the revenue — which can be attractive to anyone wanting to offer clients the possibility of having more financial resources in their pockets.

The transition to going RIA and using custodians like Schwab/IWS is often done for fiduciary reasons. Motives include greater transparency and better pricing for clients (such as no ticket charges on stocks/ETFs and no markups/platform fees); in other words, advisors have fewer conflicts of interest and more choices.

In contrast, BD/RIAs may lack these qualities unless they’re open to dual clearing without platform fees for holding advisory assets at outside custodians. The overwhelming selling point to some custodians is brand recognition. Clients see commercials or branches with these custodian brands, while clearing firm names generally ring hollow in my view.

2. Technology

One RIA told me they think the technology experience offered by the large custodians is much better because it’s designed with the end-user in mind; clearing firms design technology for the independent broker-dealer/RIA.

Paperwork at the major custodial firms is generally shorter and easier to track and understand than clearing-firm paperwork. Schwab and IWS enable advisors to do everything on a tablet. These firms also offer better client experiences when it comes to their statements and websites, which has been communicated to us by advisors that have gone RIA.

Independent RIAs are also big on outsourcing technology, while some BD/RIAs prefer proprietary technology. Outsourcing technology has been a huge cost-saver for our industry, resulting in greatly increased efficiencies.

Developing your own technology is not only time-consuming but immensely expensive, though you can tout your ability to customize technology for advisors by going proprietary. Since the industry is full of independent tech companies solely focused on this one area and constantly introducing innovations, it doesn’t seem beneficial to reinvent the same technology in-house.