Advisors Are Going Independent, With No Regrets

Advisors Are Going Independent, With No Regrets

Plus 5 Trends Behind the Growth in RIAs

Advisors Are Going Independent, With No Regrets

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Reviewed by Pamela RodriguezFact checked by Suzanne KvilhaugReviewed by Pamela RodriguezFact checked by Suzanne Kvilhaug

In the shifting landscape for financial advisory services, many advisers are boldly deciding to break away from traditional broker-dealer or big advisory firm models and create their own registered investment advisor (RIA) services. This shift toward independence is driven, they say, by a desire for greater autonomy and the chance to build a business aligning with their values and vision, plus other trends we’ll discuss below.

“Independents continue to evolve in new and interesting ways. What remains the same is that advisers are seeking independence because it offers them really the opportunity to build the business their way and see the experience through their clients’ eyes,” Jon Beatty, chief operating officer of advisor services at Charles Schwab (SCHW), told us.

The decision to go independent involves leaving behind familiar support systems and the infrastructure of established firms. However, those who have made the leap report high levels of satisfaction and fulfillment in their new roles. Independent RIAs paint a compelling picture of the rewards that await advisers willing to embrace the challenges and prospects of independence.

Key Takeaways

  • Financial advisers have more and more options to establish themselves as independent registered investment advisers (RIAs) instead of being employees of the major investment firms.
  • Being an RIA gives you independence and flexibility, and you don’t have to share your commissions or pay for desk space at a brokerage.
  • You’ll lose the larger companies’ administrative, sales, and market support, office space, training, and financial, regulatory, and legal backing.
  • Independent RIAs, however, tend to report being happier and can make higher incomes.

Changes in the RIA Space

Rewind the clock a decade, and most financial advisers are tied to a larger firm, be it a big Wall Street bank or a regional brokerage, but most see that as where they will be stuck for their careers, especially after an early 2000s collapse in the number of small RIAs. (See the charts below.) In the mid-2020s, advisers making the leap to become independent advisers are doing so with help from the likes of Schwab, Fidelity National Financial (FNF), Bank of New York Mellon’s (BK) Pershing, and LPL Financial (LPLA).

Schwab has worked with independents for 30 years, providing them with back-office support, technology platforms, and marketing. Without these offerings and those of the other major custodians, many RIAs could never have gotten off the ground. Schwab is the giant in this space, with 7,500 RIAs representing over 15,000 IARs, giving it more than half the market share.

These companies act as custodians for 84% of RIAs’ assets under management (AUM). Along with other custodial firms, they offer trading, clearing, and other services that have made going independent—even if that might strike some as odd while relying on such big companies—far more manageable than in the past.

“Independent advisers are the growth story of the advice industry,” Beatty said. “We will continue to see momentum accelerate as more advisers choose to move to the independent model, confident in the knowledge that it is a better way to serve clients while also offering the opportunity to build and grow something of their own.”

Major RIA-Related Trends

To understand what’s happening in the RIA space, we can quickly lay out the major trends in recent years:

1. Growth in the Number of RIAs

RIAs have increased steadily, driven by a growing demand for personalized financial advice. Advisers seeking greater independence and control over their practices have left traditional brokerage firms to start their own firms. This trend has been supported by technological advances, which have made it easier to establish and manage these practices.

2. Consolidation and Mergers (Mega-RIAs)

After a wave of consolidation in finance in the 1970s to 1980s—though mergers and acquisitions continue—if you wanted to be an SEC-registered adviser and work with clients to trade securities, you likely began (and were perhaps stuck) doing so while an employee of a large RIA firm or broker. There, you’d work with thousands of other seemingly interchangeable advisers pushing a slate of branded products.

Mergers and acquisitions have thus been the daily story in finance since the 1980s. Three kinds are at issue; we’ll cover the others in a moment. First, there was the consolidation that gave us the investment houses that had, by the 2007-to-2008 financial crisis, become too big to fail. Budding advisers were looking at a career working for firms like Merrill Lynch, Chase, and similar companies. (These names have changed, of course, given that consolidation continues ever and thus in finance.) Once there, you’d be among hundreds of advisers trained in branded financial products to push to retail clients. If you were good, you’d move up to work with more remunerative, higher-end customers.

Nevertheless, the overall industry culture tended toward more prominent firms, and some thought it their only chance of success. That’s still often the case, despite trend articles online depicting a tremendous shift toward independent RIAs. These claims usually rely on 1) a post-pandemic bump in AUM for independent RIAs, an outlier since the drop in the market from 2020 to 2021 could be used to show a spike in asset values across many parts of Wall Street; 2) the move of RRs into the RIA space, which isn’t the same as growth in small, independent firms.

Today, most IARs still work for massive firms like Morgan Stanley (MS), JPMorgan Chase & Co (JPM), or Merrill, a division of Bank of America (BAC). The latter alone employs 19,000 advisers and manages about $3.5 trillion in AUM.

While most advisers still start there—they have bumped up their signing bonuses and other benefits to make it very attractive—there’s no doubt been a notable rise in smaller firms, though comparatively modest given the increase in trillion-plus-AUM firms. Below is a chart of the change over time of firms by client size; the charts above used AUM. Both show a modest climb after early-2000s declines in smaller firms. The biggest story is the size of the mega-RIAs—those with a trillion or more in AUM.

3. Consolidation and Mergers (Custodial Giants)

In the last decade, Schwab has boosted its leading role as custodian for most RIAs, especially after it acquired TD Ameritrade in 2020. Meanwhile, Fidelity, Pershing, and LPL have solidified their positions as the other of the four custodial giants. All have concentrated their efforts on capturing breakaway teams from the wirehouses and investment houses, encouraging them to establish their own RIA practices on their platforms.

RIAs use these firms to house their clients’ assets instead of holding the accounts in-house. This simplifies record keeping, administration, and regulatory compliance. Where a decade or more ago, you might have felt you had to be on your own—and a bit mad—to leave the security of a job at the most prominent companies, now you have major firms giving any new RIA instant legitimacy and a marketing push to remind you constantly of the rewards should you do so.

“Go back 10 years ago, you had to be an entrepreneur. You had to want to start your own business. You had to want to build the infrastructure, maybe with a partner like a custodian or a recruiter” who brought you into another firm. “But you were pretty much on your own,” Beatty said.

Despite the dominance of Schwab with its massive market share, it’s been kept on its toes by new custodial competitors like Altruist targeting smaller and newer-generation RIAs with the latest technology and pricing models. The competitive landscape is underpinned by the consistent growth of the number of RIAs, which are expected to manage about a third of total industry assets by 2027.

4. Wirehouses Decline as RIAs Climb

For the decade up to 2023, the head count of investment advisory representatives (IARs) at independent RIAs grew annually at a compound annual rate of 5.2%, while the number of firms increased by 2.4%. Those who work at RIAs are IARs, a category different from registered representatives (RRs), who are the stockbrokers working for brokerages. RRs get paid by commission, while most RIAs charge customers a percentage of assets under management or a flat or hourly fee for their services.

Below, you can see the long-term decline in RRs. The number of RRs working at independent broker-dealers (IBDs) has declined by about 20% over the last two decades. However, they haven’t been migrating to the big wirehouses, which have dropped their numbers in RRs by about 10% in the decade up to 2023.

Much of that decline, then, has boosted the numbers going into RIAs, which grew by a full third in the decade leading up to 2023. Below is a chart showing the decline in RRs against the rise in IARs and dual-registered professionals.

5. Consolidation and Mergers (Smaller RIAs)

Meanwhile, independent RIAs often gain significant portfolios of wealthy clients in a manner that makes their outsized peers envious—especially as the latter have been working in recent years to transition from being “just” discount brokers to being the go-to advisers for those with high incomes. Hence, any news search under “RIA” brings up a slew of links to articles on smaller RIAs being scooped up by JPMorgan Chase & Co, UBS, or another investment giant. Thus, even as there’s some pull toward independence, once there, firms tend to merge or be acquired—sometimes by the giants that the advisers had left not too long before—given the benefits of size in the market.

With these trends in the background, here is a table that lays out your options if you want to become an RIA.

Core RIA Business Models Description Benefits Drawbacks
Join an RIA as an employee You work for an established RIA firm as a salaried employee. • Less of an operational burden and fewer compliance responsibilities • Access to the firm’s resources and infrastructure • Training and mentorship • Financial security and predictable paychecks
• Immediate credibility to clients
• Less autonomy and control
• Compensation may be capped
• Lack of equity ownership
• Wedded to specific types of clients
Affiliate with an RIA firm You have your own practice but collaborate with an RIA firm to support compliance, technology, and other operational areas. • Maintain independence and control over client relationships
• Make use of the firm’s compliance, technology, and other resources
• Potential for revenue sharing
• May have to follow specific firm policies
• Lack of full equity ownership
• Still have some operational responsibilities
Share Ownership With an Equity Partner You partner with an RIA firm, typically operating under their brand and utilizing their resources. • Revenue sharing
• Ability to shape a firm’s direction
• Potential for greater long-term value
• Requires a capital investment upfront • Share decisions with partners
• Potential for conflicts among partners
Contract Tasks to a Platform You use a third-party platform to handle various business tasks (e.g., compliance, technology). • More focus on client-facing activities
• Access to bundled technology and services
• Potential cost savings from economies of scale
• Lack of complete control over major parts of your operation
• Relying on the quality and professionalism of the provider
• Fees for the platform
Create your own RIA You create an independent RIA with complete control over all aspects of the business. • Full managerial control
• Ability to build clientele, investments offered, and so on, according to your own vision
• Potential for increased long-term equity value
• Significant operational and compliance burden
• Need to build infrastructure from scratch
• Higher startup and ongoing costs

RIAs Are Happier, Make More

Financial advisers who form independent RIAs do so for a few major reasons, including greater control, flexibility, and the ability to provide unbiased, client-centric advice. This has generally made them happier. According to a 2024 Schwab report, 79% of advisers reported being happy with their decision to go independent, 76% said they are happier in their personal lives, and 69% wished they had made the move sooner. The report cite advisers saying the following:

1. They Value Their Autonomy

First, independent RIAs have the autonomy to build their practices according to their vision and values. They are free to make decisions about the products and services they offer, the clients they serve, and the technology they use without the constraints imposed by a larger firm. This level of control allows advisers to create a business that aligns with their personal and professional goals, leading to a greater sense of purpose and satisfaction.

2. They Value Their New Client Relationships

In addition, independent advisers say they can prioritize client relationships and deliver personalized, unbiased advice. By removing the pressure to sell specific products or meet quotas, RIAs can focus on understanding their clients’ unique needs and providing tailored products that serve their best interests. This client-centric approach could lead to deeper, more meaningful relationships between advisers and their clients.

3. They Can Make More

The financial rewards of independence also contribute to increased happiness among RIAs. Without the constraints of a larger firm’s compensation structure, independent advisers can earn more by building their own fee schedules and retaining a larger portion of their revenue. In addition, as RIAs grow their practices, they can benefit from their firms’ increased equity value.

Schwab’s survey showed the median AUM of recently independent advisors is $278 million, and in the next five years, they expect to oversee $396 million in AUM, an increase of 42%. Those advisors considering going independent expect a median AUM of $176 million to begin, and the median AUM they expect to manage five years after independence is $297 million, putting their growth expectations in line with what their already-independent peers have found.

4. They Can Form Their Work Life as They Wish

Beyond the professional benefits, many RIAs report improved work-life balance and personal fulfillment after transitioning to independence. With greater control over their schedules and the ability to build a team that supports their vision, advisers can create a work environment that allows for more flexibility and time for family, hobbies, and personal pursuits.

An earlier Schwab study found that more than 90% of advisers who transitioned to independence had no regrets and would make the same decision again. These advisers also reported increased happiness and revenue growth, with seven in 10 noting a rise in revenue since going independent.

Should RIAs Still Start Their Careers at Brokerages?

Trading in the comfort and protection of working for a large firm to become a business owner can be intimidating, but once you make a move, you’ll need to move quickly; most RIAs form within about seven months. Schwab also found that two-thirds of advisers said it took under three years to prepare to move to an RIA model, and when they did, 90% of advisers transitioned within a year. Not surprisingly, most had started at a full-service bank, brokerage firm, or a major national or regional broker-dealer before transitioning out.

A third of those who started at a bank or brokerage said they chose that path first to get the necessary experience. While this career path is still very common among new advisers just coming into the wealth management industry,

Starting a career at a brokerage firm has long been a traditional path for many financial advisers, but is it still the best route for aspiring investment advisers? Here are the advantages of starting at a brokerage:

  • Training and development: Brokerages and big banks typically offer robust training programs with a strong foundation in financial products, sales techniques, and regulatory compliance. This comprehensive training can be invaluable for new advisers, equipping them with essential skills and knowledge.
  • Signing bonuses: When you’re just starting and might be starting a family, have student debt, or would just like to earn some money after years in school, the salaries and upfront bonuses of signing on with a major firm can be quite attractive.
  • Mentorship opportunities: Working at a big firm often provides access to experienced mentors who can offer guidance and support. Learning from seasoned professionals can speed up your development in ways few things can.
  • Client acquisition: These firms often have established brands and marketing resources that can help you build your clientele quickly. Support in generating leads and converting prospects into clients can be a significant advantage for those starting out.
  • Regulatory and compliance support: Large firms have dedicated compliance departments to ensure advisers adhere to regulations.

The Roles of Custodians

For financial advisers considering the transition to independence, the support and resources offered by major custodians like Charles Schwab, Fidelity, and others have made the process more accessible and less daunting. These custodians have developed comprehensive platforms and services designed specifically to help advisers navigate the complexities of starting and growing an independent RIA practice.

“If you wanted to start on your own a few years ago, that was a huge and heavy lift, whereas now you’ve got multiple ways to open your own shop with a lot of different help for any aspects you might need, whether it’s compliance, tech, or any other business administration aspects,” Beatty said.

Custodians provide a range of essential services, including asset custody, trading, and clearing, as well as access to a wide array of investment products and research. By partnering with a reputable custodian, independent RIAs can focus on serving their clients and growing their business, while the custodian handles many back-office functions.

Beyond these core services, custodians have invested heavily in linking up support ecosystems for independent advisers. “We have business consultants and startup consultants who help resource advisers navigate the maze of decisions around technology, financing, compliance, and value-added services that they want to build and deliver to clients. We connect advisers to other resources within the industry,” Beatty said.

This support is particularly valuable for advisers who may not have extensive experience in running a business or navigating regulatory compliance. Custodians offer guidance and resources to help advisers develop business plans, help with the technology needed, put compliance procedures in place, and build their brand. Schwab and others also offer financing for those who need it, and about a quarter of those the company surveyed said they might seek that out.

“The ecosystem has made it more feasible for advisers who aren’t as entrepreneurial and want to start and not want to start their own firm … Advisors are realizing I can be independent, but I don’t have to go it alone,” Beatty said.

What is an RIA?

A registered investment advisor (RIA) is a professional advisory firm that provides financial advice and manages investment portfolios for clients. RIAs are regulated by the SEC or state securities regulators, depending on the size of the firm. They are held to a fiduciary standard, meaning they are legally required to act in their clients’ best interests.

How Does an RIA Differ From a Financial Planner?

While both RIAs and financial planners provide financial advice, there are essential differences. RIAs typically focus on managing investment portfolios and providing ongoing investment advice, while financial planners may offer a broader range of services, including retirement planning, tax planning, and estate planning. In addition, RIAs are required to adhere to a fiduciary standard, while financial planners may not be, depending on their certifications and affiliations.

What Regulation Must RIAs Specifically Follow?

RIAs must register with the SEC or state securities regulators, depending on the amount of assets they manage (typically about $100 million in AUM). They are required to file Form ADV, which provides detailed information about the firm’s operations and disciplinary history. RIAs must also follow various rules designed to protect investors, including maintaining accurate records, implementing compliance programs, and adhering to fiduciary standards.

How Do RIAs Manage Conflicts of Interest?

RIAs are required to reveal any potential conflicts of interest in their Form ADV, which is filed with the SEC and outlines the firm’s business structure, fees, and possible conflicts. In addition, because RIAs fall under a fiduciary standard, they must always act in the best interests of their clients, which should mean they are free of such conflicts.

The Bottom Line

The financial advisory landscape is undergoing a significant transformation as more advisers are breaking away from traditional broker-dealers and other firms to establish their own RIAs. Most report being happy they did so. This shift is driven by a desire for greater autonomy, the ability to provide client-centric services, and the potential for increased income and personal fulfillment.

Going independent is challenging, but the rewards can be compelling. Independent RIAs report higher levels of satisfaction, improved work-life balance, and the opportunity to build a business that aligns with their values and vision. The support and resources provided by major custodians like Charles Schwab and Fidelity have made the transition to independence more accessible, offering guidance, technology, and compliance support to help advisers navigate the complexities of starting and growing their practices.

As the RIA channel continues to grow, consolidation and mergers are reshaping the landscape, with larger firms acquiring smaller RIAs and new competitors emerging to challenge the dominance of the industry’s giants. Despite these changes, the appeal of independence remains strong, as the numbers striking out on their own each year show.

Read the original article on Investopedia.