Top 5 Reasons Why Advisors Go RIA

Top 5 Reasons Why Advisors Go RIA

Many Advisors Seek Brighter Pastures By Being Independent

Top 5 Reasons Why Advisors Go RIA

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Reviewed by Anthony BattleFact checked by Suzanne KvilhaugReviewed by Anthony BattleFact checked by Suzanne Kvilhaug

For financial advisers, the traditional employee model of working at a major investment firm can feel like silver handcuffs: you’re relatively well compensated but lack true independence. Few dream of working as one among many advisers within massive, often bureaucratic firms. Fortunately, independent registered investment advisers (RIAs) told us what research has shown: it is easier than ever to strike out on your own and a great majority are happy they made the move.

“The biggest factors influencing my decision to transition were my inability to work with who I wanted and how I wanted, as well as my inability to control my compensation,” William Holliday, a certified financial planner at Elite Wealth Management in San Diego, California, told us. “Now that I’m the boss, I can directly influence whom I work with, when I work, how I work, and how much my compensation will increase more than ever before.”

Key Takeaways

  • Independent RIAs are those registered with the U.S. Securities and Exchange Commission (SEC) or one or more of the 50 states and have no broker-dealer affiliation.
  • Most independent financial advisers have a fee-based model that puts all their services into a more transparent, single fee based on the percentage of assets placed with them.
  • Investment advisory representatives (IARs) and registered representatives (RRs) who become registered investment advisers (RIAs) must act in the highest fiduciary interest of their clients.
  • RIAs must adhere to stricter conduct standards, though some administrative aspects, like having the industry approve marketing materials, are often easier.
  • RIAs may appeal more to younger investors who prefer nontraditional fee structures.
  • Many newer RIAs lean on big custodian firms like Schwab, who provide the technological, regulatory, and back-office support most need to get started.

While much of the industry discussion has focused on advisers, many broker-dealers are also looking to form RIAs. In a 2023 survey, almost a third of independent broker-dealers (IBDs)—those who have already broken away from the big wirehouses—said they were looking into becoming RIAs, part of a long-term decline in the number of registered representatives (RRs).

The transition to independence is not easy. However, many who make the leap often find greater professional satisfaction and the ability to tailor their services to meet client needs. If you’re considering this path, understanding the benefits and preparing for the hurdles can set you up for a greater chance of success.

What Is an Independent RIA?

RIAs are professional firms that provide personalized financial advice to clients. While technically all RIAs are independent, the term specifically refers to the smaller ones in terms of assets under management (AUM). They are defined as registered with either the SEC or a state, with no broker-dealer affiliation, and all the bigger investment firms have both. So-called hybrid RIAs are on the rise and must also be registered with a state of the SEC. The owner of a hybrid is an advisor, but the RIA is affiliated with a broker-dealer, meaning it combines the fee-based business of the RIA with the commission-based broker-deader model.

Some joining the independent RIA ranks are RRs coming over from the ranks of the broker-dealers or “wirehouses” (they got the name from the telegraph wires that once ran through them). But most are IARs who are employees of major investment firms, like Morgan Stanley (MS), JPMorgan Chase & Co (JPM), or Merrill, a division of Bank of America (BAC). These companies are massive. For example, as of mid-2024, BAC employed over 19,000 advisers managing about $3.5 trillion in assets under management (AUM) across all its businesses. While there’s been some ebb and flow, each year, about four-fifths of advisers work for the bigger firms.

The Big 4 Custodians

Four companies, Charles Schwab Corp. (SCHW), Fidelity National Financial (FNF), Bank of New York Mellon’s (BK) Pershing, and LPL Financial (LPLA), act as custodians for 84% of assets for RIAs.

Operating as an independent RIA was once a far more significant challenge. Few resources were available for smaller firms, and it was more difficult to compete with the marketing and distribution power of the larger institutions. “Go back more than 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,” Jon Beatty, Schwab’s chief operating officer of Advisor Services, told us.

Despite technological and regulatory barriers, the seeds of independence were already being sown. Once these sprouted, they would cause a significant shift in the industry. The coming ubiquity of the internet and digital transfers of financial data made it far easier for RIAs to go out on their own. They were helped by another set of firms in the industry consolidating, not the big RIAs in this case, but Schwab and Fidelity, among others, who became the major custodians in the industry. Their size gives any advisers working with them access to marketing and names that stand for longevity and financial heft, granting newly formed RIAs instant legitimacy.

Unlike advisers who work for wirehouses and large investment firms, independent RIAs are not tied to any specific family of funds or investments, allowing them, they argue, to offer unbiased and customized financial advice. The size difference between the independents and the biggest RIAs is massive—JP Morgan Chase alone has 8,900 or so advisers and $3.2 trillion in AUM.

However, there are fewer price differences than you might expect when looking at other industries, like retail, where the size of the largest companies can make being a small operator unsustainable. For example, with its boulevard-size aisles, Home Depot offers variety and prices few can match, which is why there are so few genuinely independent hardware stores anymore: your options are Home Depot, Lowes, or an affiliate of Ace Hardware. However, in finance, the independents argue they are the ones who can offer the greater variety since they aren’t held to selling the specific financial products of a JPMorgan or UBS Group (UBS).

As RRs are looking to move over to RIAs and IARs consider striking out on their own, let’s look at the top five reasons for doing so:

Reason # 1: Autonomy

As an independent RIA, advisers are no longer employees but owners of their own practices. They have the autonomy to decide how to run their business operations, from their investment philosophy to the fonts on their letterhead. This level of independence is a stark contrast to the directives and restrictions advisers often face at traditional wirehouses or broker-dealers.

The ability to call the shots for their practice is an enticing proposition leading many advisers to make the move. “Advisors are seeking independence because it offers them really the opportunity to build the business their way and see the experience through their clients’ eyes,” Beatty said.

You can curate your own menu of products and services, which independent RIAs told us meant they can offer what truly benefits their clients, not what might be best among in-house offerings. This flexibility enables you to build stronger, more trust-based relationships with your clients, as they can be more confident that your recommendations are driven by their needs and goals, not by quotas or corporate directives.

Moreover, autonomy extends to how you manage your practice. As an independent RIA, you have control over your schedule, your team, and your work environment. This means you can form your business in a way that supports your personal and professional goals, whether that means focusing on a niche, adopting new technologies, or creating a more flexible work-life balance.

Beatty cited numbers for us that cohere with other surveys in recent years. “79% of the study respondents said that they were happy with the decision to go independent, 76% said they are happier in their personal lives having gone independent, 69% said they would wish they had done it sooner,” he said.

The Challenges of Going Independent

However, there’s no denying it’s not easy once advisors or brokers break off on their own. Brian M. Schmehil, managing director of Wealth Management at the Mather Group (TMG), worked with three partners when he left Morgan Stanley. While TMG has expanded greatly in the past decade or more—its PR writers must have keyboard shortcuts for synonyms for “acquisition” to avoid too much repetition from one release to the next—this wasn’t preordained when they started.

“At times, it was scary breaking away and not knowing what tomorrow may bring,” he said. But Schmehil noted that at the major firms, when perilous economic moments arrive, there’s not much you can do but wait to see if a virtual pink slip arrives in your email. “I can tell you it was a lot less scary than sitting at Morgan Stanley during the Great Recession wondering if our jobs or the company would be there the next day. At least with having your own RIA, you control your destiny.”

For Holliday, starting up his own RIA wasn’t easy either. “The most challenging aspect of the transition was learning what I didn’t know about running my own firm. It’s a steep learning curve, but it’s doable.”

Schmehil had three partners he could lean on during those early years. “We had to build everything from scratch starting day one, which required a lot of time and resources all while still having to do our day job. We went into it not knowing if all our clients would come over but still having to lock in very high fixed expenses to ensure we could service them,” he said. All but two of their clients would move with them to the new firm. This, too, tends to be a fear someone contemplating leaving a firm need not have: if you’ve been serving your clients well, most will likely come with you to your new venture.

New RIAs are always trying to find steady footing on a ground often rocked by volatility. “The market dropped though a few months later in 2011 due to a debt crisis in Europe and a bust to U.S. credit ratings, so our fees suddenly dropped with it while our expenses stayed the same,” Schmehil said.

Reason # 2: Financial Rewards

Another significant factor driving financial advisers to go independent is the potential for increased income. As an independent RIA, you can build a more profitable practice by reducing costs, improving revenue streams, and making your operation more efficient.

In the traditional broker-dealer model, advisers often face high overhead costs and have limited control over their costs. By going independent, you can make strategic decisions about your expenses, such as choosing cost-effective technology products and negotiating favorable rates with service providers. This allows you to keep more of your revenue and reinvest it into growing your practice.

“Advisors moving to independence can choose to build their tech stack through the lens of how they want to serve their clients, they’re not locked into legacy systems, and the fact that there are options there in significant ways allows them to put it together in the way that they want to run their business and serve their clients,” Beatty said.

In addition, as an independent RIA, you can diversify your revenue streams and adapt your pricing model to better serve your clients and increase profitability. For example, you can offer a broader range of services, such as financial planning or tax preparation, and charge for them accordingly.

The potential for increased income is not theoretical. Most advisers report greater earnings after going independent, often significantly more. 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.

Why RIAs Stay Employees

A 2023 J.D. Power study found that financial advisors expecting to stay employees for the long-term cited their top reasons as their company’s “strong culture” and leadership, with others citing support for professional development, training, and technology.

Reason # 3: Your Clients

Many independent RIAs say that breaking away improves their ability to serve clients. Newly independent RIAs surveyed by Schwab were almost unanimous (98%) in listing both “wanting to provide a more personalized service” and “freedom to do what is best for their clients in their answers” in their answers as reasons to form their own firms. In addition, three-quarters (74%) of those who’ve made the move say it’s been a net good for their clients.

“Right now, many advisers are struggling to find the time to deliver the level of hands-on service they know is critical to growing their business,” said Craig Martin, executive managing director and head of wealth and lending intelligence at J.D. Power. “They’re spending more time on administrative and compliance-oriented tasks and, in many cases, they are starting to question whether their firm is committed to providing them with the support and resources they need to succeed.” 

Without the constraints of a corporate agenda or product push, you can focus on providing advice that aligns with your clients’ goals. J.D. Power’s 2023 survey found that almost a third of financial advisors don’t have the time to adequately focus on clients.

Independent RIAs said they can tailor their services and increase the time they spend directly with clients, fostering deeper, more personalized relationships. “I have always been a fiduciary to my clients, and I don’t want to sell them products that aren’t best for them just to either pay me more or lock them into a relationship,” said David Haas, an advisor at Cereus Financial Advisors in Franklin Lakes, New Jersey. I think many wirehouses try to do this and are still doing it.”

With direct control over the tech you use and the financial products you offer, you can specialize in serving specific clients or offering niche services. This targeted approach allows you to better understand your clients’ challenges and aspirations, enabling you to provide more comprehensive and impactful advice.

By prioritizing the client experience, independent RIAs can differentiate themselves in a competitive market, attract and retain loyal clients, and build a thriving practice based on trust and personalized service. These are key elements that investors often say are just as important to them, if not more, than their returns.

Reason #4: Flexibility To Make Changes

In an industry where technology and client expectations are constantly evolving, the flexibility to adapt is crucial for long-term success. For financial advisers, going independent can provide the agility needed to stay ahead and make changes that benefit both their clients and their practice.

As an independent RIA, you can decide what’s in your technology stack, services offered, and investment strategies without the bureaucratic delays often associated with larger firms. Custodial firms like Schwab have made it easier to get and later adjust what you need in your practice. “We have business and startup consultants that help resource advisors and help [RIAs] navigate the maze of decisions around technology, financing, compliance, value-added services that they want to build and deliver to clients,” Beatty said.

This allows you to be more responsive to market trends, client feedback, and new prospects for growth.

“Technology and client expectations are constantly changing in all industries,” Schmehil said. “It is a big reason we left Morgan Stanley when we did. We saw the industry going a different direction to fee-only, comprehensive services.”

For example, Schmehil said, TMG moved their clients from a brokerage model using products and mutual funds to ETFs in the early 2000s and started offering in-house tax preparation and tax strategies before many other RIAs saw the benefits of doing so.

It also allows independent RIAs to differentiate themselves in a crowded market. “We leveraged technology in advice, portfolio construction, and interacting with clients while most thought it was only for the younger generations,” Schmehil said. TMG has been successful enough that in 2023, it launched an “innovation lab”—an in-house think tank—”so we’re ahead of the game when it comes to delivering internal efficiencies and giving the clients what they want before they know they want it.”

Reason #5: Fees

Fee-based planning offers many benefits for financial advisers and their clients compared with the traditional commission-based model. By adopting a fee-based structure, independent RIAs can provide more transparent, client-centric services that align with their fiduciary responsibilities and foster long-term success.

How one charges clients would not seem to significantly affect one’s business, aside from revenues, that’s not the case with RIAs. Below are just some of the knock-on effects:

  • Transparency: A primary advantage of fee-based planning is the transparency it provides to clients. Unlike commission-based models, where fees may be hidden in complex prospectuses or sales materials, fee-based advisers typically charge a straightforward hourly rate, flat fee, or percentage of AUM. This clarity lets clients understand precisely what they are paying for and what services they will receive in return. By adopting a fee-based model, independent RIAs can create a more client-focused experience that prioritizes transparency and simplicity.
  • Alignment of interests: Fee-based planning also helps align the financial interests of advisers and their clients. When advisers charge a percentage of AUM, their success is directly tied to the growth of their clients’ portfolios.
  • More comprehensive services: Because fee-based advisers are paid for their expertise and not only the number and size of transactions, they are more likely to offer comprehensive financial planning services, such as retirement planning, tax strategy, and estate planning. These value-added services help clients navigate complex financial decisions and achieve their long-term goals, fostering deeper, more meaningful relationships between advisers and their clients.
  • Fiduciary responsibilities: Independent RIAs are held to a fiduciary standard, which requires them to always act in their clients’ best interests. This higher standard of care distinguishes fee-based advisers from commission-based planners, who are only required to meet a less stringent suitability standard. By embracing the fiduciary role, independent RIAs demonstrate their commitment to putting client needs first and building trust-based relationships.
  • Potential tax advantages: Fee-based planning can also reduce clients’ taxes. Fees paid out of pocket for investment advice may be deductible as a miscellaneous itemized deduction on Schedule A of their tax return, subject to certain limitations. In contrast, commissions paid to buy or sell investments are typically used to adjust the cost basis of those investments and can’t be deducted separately.
  • Attractiveness to buyers: For advisers considering their long-term exit strategy, a fee-based RIA firm can be more attractive to potential buyers than a commission-based practice tied to a broker-dealer. The fee-based model’s simplicity and transparency make it easier to transfer client accounts and rebrand the firm, potentially commanding a higher valuation in the marketplace.

What Is an RIA?

An RIA is a registered investment advisor. It’s either a single person or a company that provides clients with financial advice. An RIA is registered with the Securities and Exchange Commission, and an advisor must pass the Series 65 exam to become an RIA.

Besides Custodians Like Schwab and Fidelity, Where Else Can Independent RIAs Get Support

One place with resources and networking opportunities for those going independent is the National Association of Personal Financial Advisors (NAPFA), which was founded in 1983 to provide professional support for the fee-only crowd. NAPFA requires you to adhere to a code of ethics and take an annual fiduciary oath that reflects their commitment to running a practice that discloses conflicts of interest, provides suitable written disclosures, and, of course, provides compensation only through fees.

NAPFA also provides its members networking and marketing support, resources for continuing education and professional development, and annual conferences where members can exchange ideas and learn about new products and services.

What Does an RIA Firm Do?

An RIA firm gives investment advice to clients. All RIA firms must abide by their fiduciary duty at all times. Registering as an RIA requires an advisor to reveal investment styles and strategies, total client assets under management, fee structures, any earlier disciplinary actions, and any potential conflicts of interest.

The Bottom Line

Becoming an independent RIA has some compelling benefits for financial advisers: greater autonomy, flexibility, and the ability to provide more tailored client-centric services. Independent RIAs can build their businesses according to their vision and select the products and services that best align with client needs. In addition, the fee-based compensation of independent RIAs can promote transparency, align advisor and client interests, and allow for the delivery of more financial planning services.

The path to independence is not without its challenges, but the rewards can be there. Independent RIAs often report greater professional satisfaction, the potential for increased income, and the opportunity to build enduring, trust-based relationships with their clients. As the financial advisory landscape evolves and client expectations shift toward a more personalized and holistic service, the appeal of the independent RIA model is expected to grow. With the support of custodians and an ecosystem of technology and other service providers, advisers have resources that didn’t exist until relatively recently. That’s yet another reason financial professionals are saying it might be time to strike out on their own.

Read the original article on Investopedia.