• Phil Kerkel and Anushka Nadkarni
  • Published: 20 November 2019

With the emergence of an independent financial market, registered investment advisors (RIAs) have, in very little time, become the preferred model for the advisory channel. This sector is expected to account for nearly 30 percent of the retail financial services business by 2020  – some have called it the ‘Future of Advisory,’ while others are skeptical about the pace of the shift to this new channel. The market is speculating if this change is just a mere bubble of sorts or is this truly a win-win solution for both clients and advisors. 

There are several reasons why this sector is appealing to both sides of the spectrum, and it is crucial to understand the influences shaping the rise of this independent industry for stakeholders to make an informed choice or decision. 

Fiduciary duty. RIAs are subject to a fiduciary duty by the SEC, which means that investment advisor representatives (IARs) have a fundamental obligation to act in the best interest of clients and operate in good faith at all times. This guarantees that advisors ensure the client's interest always lies above their own, providing holistic wealth planning advice based on the client’s overall financial goals and objectives. This differs significantly from a broker/financial advisor (FA) who works for a traditional wirehouse or broker-dealer and is subject to the ‘suitability’ standard by FINRA. This means that the FA needs to advise on a particular investment as long as it is ‘suitable’ or within the risk profile of the client, irrespective of whether it fits in the client’s overall wealth plan. 

Fees. RIAs usually operate a fee-based business, which means they either charge a flat fee or a fixed percentage of the client’s assets under management (AUM). This is a massive benefit for the client since this ensures the advisor’s interest aligns with that of the client to increase the overall wealth/value of the portfolio. This also addresses the concerns of the new generation of millennials that is less trusting and demands more transparency; and also mitigates the risk of an advisor recommending an investment purely for revenue purposes, since most brokers/FAs run a commission-based business, which means their revenue is directly proportional to the number of times a client transacts. 

Autonomy and flexibility. RIA’s are truly ‘independent’ in nature, which means advisors are treated as ‘owners’ of their business and are given full autonomy to run it as they want. This means easier processes and procedures, best-of-breed technology, and support, leading to faster turn-around times and quicker access to advisors and client tools, all of which create lesser hassles for both the advisor and client. Additionally, RIAs use independent custodians to hold and safeguard client assets, which certainly provides a reassuring system of checks and balances for clients, since the investment advisor is separate and unattached to the holding company of their investments.

Customization. Another important aspect of financial advice today is personalization. The new generation of clients demands disruption and embraces new technology, shying away from ‘standard’ or ‘mass’ products and services. They are more inclined towards value-based investing and meeting their personal goals/objectives versus beating a specific market benchmark. The independent nature of an RIA removes the restrictions of selling only proprietary products; and releases pressures from advisors to work within the boundaries of a large wirehouse or broker-dealer, which typically offers the same suite of products/services across advisors. The RIA structure allows the advisor to tailor their offerings based on the unique needs of each client and can genuinely provide the ‘best in class’ products offered by the entire scope of custodians and third-party providers in their network.

Too good to be true?

The RIA model is undoubtedly reducing the gap between what wealth clients expect and what advisors can offer. But it is essential to understand that the unique proposition for this business model is ‘independence,’ which brings along with it the same risks and responsibilities that a business owner would typically own or manage. This includes daily operational challenges, technology management, cybersecurity, risk and compliance oversight, performance management as well as compliance with the ever-changing industry rules & regulations. Moreover, the SEC regulations and oversight is getting more stringent by the day, and there is very little room for error or slippage under their purview.

This is certainly more beneficial and reassuring for clients and puts additional pressure on the IARs to run a tight ship and ensure their business is run with the highest level of integrity. What plays here is the risk-reward trade-off – for advisors that take the risk of being independent and breaking away will undoubtedly earn a higher reward with higher client AUMs and in turn, higher revenue. As some would say – the wealth management industry is at its peak of evolution, and it truly is now going to be the survival of the fittest and the finest.