Q64 – What Do I Think Of “IAR-Only” Channels At Broker-Dealers?

Also available as podcast (Episode #64)

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What Do I Think Of “IAR-Only” Channels At Broker-Dealers?

An increasing number of broker-dealers are rolling out “IAR-only” channels as an affiliation option.  While this is predominantly amongst independent broker-dealers, the affiliation option might eventually reach W2 employee broker-dealers as well.  These IAR-only channels are primarily a retention effort to retain increasingly fee-based advisors that are otherwise leaving the broker-dealer for the RIA model.  It’s important to understand what IAR-only offerings are, and how they compare to alternatives in the marketplace.

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Full Transcript:

What do I think of IAR-only channels at broker-dealers? That is today’s question on the Transition To RIA question and answer series. It is question #64.

Hi, I’m Brad Wales with Transition To RIA, where I help you understand everything there is to know about why and how to transition to the RIA model.

If you’re not already there, head to TransitionToRIA.com, where you can find all the resources I make available to help you understand the RIA model. I have videos, the podcast series, whitepapers, articles. Everything is there for you to consume for free. Again, TransitionToRIA.com.

Today’s episode is a topic that’s been in the news more recently as firms are rolling out these new channels. I am getting asked about this, so I wanted to do an episode specifically on these so-called “IAR-only” channels that are appearing at broker-dealers.

There are five different points regarding these channels that I’ll discuss on this episode.

I had to make good notes because I want to make sure I cover all five. To recap before we get started, the five topics are:

  1. What are these IAR-only channels that are appearing at broker-dealers?
  2. Next is why are broker-dealers setting up these new channels? Why are they appearing as they are?
  3. Third is how do these IAR channels compare to other alternatives in the marketplace?
  4. Fourth, we’ll talk about who these IAR-only channels appeal to, or will likely appeal to in the marketplace.
  5. And finally, what broker-dealers need to do to improve their IAR-only channels and make them more appealing to advisors. So we’ll finish with that at the end.
What is “IAR-only?”

So, for starters, the first topic is what is an IAR-only channel?

IAR, Investment Advisor Representative, is where you have your 65 or 66, or depending on the state you’re in, maybe you’re excluded because you have a CFP or a CFA or something like that, where you are under an RIA. It could be your own RIA, it could be someone else’s RIA, but the formal title of that is an Investment Advisor Representative, you as the individual under an RIA.

Most financial advisors at traditional broker/dealers today wear two hats, with somewhat rare exception where that’s not the case. They are an IAR under their firm’s, as they say, corporate RIA, and that is what allows them to offer fee-based accounts to their clients. And then simultaneously, they are a “Registered Representative” under the corporate broker-dealer, and that is what enables them to offer commission accounts to clients.

Those two roles are governed by entirely different regulatory bodies that oversee them. FINRA oversees the broker-dealer side and has its set of rules, and the SEC oversees the RIA side and establishes the rules that go with that.

Most advisors at traditional broker/dealers nowadays are offering commission and fee-only solutions, and hence are wearing this dual hat. Again, they are an Investment Advisor Representative under the corporate RIA, and they are a Registered Representative under the broker-dealer.

These IAR-only channels are primarily happening at independent broker-dealers. I think we’ll eventually see versions of this come along in the W2 wirehouse type model as well. But for now, when I talk about IAR-only channels, we’re seeing this in the independent broker-dealer world.

What these broker-dealers are saying is…“Mr. and Mrs. Advisor that are wearing two hats, maybe your practice has evolved to the point where more and more of your clients are in fee-based accounts” – which is by far the industry trend. That’s what we’re seeing.

“Why don’t you drop your 7, drop FINRA affiliation, drop your affiliation with our corporate broker-dealer, and be an IAR-only under our corporate RIA?”

That in short is what an IAR-only channel is. It’s for advisors that want to be 100% fee-only, they don’t need or want any sort of BD affiliation, you can do that under their corporate RIA. You do not need their broker-dealer.

This is a relatively new evolution. There was certainly a time where even if an advisor was 100% fee-only, independent broker-dealers would still require that you have your 7 because that’s what their systems are set up to accommodate. We’re going to get into what some of these challenges are.

The broker/dealers have now evolved to the point where you can drop your affiliation with the B/D, and be solely under the corporate RIA. So again, in definition, that is what an IAR-only channel is.

Why are broker/dealers creating IAR-only channels?

Next, we’re going to talk about why independent broker-dealers are setting these channels up.

By far, the number one reason is for retention. They have existing advisors in their independent broker-dealer (or W2) channel that are becoming increasingly fee-based. Again, that’s where the industry trend is by far going.

An extreme example, let’s say you’re already 98% fee-based and that final 2% you could solve for – I’ve done all kinds of episodes on how to solve for the remaining or existing part of the commission assets in your practice if you wanted to move more into an RIA model.

Independent broker-dealers are watching these advisors leave their firm. These advisors as asking themselves, “I’m 98%, 99% fee-based, why am I still here? Why am I attached to your broker-dealer? Why am I putting up with FINRA when I’m essentially already fee-only anyways?”

As a retention tool, these firms are rolling out these IAR-only options.

Now, of course, in press releases announcing these channels they talk about attracting advisors to the firm and the offering.  They are going to work to do that, but make no mistake, the main motivator for why these channels are coming to fruition initially is retention, because they are losing advisors that are becoming increasingly fee-based and moving more into an RIA model.

This is understandable, as a business they would prefer to retain those advisors than see them lost to some sort of RIA model or iteration.

It’s interesting that we even call these firms independent broker-dealers still.  The majority of their advisors’ clients’ assets are in fee-based accounts now, on their RIA side, not in commission accounts.

So, it’s interesting that we still call them independent broker-dealers, who have a corporate RIA alongside, when, in fact, we should be referring to them as corporate RIAs that also happen to have a broker-dealer for the remaining amount of the commission assets that still exists with their clients.

Some independent broker-dealers are rebranding their independent broker-dealer channel by simply calling it their corporate RIA. And for the advisors that have some commission business still they have a way to accommodate that.

So, the reason these firms are setting up these IAR-only channels is by far for retention purposes of their existing advisors.

For reasons I’ll get into shortly, these IAR-only channels are going to have a hard time attracting external advisors, who are at other firms, or other affiliation models. I think they will have some success, but it will be a challenge as well.

So, again, it’s primarily, at least for the foreseeable future, in my opinion, a retention play internally that they’d rather retain their advisors in some capacity than lose them altogether.

It makes sense they do this. I just wish they would be a little more forthright about it. But it is what it is.

How do IAR-only channels compare to alternatives?

The third thing I want to talk about is how do IAR-only channels compare to alternatives that might be available?

Perhaps you are an advisor in that potential retention situation, or you hear the news about these new channels, and you think they might be an option for you.  You should consider your options, understand the pros and cons of each, and how they might be a good fit for your practice or not.

So, what are the alternatives that you should be comparing them to?

I’ll start by talking about some of the challenges of these IAR-only channels. I think it’s going to be hard for them to attract advisors that are not already with their firm and it’s because of some of these challenges.

The first challenge is that these independent broker-dealers are having to reinvent themselves. By their very name, they were traditionally, historically broker-dealers that eventually incorporated some sort of corporate RIA into their offering.

Now the wind has shifted so much that fee-based is becoming the dominant force and so these firms are having to reinvent themselves from what they’ve built up over decades.

They have decades of in-house technology that was built with a, if not just broker-dealer, at least a dual hat advisor in mind. They have decades of institutional knowledge on the leadership team or the rank and file at the home office that is used to adhering to what is expected with a dual hat financial advisor.

They have entire compliance teams that no matter how short or long they’ve been there have a mindset that these advisors are registered representatives of a FINRA regulated broker-dealer.

You can’t instantly flip that switch. They are having to reinvent themselves.

I used to work at the home office of a multi-channel broker-dealer and I used to give presentations to different back-office areas, whether operational areas or technology areas and whatnot, to help them understand the RIA model. The institutional knowledge they had was on a registered representative, FINRA way of doing things.

Progress is being made, but you cannot just turn all that off and think…we are solely on the corporate RIA side and everything we do is based on the knowledge and the requirements of such a channel.

So, just know, these firms have this legacy challenge that they’re having to reinvent themselves. You’ll see how that compares to some of the alternatives here in a moment.

Another challenge they have is they generally only offer a single custodian to choose from. It is their own custodian, as often the larger firms are self-clearing.

So, compared to the alternatives, you only have one custodial option and it is their custodial option. That might be great, that might fit your needs, and it’s something you could look at. But that is a challenge compared to alternatives out there. You are forced to be single custodian and it is their custodian.

Next challenge they have is that they provide you with their own proprietary technology.

They say… “You can use our corporate RIA and look, we have this wonderful technology built out.”  In many cases, it is good technology. The reality though is the RIA model has evolved to where the standard way of doing things is to use third-party tech stacks.

I did an episode on that. There are some wonderful technology vendors in the marketplace that are providing solutions that continue to evolve, continue to innovate, continue to get better.

The challenge for IAR-only channels at a large broker-dealer that are using their own in-house proprietary technology is can they continue to compete with these technology vendors?  These are vendors that now have more scale than any one particular broker-dealer has to justify the cost needed to build out these solutions. Can in-house proprietary technology compete against these third-party solutions?

In the RIA model, the typical approach is to use third-party technology. That’s not something we’re really seeing with these IAR-only options. So something to consider there as well.

The last thing, before I explain some alternatives, is that it is harder to one day breakaway and start your own RIA. Let’s say you are in the independent broker-dealer channel of one of these firms and you are becoming increasingly fee-based, and you think maybe you want to have your own RIA at some point, or maybe you’ll want to join an RIA – I did an episode on why you might want to join an RIA, which is what you’re effectively doing with an IAR-only channel.

If you one day want your own RIA, under the typical model, you would be using third-party custodians, third-party technology, all those sorts of things. If you only take, it’s hard to say, a baby step and go to this in-house IAR-only channel, well, if one day you want to become your own RIA, you still have to reinvent your practice at that point.

It does not set you up to take that next and final step of having your own RIA.  So, just know that that is a challenge. It is harder.  Do you want to do that in-house small step initially then still have to take another step later on, or go with the standard approach in the RIA marketplace from the jump?

So, the independent broker-dealers have this historical legacy, knowledge, technology, infrastructure, operations, compliance. Everything’s built for the dual hat advisor and they’re having to reinvent themselves. They only have a single custodian, they have proprietary technology.

There are firms that recognized years ago that there are advisors that are making this migration to fee-based that will want to drop their FINRA, drop their broker-dealer affiliation at some point, but perhaps don’t want to start their own RIA. There are pros and cons with all of the different approaches. Again, that’s why you might want to join an RIA, go check out the standalone episode I did on that.

These new firms don’t have decades of a different kind of model, an anchor holding them back.  These firms were started from the beginning to cater to the fee-based advisor. The proprietors asked themselves…“If we’re going to start what is effectively a standalone IAR-only channel, how can we make it attractive for advisors to want to come to?

They did things like be multi-custodial. They use best-in-breed third-party technology. They made it so that if one day you ever did outgrow their offering, you could step away and continue to use the same custodian, continue to use the same technology.

I should back up, quick sidebar, there are all different kinds of flavors of RIAs you can join. There are some RIAs you can join that will acquire your practice. There are some that will require that you use their firm name. There are some that will require you be a W2 employee of theirs. There are different reasons you might explore those particular offerings.

What I’m referring to here as an alternative to broker-dealer IAR-only channels are offerings where you will retain 100% ownership of your practice, you will be able to use your own brand, you will be able to one day breakaway and start your own firm if you want. They’re purpose-built from the start to cater to the exact advisors that the broker-dealers are now trying to retain in-house.

It’s not to say broker-dealers aren’t working hard to build a competitive offering, but the question is, as you consider them, what does their in-house version look like with its inherent challenges that I mentioned? And then, how do these standalone purpose-built RIA offerings compare to that?

If you’re in a situation where you’re going to explore a broker-dealer’s IAR-only offering – you might consider it – it is important to also look at alternatives. How do they compare? It’s important to know the alternatives are out there and know that there are differences in their offerings.

Who does the broker-dealer IAR-only channels appeal to?

Moving along, number four. Who do these broker-deal IAR-only channels appeal to?

The main advisor set that’s going to find them appealing are advisors that are already with that broker-dealer. They’re already in an independent broker-dealer channel, or maybe the firm has a W2 channel. They are becoming increasingly fee-based and they want to step away from FINRA. They want to step away from broker-dealers.

It is logistically easier to simply make an “internal transition” from one of those channels over to the firm’s IAR-only channel. Even if that channel is arguably not as competitive as the alternatives in the marketplace, it is a simpler transition.

There are advisors making that move, and that’s perfectly fine. What I tell advisors is you have to weigh out an easier transition, but it maybe comes with trade-offs. And so what is more important to you?

Something I help advisors think through is the pros and cons of these different pathways and approaches they could take. Broker-dealer IAR-only channels will appeal to some of those advisors and it will be a retention opportunity for broker-dealers to retain advisors.  There is going to be some appeal. I just think they will struggle to attract advisors that are at other firms or other affiliation models into their offering.

How can broker-dealers improve their IAR-only channels?

The last thing I want to talk about is what broker-dealers can do to do to make their IAR-only channels more appealing to external advisors, not just be a retention play or an easier internal transition type play.

First, you must bring in leadership from the RIA world. If the IAR-only channel is embedded in the same channel as the independent broker-dealer channel and led by the same team members that have been with that independent broker-dealer channel for years, perhaps decades, how different are they going to run the IAR-only channel?

Do they have the experience and the knowledge of what is competitive in the RIA marketplace? To treat it differently? To build it differently? To run it differently?

You need external people that have lived in the RIA world to come in and point out what it takes to be competitive against the alternatives in the marketplace.

There are some wonderful people that have worked a long time at independent broker-dealers. This is not a knock on them. I just think if you’ve been in that world for years, if not decades, you have that institutional knowledge, that doesn’t prepare you well to lead an IAR-only channel.

If you are looking at one of these channels ask who is leading it and how are they different from who is leading the independent broker-dealer channel?

Next up, I would ask if there is a separate compliance team that provides the compliance for the IAR-only channel, or is it the same team that does the independent broker-dealer channel?

It’s not their fault, but the compliance folks that for years or decades have run things with the mindset of advisors wearing two regulatory hats, how are they going to flip the switch and all of a sudden adhere to solely the RIA world?

You need a standalone team brought in that recognizes how things work in the RIA world. They need to be able to say….“I don’t care how it used to work in the FINRA world or the broker-dealer because that’s not applicable to us anymore. All that matters is the RIA world. We are IAR-only.”

Is there a separate set of compliance people? Do they have the separate experience of the RIA model?

Finally, how is the IAR-only channel tasked with growing? They must build something that’s competitive to the alternatives in the marketplace. Can they do that? Can they set how they price the offering? Can they set the types of solutions they provide for advisors? Can they set how they manage compliance?

Or do they also have to be mindful of the other channels at the same firm?  “If we let the advisors in this channel do that but we’re still not letting them do it in these other channels we have, that could cause some internal frustration. Advisors over here might be unhappy, so maybe we can’t do it over here in the IAR-only channel.”

To make such channels successful, you essentially must let them be in a silo. They need leadership with the right experience, the right compliance folks, and you must build it to be competitive with the RIA alternatives in the marketplace.

It doesn’t matter what other channels are doing. They have their own competition. If they want to price things one way and we want to price it a different way, we should be able to do it.

If they want to not offer certain solutions, but we want to be able to offer those solutions, we should be able to do it. That’s what it takes to be competitive to the IAR-only channel’s alternatives in the marketplace.

If the broker-dealers don’t provide the leadership of their IAR-only channels the ability to do that, I don’t know how they’re going to compete, how they’re going to attract advisors.

You must have the right leadership. The right compliance, separate from the independent broker-dealer compliance. And finally, you must give them the freedom and flexibility to compete in the marketplace and not have to be mindful of what other channels are doing. Because at the end of the day, if they are holding them back, then it’s effectively no different than the traditional independent broker-dealer channel regardless.

I was having a conversation recently, I won’t name the firm, with a lady that had been in their independent broker-dealer channel, and moved a while back to her firm’s IAR-only channel. I asked her if she can tell a difference between the two channels. Her response was….not really at all. There’s a little difference in how they price it out, but as far as the compliance, as far as the supervision, oversight, technology, she said it’s almost effectively the same thing.

These IAR-only channels might still be good for you. You should consider them. But I think they’re a bit overblown, unless they get the freedom and flexibility to do some of the things I’ve talked about. And even then, it’s going to take some time for these platforms to evolve.

So, I just wanted to give some perspective on what these offerings are, what I think can be done to improve them, things you should consider as you maybe look at them as an option for your practice, and to know that alternatives exist.

Like I said, my name is Brad Wales with Transition To RIA. This is the type of conversation I have all day long with advisors. Should you go into the RIA model? And if it makes sense to do, what sort of options and pathways exist?

IAR-only options at broker-dealers exists now. I think we’re going to see more and more firms roll out such offerings. You need to understand how they work, and what the alternatives look like. That is the sort of thing I help advisors with. I’m happy to have that conversation with you as well.

If you’re not already there, again, head to TransitionToRIA.com. You can find all my resources, the videos, the podcast, the whitepapers, the articles. At the top of every page is a contact link. Click on that and you can instantly and easily schedule time to have a one-on-one conversation with me to talk about today’s topic or anything else RIA-related you would like to talk about. Again, TransitionToRIA.com.

With that, I hope you found value on today’s episode, and I’ll see you on the next one.

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