Q73 – What Is A “Corporate RIA?”

Also available as podcast (Episode #73)

Apple  |  Android  |  Spotify  |  Amazon  |  Stitcher  |  Audible

What Is A “Corporate RIA?”

Broker/dealer affiliation models have evolved to the point where we shouldn’t be referring to them as broker/dealers anymore.  They are giant Registered Investment Advisors (“RIA”) that happen to also have a broker/dealer alongside.  It is the RIA component of the large “broker/dealer” firms that are commonly referred to as the “corporate RIA.” What these solutions offer, and how they need to compete in the marketplace, is evolving just as quickly.

Found This Video Helpful?

Want to learn even more by better understanding what a transition to the RIA model might look like for your own practice?  I encourage you to schedule a Discovery call, and I’d be happy to begin that conversation with you.

Full Transcript:

“What is a corporate RIA?” That is today’s question on the Transition To RIA question and answer series. It is episode #73.

Hi, I’m Brad Wales with Transition To RIA. 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. You’ll find all the resources I make available from this entire series in video format, podcast format. I have articles. I have whitepapers. And as I noted, if you prefer podcast over video, and you’re watching this on video now, you can find the “Transition To RIA Podcast” on all major podcasting platforms.

And again, the website is TransitionToRIA.com.

On today’s episode, we’re going to talk about the concept of a corporate RIA. What exactly is it? How did we get here? And what is the corporate RIA model going to be going forward? That’s what I wanted to dive into here today.

First, a little background on how we got here. We’ll start with broker/dealers. That might be a large wirehouse firm, might be a regional firm, or might be an independent broker-dealer. These firms all started initially and solely as a broker-dealer.

So, for their initial existence, all the “financial advisors” underneath them were solely “brokers.” They were “registered representatives” of the broker-dealer. The way they interacted with clients was to facilitate, for instance, the buying and selling of securities for a commission. That was essentially all they did. I’m not diminishing the scope of services but meaning it was all done on that broker-dealer commission arrangement.

Over the decades, the trends have moved to more fee-based relationships where advisors wanted to work with their clients in a fiduciary capacity and on a fee basis. Those same broker-dealers in turn had to add an RIA to their offering. That is what is commonly thought of as the corporate RIA.

While there’s no regulatory definition of a corporate RIA, it’s commonly understood to mean an RIA of a large firm, like a large broker-dealer firm. They were originally just the broker-dealer, and then they’ve added the RIA.

That is why you have the arrangement now where most advisors at large wirehouse firms, regional firms, independent broker-dealers, have a “dual-hat” structure. The advisors are wearing two hats.

They are wearing the hat of a registered representative underneath the firm’s broker-dealer, and they are also wearing the hat of an investment advisor representative, an IAR, under the firm’s RIA. Again, often referred to as a corporate RIA. And for comparison, we could, in theory, call it the corporate broker-dealer.

And so, you have dual-hat advisors that can provide both services to clients both in a commission capacity and in a fee-based advisory capacity. That’s the norm that we’ve had for the past couple of decades of most advisors wearing both of those hats.

That situation has evolved, particularly at independent broker-dealer firms, to where the advisors are increasingly doing fee-based business, and their clients prefer that arrangement. At the large independent broker-dealer firms, more of their client assets are now in advisory accounts, not commission accounts. The RIA is now the larger piece of the pie than the broker-dealer is.

For decades, historically it was, “That’s a broker-dealer that also happens to have an RIA.” Now it is, “That’s an RIA that also happens to have a broker-dealer.” And yet, we still refer to these firms as independent broker-dealers.

I’m guilty as charged for doing this as well. It’s the verbiage that we as an industry have used to refer to these firms. But the reality is we arguably should be calling them independent RIAs, or corporate RIAs, that also happen to have a broker-dealer.

We’re starting to see a little of this evolution where some of these firms no longer refer to what we traditionally would have called their independent broker-dealer channels. They now refer to those channels as their “corporate RIA” channel. And to the degree you have a need to accommodate commission business, whether you want to continue to do new commission business as that dual-hat advisor, or you have legacy positions that you need to maintain or protect, they will accommodate that with their broker/dealer.

It’s no longer, “Join our broker-dealer, and by the way we have a wonderful RIA.” It’s now, “Join our corporate RIA, and to the degree you need it, we have a broker-dealer alongside it.”

Those offerings are continuing to evolve though in part because they’re losing advisors to the RIA model. So, the question is, “How can they stem the bleeding?” You see this not just at independent broker-dealers, the same thing is happening at wirehouse firms, regional firms, and all those sorts of things.

Advisors are becoming increasingly fee-based to the point where, to use an extreme example, let’s say they’re 95% fee-based already, and it’s only a small portion that remains commission business.

For those that are not aware, there is a way to go into the RIA model and still maintain some amount of commission business. I’ve done several episodes on that topic if you want to dive deeper.

There are nonetheless some advisors that are looking to move entirely away from the broker-dealer world, the FINRA world. They are planning on getting to 100% fee-only.

As opposed to losing those advisors to either their own RIA or some other RIA they could join, firms are trying to remain competitive in part by starting “IAR-only” channels. I did an episode on that if you want to dive deeper into it.

At for what that channel is for, consider the dual-hat advisors I mentioned. They are under the broker-dealer, and also under the “corporate RIA.” However, some have migrated almost all their business to solely be under the RIA.

At that point, they can take the hat off of being a registered rep. They can take the hat off of being affiliated with the broker-dealer side of the house. At that point, they would be IAR-only, investment advisor representatives only under the corporate RIA.

Which at that point, calling that affiliation “independent broker-dealer” doesn’t make sense at all.  But that’s the verbiage we’ve traditionally used. I think we’ll see more of these “IAR-only” approaches. Where the advisor is solely under the firm’s corporate RIA.

Can these “IAR-only” firms compete in the marketplace?

The way to think about IAR channels, these corporate RIAs, is they are just a very large RIA. Whether you are at a wirehouse firm, an independent broker/dealer firm, etc., if you’re wearing that dual-hat, you are under an RIA just happens to be a very large RIA. In some cases, 10,000+ advisors under the RIA.

Historically, we haven’t thought of it that way. We think of them as broker/dealers. Whether it’s a W-2 employee-model broker-dealer or an independent broker-dealer. We think, broker/dealer.

But again, to the degree more and more of your assets are fee-based, you should be thinking, “I’m with an RIA.” And for some of you, it just happens to be a very large RIA.

The question you should be asking yourself is, “How competitive is the RIA I’m affiliated with compared to available alternatives?” We’re going to dig into that here briefly.

As I’ve noted, most of these firms started primarily or solely as a broker-dealer. These firms have decades of legacy technology and institutional knowledge based on a broker-dealer mindset. For decades, they’ve been building technology to cater to the needs of a broker-dealer relationship, of a commission relationship.

Over the years, they’ve added the RIA side of things and the technology has had to evolve. But make no mistake, the core of that technology was built to handle broker-dealer business, to handle commission business. They’re now having to try to evolve that technology.

They’re also having to try to evolve decades of institutional knowledge. Some employees of these firms have worked there for a very long time, some their entire careers.  That can be a good thing in some respects, but also a challenge.

Consider such folks on the compliance team.  They’ve had years, if not decades, with a mindset of how things work when there’s a broker-dealer involved. To assume they can just forget their legacy approach to things, and start fresh is not an easy task.

As an example, I spoke with an advisor recently who is affiliated with a firm that now has one of these “IAR-only” channels.  She migrated to it from what we would typically refer to as their independent broker-dealer channel.

I asked her how different her experience was in the IAR-only channel, vs her prior affiliation channel. She noted there were a few tweaks to the economics, but from a compliance perspective, pretty much nothing has changed.

There are different rules that apply to RIAs, than apply to broker-dealers. The challenge is it is the same compliance department managing the relationships with advisors that are still wearing the dual hat, that is tasked with monitoring advisors in the IAR-only channel. Reality is, it’s two different regulatory arrangements.

The advisors in the IAR-only channel should be looked at through the lens of what is required in the RIA world.  It’s difficult for the long tenured compliance folks to say, “Because they’re no longer with FINRA, because they’re no longer with the broker-dealer, we don’t have to do it that way anymore.” That sounds easy to do, but they’re having to evolve out of a legacy way of doing things.

Even if you can get everyone onboard, and you have good home office folks, operational folks, compliance folks, technology folks, there is still the challenge of how big these RIAs are.  Being managed to the lowest common denominator is still in play.

Even if you move to mostly just under the corporate RIA, there still is the compliance challenge of being managed to the lowest common denominator.  They still must put guardrails in place to try to manage, in some cases, 10,000+ advisors. That remains a challenge, even if you can migrate more and more to just, or solely, under the corporate RIA approach.

These corporate RIA’s must now also compete in the marketplace against other RIAs. Their existing advisors could leave and either start their own RIA, or they could join a competing existing RIA. Doing the latter is something I mention on a lot of these episodes.

There’s a world of RIAs that have very attractive value propositions that these corporate RIAs are now in competition with. Many of those firms were purpose-built from the start to cater to fee-based advisors. These are not firms having to unwind decades of technology, decades of institutional knowledge, decades of ways of doing things.

These firms were built from the start to say, “We’re going to start an RIA that is going to be a great platform for fee-based advisors. We’re going to build it solely with that advisor in mind. We’re not having to unwind anything. We’re not having to change. We’re not having to evolve. We’re going to use the best solutions available to cater to those advisors.”

There are some very compelling value propositions out there. The corporate RIAs are now having to compete with them. There is a lot of competition in that regard.

Advisors are asking themselves, “Should I maybe start my own RIA?” or, “If I’d rather be under someone’s else’s RIA, what does the competition look like, and how does that compare to the “corporate RIA” opportunity I have available to me now?”

What then will it take for these corporate RIAs to survive?

If I was running one of these firms where more assets are now under the RIA side of the house, I would no longer refer to the channel as a “broker-dealer” offering.

The mindset must be, “We are an RIA. What are we going to do to compete against the other options that are available to advisors? How is our RIA more attractive than an advisor starting their own RIA? How does our RIA compare to other RIA options available?”

These firms should not be comparing themselves against other “broker-dealer affiliation models.” If they want to retain, let alone attract new advisors, they need to benchmark themselves against other RIA solutions in the marketplace. That is the mindset they must have.

I’m not saying it’s going to be easy, for the various reasons I noted previously. But that’s what it’s going to take to compete because there are very good alternatives for advisors to choose from.

I hope this has helped. We’ve walked through the history of how we started referring to corporate RIAs, what they are now, and how they must continue to evolve to compete in the marketplace.

Again, there’s no official definition of “corporate RIA” but this is what is happening in the marketplace and how the terminology is being used.

With that, like I said, my name is Brad Wales. I’m with Transition To RIA. If you’re not already there, head to TransitionToRIA.com. You’ll find all the resources I make available for free. There are videos, the podcast, articles, whitepapers.

The easiest thing to do is if you want to talk about today’s topic, and how it might impact you, or anything else RIA related, at the top of every page of the website, there’s a Contact link. Click on that. You can instantly and easily schedule a time to have a one-on-one conversation with me.

I’m happy to have that conversation with you. I’m a big believer that you must educate yourself. You must know what’s available before you can conclude that any one solution is best for you. I’m happy to walk you through what those options are and how they would look for your specific practice.

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

Want To Learn More?

Schedule a Discovery call and lets begin a conversation.

Share this post

Read my free whitepaper!

Get instant access to my free whitepaper on "11 Ways The Economics Of The RIA Model Are Superior To Other Advisor Affiliation Options".
FREE WHITEPAPER:  “Steps To Take Now If You Anticipate Transitioning Your Practice To The RIA Model Anytime Within The Next 10 Years.”