Q93 – What Is The Difference Between A Corporate RIA And An Independent RIA?

Also available as podcast (Episode #93)

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What Is The Difference Between A Corporate RIA And An Independent RIA?

There are no specific regulatory or legal definitions of “Corporate RIA” or “Independent RIA.”  Instead, we must rely on how the terms are most commonly used in the marketplace.  Corporate RIA verbiage is most often used in reference to the RIA component of large broker/dealers, particularly independent broker/dealers. Independent RIA verbiage is typically used in reference to owning your own RIA.  Though variations of each of these most used references exist.

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Full Transcript:

What is the difference between a corporate RIA and an independent RIA? That is today’s question on the Transition To RIA question and answer series. It is episode #93.

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’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of things to help you better understand the RIA model and how it might look for your practice.

Again, TransitionToRIA.com.

On today’s episode, we’re going to be talking about how as you explore pathways into the RIA model, you might hear references to so-called corporate RIAs. While other providers refer to their solution as an independent RIA. We’re going to talk about what the difference is between them.

Two quick items to start.

I previously did a separate episode diving deeper into corporate RIAs. Feel free to check that episode out.

And then separate, there is no uniform, legal, or regulatory definition of either corporate RIA or independent RIA. So, what we’re going to talk about on this episode is how these phrases are generally used in the marketplace. But just know there’s not some regulatory definition that we could point to and say, “Well, that is the true example or the true definition of either one of those.” That would make things simpler if it was the case. That’s not the case though.

So, instead, we’re going to talk about how these terms are used in the marketplace and what they are typically referring to when used.

We’ll start with corporate RIA.

From hundreds of conversations I’ve had with advisors and solution providers, typically when the term corporate RIA is being used, it’s referring to an RIA at a rather large firm, oftentimes a firm that is coupled with a broker-dealer.

An example of that would be independent broker-dealer firms. There are quite a few of them in the marketplace. Some are very large, with 10,000, 15,000, 20,000 advisors.

Advisors in the independent broker-dealer model, typically are wearing two different hats.

One hat is they are a Series 7 registered representative, and they are underneath that company’s broker-dealer. And simultaneously, they perhaps have a Series 65 where they are an investment advisor representative of the firm’s RIA, where they offer fee-based accounts.

Even though we refer to these firms as “independent broker-dealers”, they typically have two components to them. The broker-dealer, which is where and how you offer commission accounts, and also the RIA, which is where and how you offer fee-based accounts. Most advisors in those channels are wearing both of those hats.

It’s the RIA piece of this that is typically referred to as the corporate RIA. That’s how that name is often used in the marketplace.

For the same reason, although it’s not referred as such in practice, we could call it the corporate broker-dealer, which sits alongside as well. For whatever reason, that name has never stuck. But on the RIA side, referring to that part as the corporate RIA is often the case.

Some of these firms are mostly now referring to themselves as corporate RIAs. They don’t really consider themselves independent broker-dealers anymore. They say, “You can join us under the corporate RIA, and by the way, we do have this broker-dealer on the side. So, to the degree you have commission business that you need to accommodate, we can do that via the broker-dealer.”

But they are leading the message with, “We are ultimately a corporate RIA that you can join under. The broker-dealer is now essentially secondary to that.”

That is different from how it was for decades. For a long time, the broker-dealer was the bigger piece of the two-component setup. But over time, more and more accounts are going from commission accounts to fee-based accounts.

Most large independent broker-dealer firms now have more assets on the fee-based side of things than they do on the broker-dealer side. So, we shouldn’t arguably be calling them independent broker-dealers anymore. The reality is, there’s more assets on the RIA side. We should be calling them independent RIAs or corporate RIAs, whatever we want to call them. Who happen to have a broker-dealer for the remaining commission assets that’s now a minority part of the overall assets at the firm.

The main takeaway is the hat those advisors are wearing under the RIA side of the firm is often referred to as the corporate RIA.

While not used as often, the same verbiage can be used to describe what occurs at a wirehouse. If you are at a wirehouse and you’re W2, you are likely also wearing those two hats. You are under your firm’s broker-dealer for your commission assets. You are under your firm’s RIA for the fee-based assets. That’s arguably a version of a corporate RIA as well.

The wirehouse world doesn’t generally use this verbiage, but it’s arguably a corporate RIA structure as well.

So, whether you’re on an independent broker-dealer, 1099 model, or you are in the W2 model, you can refer to that as the corporate RIA side of things.

Corporate RIA verbiage could also be used with smaller RIAs or standalone RIAs that were built from the beginning as an RIA.

A lot of these wirehouses or independent broker-dealers I’m talking about, even though the assets have shifted from commission to more and more fee-based and they’ve essentially become an RIA that also happens to have a broker-dealer, there are plenty of RIAs that were started from scratch as an RIA, first and foremost.

Those firms might have some sort of accommodation on the broker-dealer side, but they were purpose-built to attract advisors that want the benefits of the RIA space but don’t want to start their own RIA. I’ve done several episodes on the benefits of why you might want to look at joining an RIA.

This could include RIAs as small as 5 advisors, to firms with 500+ advisors. You could arguably say it’s the same kind of structure where you are an investment advisor representative under another RIA. Whether it’s a behemoth that has 20,000 advisors or one with 50 advisors, we could argue that both versions of that RIA are so-called corporate RIAs.

A warning I would give on this, and I’ll repeat it again at the end, is to be careful with this terminology when talking about corporate RIA, or in a second when we’re talking about independent RIAs.

An example I give on being cautious relates to the use of the word “hybrid.” I’ve done an episode on what is a hybrid RIA. I’m not really a fan of the hybrid terminology because it is misused in several instances.

For starters, the term hybrid, just like what we’re talking about here, also does not have a set regulatory definition. We can’t point to a particular affiliation model or setup as the definitive definition of hybrid. It’s used in several different ways and sometimes in ways that are not appropriate or where a firm is clearly trying to benefit from the excitement about the hybrid model.

Over the past few years, I’ve seen several examples of firms using the terminology in a way that arguably is not even close to what most people think of as the hybrid model.

Similarly, you need to be cautious about how some firms refer to a corporate RIA or an independent RIA solution. It’s important to make sure you understand exactly what they’re referring to because it could be used in different ways and sometimes – I don’t want to say by bad actors purposely using it incorrectly – but I would argue there are firms and solutions that use it in a way that’s clearly not the most thought of way of what those terms are referring to. So, something to be aware of.

Now, let’s jump to independent RIAs. What does that commonly refer to?

The first example I think is universally accepted, which is where you were to start your own RIA.  Under that scenario, you are independent, you are not affiliated with some other firm, you are not joining under some other firm. You are independent. It is your own RIA. Having your own RIA would meet the definition of independent RIA. That scenario is what a lot, but not all, people think of when you first say independent RIA. That is what comes to mind.

However, others might argue other scenarios fit the definition as well.

In our industry, if you want to go “independent” with your practice, what exactly is that referring to? Is that independent with an independent broker-dealer? Is that independent with your own RIA? Is that independent joining under either one of those as a 1099? The term independent is used very broadly.

The point I’m trying to make here is some would argue that anything beyond a W2 broker/dealer (w/ RIA) type model would be a version of independent.  And thus the associated RIA part of that would meet the definition of independent RIA.

The last example is where you might be joining an RIA. That is often referred to as an independent RIA route. Even though it’s not your own RIA, the RIA itself is independent of any large wirehouse or broker-dealer. So that too could be considered an independent RIA. That could be a relatively small RIA, mid-sized RIA, or we are increasingly seeing very large RIAs, so-called national RIAs that are coming on the scene.

Size or headcounts of advisors does not necessarily drive what may or may not be deemed to be independent, but just know another example is even if it’s not your own RIA, you might be joining an RIA that would arguably be considered an independent RIA.

The main point here is, unfortunately, I can’t give you – no one can – a definitive definition of the only way that corporate RIA and independent RIA terminology should be used.

One of the main takeaways from this is to always pay attention to who is using the terminology. I’m not suggesting it’s necessarily being used in a nefarious way, but you must ask yourself, who is expressing it as such, and very specifically, what are they referring to?

This goes back to the hybrid model where that was all the rage over the last decade or so and I would see solution providers and their business development people saying, “We have a hybrid offering, we have hybrid pricing.” And the reality is they were putting a spin on something that does not meet the typical definition of what most folks think of as hybrid.

It’s the same thing here if you hear someone talking about, particularly, the independent RIA jargon. Corporate RIA verbiage is at least a little more aligned that you’re at least going to fall under someone else’s RIA, is typically the accepted definition of that. Though there are some nuances as we talked about.

Independent RIA, however, could be an independent broker-dealer referring to their own RIA as an independent RIA. It could be referring to a custodian explaining how you can go start your own RIA. It could be referring to an RIA that’s looking to attract you as an advisor and says, “We’re an independent RIA.”

Be careful with who is using the terminology and make sure you understand what they are referring to. If you don’t have that context, don’t make any assumptions necessarily that their path is better than another path, until you fully understand it.

As I talk about in a lot of episodes, and as evidenced by what we just discussed, there are multiple different pathways you can take to transition your practice into the model. From starting your own RIA, joining an RIA, as well as some flavors in the middle. The corporate RIA and independent RIA jargon is used, for better or worse, somewhat interchangeably throughout a lot of those different pathways.

Two things to always keep in mind with that.

First, make sure to educate yourself on what are the different pathways. You want to understand the options at a generic level first before you worry about what any solution provider might be. Understand the pros and cons.

Once you’ve done that and started to lean towards a particular pathway to explore further, then you can start looking at what are the solution providers that support that model.

And then second, what is good for one advisor is not necessarily good for you.

There are pros and cons to each of these paths. There’s no hard-set rules. If you came to me at your size as an advisor and someone else the same size came to me, even from the same firm currently, that the path you choose is the same or the best path for the other advisor, even though in many ways you are very similar.

So, as you perhaps explore a corporate RIA route or an independent RIA route, be very careful assuming that because an ex-colleague or a friend went down one route, that the same route is best for you. It might not.

You need to know what’s out there, understand the jargon, make sure you’re not misinterpreting the jargon because of who’s using it, and then ultimately decide which path is best for you based on your specific circumstances.

That is something I help advisors with all day long. I help you work through all the variables, work through the education, understand what options there are in the marketplace. I’m happy to have that conversation with you as well.

As I said at the top, my name is Brad Wales. Whether you want to talk about today’s topic or anything else RIA-related, I’m happy to go over that with you.

As a starting point, feel free to jump over to TransitionToRIA.com. You can find all the resources I make available including this entire series in video format, podcast format. I have articles, I have whitepapers.

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. Whether you want to talk about today’s topic and the different pathways and the different jargon used, or anything else RIA-related, I’m happy to have that conversation with you.

Again, TransitionToRIA.com.

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

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