Q102 – What Is The Difference Between A Super-OSJ And An RIA?

Also available as podcast (Episode #102)

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What Is The Difference Between A Super-OSJ And An RIA?

When considering joining an existing advisory platform, there are multiple models to choose from.  Amongst them are Super-OSJs (Office of Supervisory Jurisdictions), as well RIAs (Registered Investment Advisors.)  There are distinct regulatory and competitive differences between the two offerings.  Determining which is better for you is contingent on what your vision for your practice is going forward and what solutions you’ll need to achieve that vision.

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Full Transcript:

What is the difference between a Super-OSJ and an RIA? That is today’s question on the Transition To RIA question and answer series. It is episode #102.

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 your practice 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 model.

Again, TransitionToRIA.com.

On today’s episode, we’re going to talk about what is the difference between a so-called “Super-OSJ” and an “RIA.” In the context of, if you were to join one, how do they differ? Why you might join one over the other.

We’ll start with some definitions.

This verbiage also applies to the employee W2 model, but a Super-OSJ is typically thought of in the independent broker-dealer model. So, something to keep in mind, we’re primarily talking about independent broker-dealers here.

For starters, what is an OSJ?

It stands for Office of Supervisory Jurisdiction. It is a FINRA term, that basically says, “Broker-dealers, if you’re going to have your brokers out in the field, you need to have supervision over those individuals.”

Who oversees the supervision of a broker is an Office of Supervisory Jurisdiction. OSJ is the terminology that’s used for that. That’s why at an OSJ you typically have someone with a principal’s license, either the 9/10 or the 24. They are acting as the principal of the OSJ of that broker-dealer.

Depending on how a broker-dealer is set up, and depending on how big it is, they literally could have thousands of OSJs across the country. Each of them being defined from a FINRA perspective as an Office of Supervisory Jurisdiction.

Now, many of these same brokers in these offices are also under the broker-dealers corporate RIA. I’ve done episodes on that as well, where they can offer their clients both commission account solutions and fee-based solutions. The OSJ terminology applies to the broker-dealer, commission side of things.

The question then is, when does it go from an OSJ to a Super-OSJ?

There’s no regulatory definition of what a so-called Super-OSJ is. Long ago some OSJs, as I just defined them, slowly started growing. They might have been two advisors originally, where one of them had a principal license.

Then at some point, they added another advisor. And then another advisor. And then they realized, “We’re growing this thing. Maybe we can attract advisors into this.” Suddenly, you have OSJs that went from maybe a small, handful of advisors initially, and have now grown to dozens, and in some cases hundreds of brokers under their OSJ.

Now, that doesn’t necessarily mean they are all physically in that same location. But they are falling under the supervision, from a broker-dealer standpoint, of that OSJ.

That OSJ is saying to their broker/dealer, “On behalf of the broker-dealer, we’re the principals here, we will supervise these dozens or perhaps hundreds of brokers that are part of our OSJ.” Some of these have grown very large, these Super-OSJs.

At first, this seems like a win for everyone to have Super-OSJs.

For starters, for the broker-dealer, when the OSJ takes responsibility for most of the direct compliance of the OSJ’s brokers, that’s less the broker-dealer must do themselves.

Part of the value proposition of Super-OSJs is also typically that advisors that join them get to use the OSJ’s direct operational support.  The OSJ will call into the (broker-dealer) home office on their behalf if there’s something that must be done.

The broker-dealer gets to offload some of that direct operational support as well. So, again, that’s good for the broker-dealer.

Further, and this is a big one for the broker-dealer, the Super-OSJ is recruiting advisors to join their Super-OSJ.

A broker-dealer naturally wants to grow. And so, instead of the broker-dealer having to find advisors to attract to the firm, the Super-OSJ is out there as an extension of sorts of the broker-dealer, and they are doing the recruiting. They are trying to attract advisors. They are bringing them in. And all the assets brought to the Super-OSJ are ultimately with the broker-dealer. That’s a benefit to the broker-dealer.

So, you might think, “A Super-OSJ is seemingly not a bad thing at all for a broker-dealer.” That is where things get a bit tricky though.

The bigger a Super-OSJ gets, the higher the payout they get from the broker-dealer. Part of the value proposition of a Super-OSJ is to say to an advisor, “Because we get this much higher payout because we’re so big, we’re able to in turn give you a higher payout than you could get on your own going directly to the broker-dealer.” That’s a plus for the advisor. The Super-OSJ gets a better deal and passes along a part of that to the adviser.

And then the third prong of the win-win-win is the Super-OSJ itself.

They are doing this to make money. Part of what they do is they essentially take a spread. They get a higher payout from the broker-dealer because of how big they are. They give something less than that to the adviser, which, again, still might be better than that adviser could get directly. But the Super-OSJ is making that spread.

So, you might think with all these benefits to the broker-dealer, they’d want lots of these Super-OSJs. As the arrangement seems to be a win for everyone. And, again, in many instances it is a good thing, as I just went through.

The challenge we’ve seen over the last couple years though is as the Super-OSJs get larger and larger, there is more and more friction between the Super-OSJ and the broker-dealer.

I don’t want to point fingers at the Super-OSJs, but the challenge is, as the Super-OSJs get bigger and bigger, they typically demand more and more from the broker-dealer. That could be a higher and higher payout, more support, or more resources.

When a Super-OSJ has got so big and it’s such a meaningful amount of revenue for that broker-dealer, the Super-OSJ can politely say, “Broker-dealer, if you are not able to accommodate our request for what we’re asking for here, keep in mind, we can always leave and go to some other broker-dealer, and they would love our business, because look how much revenue we generate for you.”

That’s a slippery slope. The Super-OSJ is a for-profit business. They are trying to have the best experience, the best resources, the best payouts for their advisers. So, it’s reasonable for them to make such requests.

But, a broker-dealer still has costs, they need to supply resources, they need to be able to make a profit. As they get squeezed, this becomes an increasing friction point.

What we’ve seen over the last decade or so, and I think this trend is going to continue, broker-dealers are saying, “Maybe this isn’t working out as good as it did at one point.” Maybe both sides are saying that. Those Super-OSJs then breakaway and start their own RIA. As opposed to remaining under the corporate RIA, the Super-OSJ says, “We’re going to start our own RIA.”

Not in all cases, but in some cases, those Super-OSJs breaking away will be able to still retain the broker-dealer as their commission solution for their advisors. That’s not really ideal for the broker-dealer from a revenue standpoint though, because you’re taking this huge amount of assets away from them (the advisory assets.)

I think this breakaway trend of Super-OSJs will continue. I think almost all remaining Super-OSJs at independent broker-dealers will one day start their own RIA.

If that independent broker-dealer also has a custodial channel at their firm, they might still be able to provide custodial services (for the advisory assets) for the breakaway RIA.  Or the breakaway RIA might take their assets to another custodian entirely.

So, that’s a quick primer on OSJs and Super-OSJs. The question then is, does that compare to an RIA?

A standalone RIA, whether started by an individual advisor, a team, a Super-OSJ, etc., if all clients of that practice are on a fee-only basis, that RIA doesn’t need a broker-dealer affiliation at all. They are just an RIA.

As I’ve discussed in plenty of episodes, that RIA goes to the marketplace and pulls together the needed solution providers to support the RIA. Which as noted, might not include a broker-dealer at all.

So, the terminology “OSJ” would not apply to a 100% fee-based RIA. OSJ is a FINRA term related to broker-dealers. A standalone, 100% fee-only RIA has no affiliation with a broker-dealer.

But keep in mind, and I have this conversation all the time, there are advisors that say to me, “I’m thinking about starting my own RIA, but I have this large commission business that’s still meaningful to the practice.” Oftentimes, it’s variable annuities that are sitting there paying a trail, and it makes sense to leave the client in those positions.

I’ve done several episodes on how you can solve for a commission part of your practice. Often, that might involve using a so-called RIA-friendly broker-dealer. Very quickly, that model is where a broker-dealer says, “We’re the RIA-friendly broker-dealer. We realize you want to have your own RIA. Great, go start it. Keep your assets wherever you want. We just want to get the commission assets that you have and here’s how we can work with you in that regard.

And so, in that scenario, you still have a tie to a broker-dealer. And for some large RIAs, whether it’s homegrown as an RIA or a Super-OSJ that has evolved and started their own RIA, there might be dozens or hundreds of advisors that still need that commission solution.

When that’s the case, the broker-dealer might to a degree consider that relationship a Super-OSJ of theirs. Even though they’re their own RIA, for the fee-based assets, the commission side could still prompt the OSJ term to be used. While that might technically be true, such verbiage is not often used when describing such a scenario though.

Now, I’ll cover a couple benefits of why a Super-OSJ might transition out from under the corporate RIA like I talked about, and start their own RIA, and how that could benefit you.

So, if you were looking at, “Should I join a Super-OSJ that is under the broker-dealer’s BD and corporate RIA,” that’s an option. Or, “Should I join one of these firms that has their own RIA and they have this RIA-friendly broker-dealer solution for advisors that have a need for it?”

It’s not to say that there aren’t still perhaps good Super-OSJs that are under a BD and corporate RIA. I don’t want to make a blanket statement here as I give you some of the benefits of going with an RIA, vs Super-OSJ. But you would want to flesh out what their value prop is, and does that overcome some of the benefits I’m about to point out here.

First, a Super-OSJ that becomes their own RIA, now can become multi-custodial. When they were under the BD’s corporate RIA, in almost all circumstances, they must keep their clients’ assets at that broker-dealer. Even on the fee-based side, they’re all housed at that broker-dealer. You don’t have a choice.

You can’t go to your clients and say, “We have three custodians. Here’s why you might open your account at one custodian or this custodian. It doesn’t make any difference to me as the advisor. Which would you like to do, client?”

When a Super-OSJ breaks away to their own RIA though, all of a sudden they can be multi-custodial have that ability, and most typically do.

If the broker-dealer the Super-OSJ was with previously has a custodial channel, the typical path is normally they’d go to that broker-dealer and say, “We are going to go in a new direction (start our own RIA.) Maybe it’s best for both of us. But for the benefit of the relationship, benefit of an easier transition, we would like to take our existing advisory assets that are with you now and keep them at your custodial channel.”

And while they might not point it out, that “Yes, over time we are going to add a couple other custodians, we’ll eventually grow assets over there. But we would like to be able to keep the current assets here. That would be easier for our advisors, our clients during this transition.” That’s typically how it happens.

There have been a few exceptions though where that didn’t occur, and the broker-dealer says, “This relationship is not working anymore. We can’t stop you from going in this new direction, but we’re going to end our relationship and you’re not going to use our custodial channel either.” That has happened as some of these firms have migrated away. But that’s more the exception than the norm.

Another benefit when a Super-OSJ becomes their own RIA is the additional technology solutions they now have available to them.

When they were under the broker-dealer’s corporate RIA, in most instances, the only technology available to use (often required) is the broker-dealer’s technology. Which is often proprietary technology.

The fintech world has expanded so dramatically that there’s all kinds of wonderful fintech solutions which in most cases a Super-OSJ, while they’re still captive under a corporate RIA, are not able to offer to their advisors to use.

Whereas, if they go in a different direction and start their own RIA, and because the RIA now has nothing to do with the broker-dealer, they can use whatever technology they want to use. That’s another benefit to advisors and ultimately their clients.

The final example of a benefit I’ll give, and this is not an exhaustive list, is a standalone RIA can typically access more investment solutions.

While a Super-OSJ was under the corporate RIA, typically, they are only allowed to access, for example, SMA managers that are on that broker-dealer’s SMA platform. Whereas an RIA can access a variety of TAMPS, I’ve done an episode on that, where they can access perhaps hundreds of different investment solutions that they can offer to their advisors to use with their clients.

The universe of available solutions is going to be bigger under the RIA model versus a Super-OSJ under a corporate RIA. Which granted, the bigger broker-dealers generally have a pretty good sized set of options, but it is always going to be smaller than what an RIA could tap in the marketplace on their own.

The point is to help you understand the differences between a so-called Super-OSJ and an RIA, and to help you understand why we’re seeing Super-OSJs merge out to become their own RIAs.

And then ultimately for you, if you’re looking to join an existing solution (vs starting your own RIA) to understand how Super-OSJs and standalone RIAs differ.

Super-OSJs still exist and you can learn about their value propositions. But you also have RIAs to choose from. Some of which were originally a Super-OSJ that became an RIA. There are some very compelling value propositions to choose from.

It’s important to understand the differences in what each of those paths can provide for you. I don’t want to make a blanket statement that the RIA is always better than Super-OSJ because I’m sure there are some descent value propositions out there for some Super-OSJs. But know there are differences between them and you would want to dive into those details as part of your due diligence while considering these different pathways.

I hope this has helped you better understand some of this jargon, this terminology, how it might apply. It can get very confusing when you’re talking to someone and perhaps they’re trying to attract you to their solution. Hopefully this has helped in that regard and will help you better understand how it all works.

As I said at the top, my name is Brad Wales with Transition To RIA.

If you 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. All kinds of resources to help you better understand the RIA model.

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 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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