Also available as podcast (Episode #61)
What Should I Do With My Legacy Commission Business?
A common misconception of the RIA model is that you have to be 100% fee-only to transition to it. While your assets underneath the RIA itself would be fee-only, there are a number of solutions available to accommodate and/or solve for the existing commission part of your practice as well. As there are nuances to each of the available solutions, there is no one-size fits all approach. Instead, each advisor needs to consider the specifics of their unique practice, and which of the solutions is most accommodating for them.
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What should I do with my legacy commission business?
That is today’s question on the Transition To RIA question and answer series. It is episode #61.
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 are not already there, if you head over to TransitionToRIA.com, you can find all of the resources I make available, the entire question and answer series in video format, podcast format, I have whitepapers. All kinds of great resources to help you better understand the RIA model. That is TransitionToRIA.com, go check it out.
On today’s episode, this is a follow-up to a prior episode I did where we talked about if you’re an advisor that wants to move into the Registered Investment Advisor (“RIA”) model, but you still have some amount of commission business….first, can you make that transition? And next, what are the solutions available for you to accommodate the commission part of your practice?
Like I said, I did an episode earlier primarily on so-called RIA-friendly broker-dealer solutions. I’m going to touch on that again on this episode as well, but we’re going to go into a couple more different pathways that advisors have available to them of how to accommodate their commission business.
There are two main reasons advisors might need to solve for this. It’s not always so simple as going 100% fee-only, dropping FINRA altogether, and being solely RIA.
The two primary reasons are to protect the client relationship, and then due to the amount of commission revenue you’re currently receiving.
If your sole relationship with a client is a single commission account – maybe it’s a 529 plan, something along those lines – if that is the extent of the client relationship, at that point, you can consider whether that’s even worth bringing over with you into the RIA model or simply walking away from it.
We’re going to get into some different solutions here, but more often than not, the commission piece is tied to a client that also has an advisory account.
If a client of yours has a $1million IRA fee-based account, you’ll clearly want to bring that with you to the RIA model. But they perhaps also have a variable annuity, that still makes sense for them to have. Or they do have a 529 account, or whatever the case may be.
If you were to walk away from that commission piece, you’re now risking someone else being introduced to that client relationship and possibly trying to take the rest of the client from you. We have to consider, do we need to protect a client relationship with which path you might take with this?
The other variable is economics. How much production are you generating from the commission part of your practice? If it’s a very small part of your practice, potentially you can try to whittle that down. Again, I’m going to get into some solutions.
But for many advisors, it’s a meaningful number. There could be some legacy variable annuity (“VA”) positions that have been built up over the years. Maybe the advisor is not looking to do more new VA business, though that is still an option. But in some instances, those legacy positions are generating tens, if not hundreds of thousands of dollars in trails every year.
So, it could be a matter of a client relationship to protect and/or meaningful revenue that is still being generated. That must be considered.
As we go through each of these solutions, we’ll have that as our lens of why some of these solutions are more appealing than others depending on your specific circumstances.
The last thing before I jump into the list, is a reminder that an RIA itself cannot accommodate commission business. Nothing has changed, no new regulations, or anything like that. Under the RIA itself, you would only have advisory accounts. However, it is possible for an investment advisor representative of an RIA to also potentially be wearing two hats.
It is possible to be under an RIA – your own or another one you might join – and also be wearing alongside of it the hat of maybe a registered rep with a broker-dealer. So, just keep in mind, an RIA itself does not accommodate commission business. You can however put something alongside of it that can potentially accommodate your needs.
As for list…there’s no particular order here, except for the first one, as it’s the easiest one to toss out there. It generally involves advisors where it’s a very small part of their business. But beyond that, the list is not in an order of best to worst, or vice versa, or anything like that.
Walk away from the business.
The first path is to simply walk away from the business. I’ll give an extreme example. If you are 99% fee-based and 1% of your practice is commission, and none of that 1% is a situation where you need to protect the client relationship – perhaps the extent of what you have with that client is solely a 529 – if that’s the case, it might simply be easiest for you to walk away from the business, leave it behind at your prior firm.
At some point, that number is so small from a revenue perspective or from a client number perspective that you have that option to potentially just walk away from it. Or put differently, don’t move it with you to whatever your next path into the RIA model is.
I won’t belabor this point too much because for many folks such a path is easier said than done, but just know that it is an option. And it does occur at times when the situation warrants it. So that’s the first solution.
Number two is to potentially convert some of your commission business into fee business. You’ve maybe already been doing this over the years anyways, where you’ve been moving clients from a transactional commission type relationship into a fee-based relationship.
Now, maybe you think you’ve ran the full course on that and all I have left are variable annuities or 529s or those sorts of things. There is now an increasing marketplace of solutions where you could potentially convert some of those existing positions into a fee-based chassis. I did a separate episode on this with respect to insurance products.
As an example, you might be able to take a variable annuity that was originally issued under a commission kind of chassis, and now potentially convert that into a fee-based variable annuity for the client.
You need to do this with the clients’ interest first. It must make sense for them to leave whatever current structure they have and convert it. The providers of the conversion solutions help you with that analysis.
In many instances, the client can be better off doing a conversion. Depending on the timing of when the original annuity was put in place, maybe the interest rate environment has changed to the point where it’s advantageous for them to leave the particular variable annuity they’re in and convert it into a new fee-based annuity – which you then can carry under the RIA model.
Other times, it might not be advantageous to the client. That’s why an analysis needs to be done. But be aware there is an increasing ecosystem available to potentially convert a lot of your legacy commission positions into a fee-based chassis.
That is a way to whittle down the commission part of your practice potentially further. So that’s number two.
Number three is to sell the commission part of your practice.
This path gets tricky though if you have the client relationship dilemma where the client has both an advisory account and a commission account. That could make it less appealing for you to sell it.
I’ll give you an example though of where I have seen this happen. If an advisor is at a firm and the commission part of their practice is in some sort of proprietary products of the firm, being able to move the assets might not be an option.
I won’t get into that in this episode, but that’s another example of why you wouldn’t necessarily want to use proprietary products is the captive situation you then find yourself in.
In that scenario though, a solution might be to sell it to an advisor that’s remaining at the firm. You would want to be comfortable with whoever you sell it to, that they wouldn’t in turn try to poach the rest of the client relationship (i.e. the advisory account you might have with the client.)
These transactions are usually done on a very personal basis with someone the advisor knows well and is comfortable with. It can be a good thing for the receiving advisor too. It’s new business for them that’s proprietary. It’s sticky. It can’t go anywhere. It must be serviced by someone.
Conversely, if a large part of the commission piece of your practice doesn’t involve a wider client relationship, you have an asset on your hands. Oftentimes, these are trail-paying positions and you have the ability to potentially sell it to someone. Particularly when reoccurring revenue is involved, there is value in that.
So you have the ability to potentially sell it to someone and that is your way to kind of extract you from that part of the practice.
Next, and this is what I did a prior episode on, are so-called RIA-friendly broker-dealers. If you were to start an RIA – or, there are pathways where you could join an RIA, I did a whole episode of why you might want to join one, and if that’s the path you go with, they’ve already set up this apparatus for you – but if you were to start an RIA there are so-called, RIA-friendly broker-dealers.
Their main business model is to say…“we understand you have advisory assets, and you have commission assets. And those commission assets are so large that it makes sense for you to want to keep them.” (i.e. you don’t want to sell them or walk away.) “We, the RIA-friendly broker-dealer, would love to have you put your commission business with us. You can do new business and/or you can just hold legacy positions. You then go over there and you start your RIA. We’re not going to take any of that revenue. That’s 100% yours. We’re going to stay in our lane over here, and we’re going to give you a traditional independent broker-dealer style payout.”
“We do have some slight oversight required for regulatory reasons, but for the most part, we stay out of your RIA. You keep 100% of the revenue. We like our part of the business, our share of the business over here.”
That solution exists. It’s something you can explore. It is a pretty typical arrangement. I don’t have any exact stats of how many RIAs have it. If I had to guess, from looking at ADVs over the years, maybe 25% or so of RIAs have some sort of RIA-friendly broker-dealer solution alongside them.
Know that this solution does exist. It is available. I did a whole episode on that. You can dive deeper into that as well.
Park and advise
The last pathway, the fifth one, is a relatively new evolution in the marketplace. It’s kind of an extension of the RIA-friendly broker-dealer solution. It’s typically a firm that is also an RIA-friendly broker-dealer that says…“We realize you might not want anything to do with FINRA or a broker-dealer anymore. You want to drop your (series) 7, move on, not have to deal with any sort of oversight or anything like that.”
What they say is… “Move those commission assets to us, to our broker-dealer. You drop your 7 because you’re formally moving those assets to us. You will not be the registered rep on those assets. We, the broker-dealer, will service those assets, but we will commit to a couple of things. We will not, under any circumstances, try to poach the client relationship. We are essentially a holding spot for those assets, to protect those assets, to do the service that is perhaps necessary, the client needs to do a change of address or whatever the case is. We will protect that.”
“We, the broker-dealer, will retain the trail on that because you no longer have your 7.” If you don’t have your 7 with that broker-dealer, you cannot receive or share in the trail. So they retain it. However, what they do is turn around and hire you as the RIA for fiduciary guidance on what they should do with those assets.
They say… “You now have brought us $50 million in variable annuities” or whatever the case is. “We, the broker-dealer, will take your guidance on how these should be managed perhaps in the sub-accounts. We will hire you (typically on a basis points on the assets) and you will provide us that guidance as the advisor. You will get paid on it, but you are not directly receiving the trail. You are not directly sharing the trail.” You are not a registered rep of that broker-dealer.
I think this is going to become a popular solution because it solves for the desire of many advisors to fully move away from FINRA, from that broker-dealer world, and to be 100% fee-only. Many advisors don’t want to wear dual hats anymore.
Under this solution, you are putting a Chinese wall between each part. You’re saying…”I’m going to move those assets there. They are the broker-dealer on it. I am simply hired to provide guidance on how those positions should be managed.”
And so you can continue to receive revenue on it, and you’ll know that the client relationship will be protected. I think we’re going to see more and more of this approach. I don’t want to say it’s a win for all parties because I never want to oversell anything and make it sound like there’s not pros and cons, because there’s always pros and cons to things.
As an example, you generally would make more revenue for yourself if you went with the full RIA-friendly broker-dealer solution where you are the Series 7 and you are directly receiving the trails. But again, that comes with the trade-off of still being in the FINRA world, still being a registered rep. Everything has its pros and cons.
That is the last solution. There’s not necessarily even a name for it yet. I think we’re going to see that continue to grow and increase and there’s advisor interest in that for several reasons.
Those are the five main ways you solve for your legacy commission business. Most advisors that are considering the RIA model do have this to think through. Of all the conversations I have, it is extraordinarily rare that I would be talking to someone at a traditional broker-dealer firm, a wirehouse firm, an independent broker-dealer, etc. that’s already 100% down to every last account fee-based. Because if they are, I’d say… “why haven’t you already made the move to the RIA model?!”
Most advisors I talk to have some amount of commission business. The solutions we talked about today are how to navigate that. But every advisor situation is unique. It depends on your client relationships. It depends on how big your practice is. It depends on how much commission production you are generating.
So, please, take this at a high level. You have to dig into your specific circumstances to figure out which of these paths might be best.
The final thought I’ll leave you with is that there has to be enough meat on the bone for a lot of these solutions. It must be worth it to an RIA-friendly broker-dealer to go into partnership with you with their solution. If you are generating a million dollars in fees and commissions and only $5,000 of that is commission trail revenue, most of these solutions are not going to work with you. The math doesn’t work for them.
There needs to be enough meat on the bone for the solution provider to make it worth their while. A lot of these solutions have minimums of either X in production or X in assets.
It’s the same if you want to, for example, sell that part of your practice. It’s not worth your time or someone else’s time if that’s a small part of the practice. There needs to be enough meat on the bone for the counterparty, to make it worth their while. Keep that in mind as you think about these solutions.
This is the sort of thing I help advisors talk through every day. Every advisor situation is unique because of how much meat is on the bone, how much commissions are part of the practice.
This is an extreme example, but size of the assets alone is not the only variable, it’s also desire. A number of years ago before some of these solutions I’ve discussed were as readily available, I knew of an advisor who walked away from hundreds – I think it was $200,000 – in trail revenue on commission business. Simply walked away from it as opposed to try and find some solution because they were so ready to move on from a FINRA affiliation, they wanted to be 100% fee-only.
At the time, unfortunately, there were not some of these solutions, or they were not as robust. And the advisor chose to simply say… “You know what? That’s fine.” This was a larger advisor, so it was easier for that advisor perhaps to walk away from $200,000. That’s still a very meaningful number.
Rest assured the minimum sizes for some of these solutions are well below $200,000. I don’t want to give that impression. But it proves that every advisor situation is unique.
I hope this has helped you think through what these solutions are. I have these conversations all day long with advisors. I’m happy to have that conversation with you as well.
Like I said, my name is Brad Wales with Transition To RIA. I help advisors with these sorts of conversations, whether it’s should you even be going into the model, how does it work if you do want to go into the model, how do you solve for all the different things you need to solve for along the way?
Solving for the commission part of your practice is one of the checkboxes that you work through with the process. I help advisors figure out how to solve for it and who the solution providers are that can help you with that sort of thing. I’m happy to help you with that as well.
If you’re not already there, if you head to TransitionToRIA.com, you can find all my resources, the videos, podcasts, whitepapers. At the top of every page is a contact link. If you click on that, you can instantly and easily schedule time to have a conversation with me to talk about today’s topic or anything else RIA-related. I’d be happy to have that conversation with you. Again, TransitionToRIA.com.
With that, I hope you value on today’s episode, and I’ll see you on the next one.
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