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Being a financial advisor is one of the most rewarding careers you can get in to. Believe me, I’ve been doing it for over 17 years and I truly get the chance to change lives on a regular basis. However, what I’ve also learned from my years in the business is that not all advisors are alike. When most people think of advisors, they think of those who work for large broker-dealers and who make a commission off every product they sell. However, there is another route you can take and it’s one that has a lot of upside with very few negatives. It’s the life of the independent RIA (Registered Investment Advisor).

What is a Broker-Dealer?

A broker-dealer is what most people think of when they hear the term “financial advisor” (though this is changing.) Broker-dealers sell securities as a principal before selling them to their customers. In the United States, the term is used to describe stock brokerages that act as both agents and principals. When they act as a broker (agent), they make orders on behalf of their clients. When they act as dealers (principals), they trade for themselves. As you can see, broker-dealers can easily have a conflict of interest as they are monetarily rewarded for selling their clients’ products. Most agents who work for a broker-dealer are limited in some way as to the products they can sell and receive a commission each time their client purchases a product. The commission varies depending on a number of variables, most set forth by the broker-dealer.

What is an Independent RIA?

An independent RIA is one who does not work for a large company. We’re also referred to as fiduciaries, and this term means we stand behind the rules of putting our clients’ needs before our own. Most independent RIAs work on a fee basis, meaning they don’t make commissions off what they sell. Instead, they create service agreements with their clients. In exchange for a monthly (or quarterly or yearly) fee, they provide them with financial advice and recommendations. No matter how much or how little their clients choose to invest in any given period of time, an independent RIA’s fees don’t change.

What are the Perks of being an Independent RIA?

Just explaining the differences between the two types of advisors should give you a pretty clear picture of the advantages of being independent. But just to emphasize the point, I’ll list out some of the most important perks here.

More freedom

When you work for a broker-dealer, you have to play by their rules. This can mean selling only the products they authorize you to sell, having to hit different types of quotas, having the type of office they approve of and working the hours they, and a whole lot more. When you are an independent RIA, you get to make all the rules and you get the freedom to serve your clients in the way you think is best.

More relationship-building

It’s pretty tough to build an authentic relationship with someone whom you feel pressured to sell to. When you’re an independent RIA, that pressure is gone and the focus is where it should be – on getting to know your clients and finding out how you can best help them.

Increase in recurring revenue

Identifying your ‘why’ as an entrepreneur is important, and I know that most of us have a ‘why’ that involves helping people. However, we also need to provide for our families. One of the big fears of those who are leaving the world of broker-dealers is they think they’ll see a dip in their income. The opposite is actually true. When you go independent, your income is steadier as it’s not based on commissions and it builds as you get more clients.

Legacy

What do you get when you leave a broker-dealer after years of service? If you’re lucky, you’ll have some stock and money in your retirement account, but that’s about it. When you’re an independent RIA, you get to build a legacy. When you’re ready to exit the business, you have something you can sell or pass on to your heirs.

Have questions about the differences between independent RIAs and broker-dealers or interested in learning more about how you can start a firm of your own? Leave me a question or comment below!

 

Patrick Tucker, the owner of True Measure Wealth Management and founder of the Evolved Financial Advisor, has over 20 years of experience in the industry and has spent the last 15 years learning the ins and outs of the fee-only advisory business. He’s spent over $500,000 finding mentors, studying consulting businesses, taking courses, studying the soft sciences, running trial and error experiments, and learning how to be an entrepreneurial financial advisor. He’s simplified this into an easy to use and replicate blueprint for anyone who is entrepreneurial-minded and is tired of the sales culture. Patrick has been able to acquire over $139 million under management with little to no money spent on marketing.