Going Independent? Is it Better to be an RIA or IAR?

There was a great article in last month’s Financial Advisor magazine which compares RIAs and IARs. To anybody reading this article not in the financial services industry those anagrams probably mean almost nothing. However, they represent important operational choices which an advisor must make when venturing out of the wirehouse channel and into smaller, independent firms. RIA stands for Registered Investment Advisor. This is generally considered to be the most free and flexible business structure which an advisor can choose to reduce his/her exposure to onerous regulatory oversight and obtain more freedom in terms of clearing firm options, investment products and payout percentage. The choice to become an IAR (Investment Advisor Representative) may be viewed as somewhere in between total freedom and partial oversight. The difference is that IARs can rely on the back-office support offered by broker/dealers. As the article in Financial Advisor concludes, plenty of advisors are moving into the broker/dealer channel rather than opening up their own RIA, the result of a tighter compliance environment and a slumping economy.

A few years ago the real financial planning ‘purists’ would probably have told you that being an RIA is the only real way to assure pure objectivity. Because having an association with a broker/dealer can sometimes limit an advisor’s options in terms of clearing firms, investment products and compensation models, some would say that it’s not as flexible clients as the pure RIA structure. However, when considering the regulatory and economic
environment which we’ve landed in over the past five years or so, it becomes clearer why a trend is emerging in which advisors move into the broker/dealer channel first and then consider opening up their own shops.

One consideration before opening an RIA is the compliance burden. Understanding the Investment Advisers Act of 1940, along with its recent updates in terms of written policies and procedures, is anything but easy. It may be cost effective for larger RIA firms ($100M+ under management) to hire their own compliance officer, but a smaller firm would quite possibly drown with this sort of added expense. You see, RIA firms may be able to pay themselves out 100% of their compensation, but they are also responsible for eating every fee and expense associated with running an investment advisory business. And those expenses extend beyond compliance and into areas such as technology. In order to run an efficient and competitive practice, you’ll need product research, trading platforms, sales ideas, insurance coverage, etc. Some of this you may be able to obtain through an arrangement with your clearing firm, but a lot of the valuable extras only become affordable when a broker/dealer is contracting on behalf of hundreds, if not thousands of advisors. For some advisors, paying out 5% or 10% or maybe even 20% of gross revenues may be a small price to pay for handing off many of these responsibilities to a broker/dealer.

As mentioned above, the sour economy over the past year also provides a reason why some advisors might stick around the broker/dealer channel before rushing to open their own RIA. Under the RIA model, the advisor is being compensated with fees, usually either flat or a percentage of assets under management. Because stock market portfolios are down so much, advisory fees and overall compensation are down this year. Advisors may choose to hold onto that series 7 and stick around their broker/dealer to continue receiving trailer income from commissionable investment products.

Basically, this isn’t the ideal economic environment in which to risk earning less money while spending more to gain some independence. That entrepreneurial mindset will likely resume as the economy continues to improve.

All things considered, it’s a good dilemma to have if you’re trying to decide how to organize your investment advisory business. In all likelihood it means you’re transitioning away from the increasingly unpopular commission structure. If more advisors continue to think this way it could be good for our industry’s reputation as a whole.

Please don’t hesitate to e-mail or call with any questions or comments.

Russell Bailyn


Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

3 thoughts on “Going Independent? Is it Better to be an RIA or IAR?”

  1. Hey Russ,
    I found your article very interesting. I think the issue lies not only in what certification to follow but how it effects your brand as an advisor as well as what actions are you then able to perform and at what cost. While some broker dealers allow for sub advisors to brand independently, it can be a gift ( a stamp of legitimacy) or a pain, if the broker dealer does not do a good job in maintaining their brand.

  2. Hi Russ, great post. I am seeing a trend of employee advisors leaving big firms and going completely independent to an RIA. The types best suited to this business model are those who can land on their feet with over $25M AUM. But even more important, they should be entrepreneurial in nature or be willing to learn how to run their practice like a business.
    Thanks, Suzanne

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