Commonwealth: The Advisor Glide Path – How to Get to Fee-Only
Getting to fee-only might not be as challenging as you think. True, dropping your FINRA registrations is a big decision that requires you to weigh many factors, spanning regulatory considerations, business growth, and personal concerns. But you don’t need to make the jump all at once. For many advisors, easing into a new business model makes the most sense. At Commonwealth, we call this route a “glide path.” Why? Because, with the right firm partner, an advisor registration change should be a seamless, pain-free transition.
Making Sense of the Shift to Fee-Only
Today, many consumers are looking for independent financial advice from a professional they can trust. They don’t want to be sold products; they want planning services that will address their entire financial well-being. Influenced by regulatory changes and media noise about fiduciaries versus non-fiduciaries, many consumers believe these needs can only be met by a fee-only advisor.
Of course, consumer news doesn’t fully capture the complexity of the various fiduciary standards that govern our industry. Advisors, especially those who are independent, have always known there’s more than one way to commit to providing objective advice aligned with client interests. Still, it’s clear that moving to a fee-only planning model can help meet your clients’ expectations, as well as minimize the potential for conflicts of interest. And there are other significant advantages. Notably, a planning model could yield more recurring and predictable revenue than a commission-based model.
Choosing the Right Business Model
Many advisors start their glide path journey as dually registered, conducting both commission- and fee-based business under a firm partner’s broker/dealer and registered investment adviser (RIA) status. Gradually, as you increase your fee-based AUM and minimize your commission business, your vision of a fee-only business will become clear. Once you’re ready, switching to a 100 percent advisory business as an investment adviser representative (IAR) of an established RIA or of your own independent RIA can be accomplished smoothly.
When operating solely as an IAR, you drop your FINRA licenses, relinquish all commission and trail revenue, and can begin marketing yourself as a fee-only fiduciary. The RIA you register with as an IAR establishes the compliance policies and infrastructure under which you operate. At Commonwealth, we act as our advisors’ dedicated firm partner, handling compliance responsibilities and providing an exceptional range of business solutions.
If you choose to form an independent RIA, you assume the primary responsibility and risk of maintaining your own compliance and operational programs. Dropping your FINRA licenses can give you additional freedom in how you run and market your business. But it is vital to understand the obligations you’ll be taking on with this model. By working with a strong firm partner, such as Commonwealth, you can realize significant benefits from the established infrastructure.
Making the Transition
How might the transition to fee-only develop? Here are two case studies that illustrate what you could expect:
IAR glide path. An advisor (let’s call him Scott) is interested in the possibilities of marketing himself as a fiduciary. He sees himself as a fiduciary but wants to formalize that responsibility with clients. His strongest motivation, though, is creating a succession plan for his two children, his likely successors. Each individual is a CFP® professional and interested in evolving the practice to fee-only.
Scott’s practice has a strong focus on financial planning, and he uses just a few legacy commission products. This means his advisor registration change should be relatively simple, taking three to four months. That’s about average for a comfortable IAR transition. During this time period, Scott and a transition team assigned by his RIA partner should:
- Work through Scott’s accounts and gather the forms needed for any nonadvisory business
- Develop messaging to communicate the change to clients
- Update marketing and branding materials to reflect Scott’s new registration as a fee-only financial advisor
Once Scott has received the necessary forms for his nonadvisory business, he is ready to terminate his FINRA Series 7 securities registration. The licensing team from Scott’s RIA partner must file a partial Form U5 to handle this step. Once that’s done, Scott will be officially operating as an IAR.
The result? Usually, the quick transition to IAR-only translates to minimal disruption to clients. That’s why, for many advisors, the choice of an IAR-only registration is the simplest way to operate fully as a fiduciary and eliminate FINRA oversight requirements.
RIA glide path. An established advisory firm (let’s call it XYZ Advisors) is run by four millennials—all younger than 40, savvy with social media, ambitious, and on the fast track to success. Their rapidly growing practice serves a diverse group of clients: rising millennials, Gen Xers, and a significant number of preretirees.
These advisors are considering the fee-only model because they want to act as a true fiduciary for their clients, as well as a family office and trustee for one of their large clients. But they also have two other objectives:
- Streamlining compliance processes with more flexibility to increase their social media presence
- Increasing the firm’s opportunities for growth through the ability to acquire other RIA entities
Before getting to these advantages, however, there is a lot of work to do to establish the firm as an RIA. For new RIA firms, the first step is to file the required paperwork to register with the SEC or a state.
But perhaps the most important step of all is developing a plan to tackle compliance. A new RIA must develop (and implement) its own compliance program and either appoint or hire a qualified individual or firm to serve as chief compliance officer (CCO). XYZ Advisors decides to outsource the CCO role. Over three months, the four advisors interview firms and select one to contract as CCO, handling every aspect of compliance from SEC registration filings to ongoing surveillance and oversight.
Next, XYZ Advisors must review its existing client relationships and update accounts as necessary. A thoughtful plan is needed for sending out client notifications regarding the new firm’s new identity. As part of this plan, the firm must update its brand identity and marketing materials. XYZ Advisors does not need to transition accounts to a new custodian, but you should plan on spending time on this step if you’re transitioning to a new firm partner.
As you can see, the transition to RIA is longer and more complex than to IAR. In this case, being an RIA meets XYZ Advisors’ overall needs. The advisors are able to develop relationships with family members and friends of existing clients, building a strong and trusted foundation. Last, but not least, XYZ Advisors can more easily pursue acquisitions as part of its growth strategy.
Knowing When to Make the Move
These benchmarks may signal the time is right for a move to fee-only:
- You’re no longer selling commission products.
- At least 90 percent of your current book is made up of advisory business.
- You have low trail revenue (10 percent or less recurring nonadvisory revenue over the previous year).
- You want to market yourself—and be—a true fiduciary.
- You’re prepared to forgo your legacy commissions or convert them to advisory accounts. Keep in mind that if you derive any income from commission products, such as insurance and annuities, or even retain trail revenue, you aren’t a fee-only advisor.
- Your clients are on board.
- You have a plan for tackling compliance (if you’re jumping right to establishing your own RIA).
Where Do You See Yourself?
Ultimately, choosing the right glide path for your firm depends on your unique book, the type of business you want, and where you see yourself in the future. To get there smoothly, you should take the time to find the right firm partner. Whichever financial advisor registration you select, you’ll need the right infrastructure to grow and thrive. At Commonwealth, we believe in providing the indispensable business solutions you need to run the firm of your dreams.