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February 22, 2021 at 02:38 PM
What You Need to Know
- The history of the broker-dealer business may be a lesson for RIA wannabes.
- Larger margins are attractive to those who want to launch RIAs.
- Beware of enhanced regulation that comes with more competitive business arenas.
A few decades ago, many advisors had their own broker-dealer. At the time, it was relatively simple to do, and because financial services was a sales-driven enterprise, it allowed advisors to stretch their margins and keep more of the revenue they generated for themselves.
Today, of course, it’s not so simple. For better or worse, regulators keep a much closer eye on broker-dealers, which means running one has become much more time-consuming and expensive, leading many to conclude that it’s not worth the effort. In part, that helps explain why the number of broker-dealers has dropped so precipitously over the years.
Since 2005, the industry has shed nearly 1,600 firms, according to FINRA’s most recent data, a decline of roughly 31%. Meanwhile, during this same period, the amount of working registered representatives has remained relatively static, down only about 4%.
Different Space, Same Story
These trends are instructive when considering where the RIA space is today — and where it could be heading. As the industry continues to focus on providing clients advice-based financial planning solutions, a burgeoning number of advisors now have either launched RIAs or have thought about doing so.
The reasoning will sound familiar: Many believe it will allow them to expand their margins, letting them convert more of the revenue they generate into profits. For some, especially those with plentiful resources, that could be true. For most, however, it is not.
There are a host of reasons for this — and they all mirror what has occurred within the independent financial services space over the past decade or so.
The first is that many corporate RIAs now offer top-notch services, products and tech platforms. This hasn’t always been the case. Whereas in the past, it perhaps wasn’t feasible for advisors in growth mode to rely on an outside partner to give them all the tools and flexibility they need to serve clients, today it is.
The second is a failure to appreciate the full scope of the responsibilities involved with running an RIA, including everything from obtaining extra office space, to managing staff, to performing all the product due diligence by themselves.
Interestingly, this isn’t as much a question of money as it is a challenge to find the time and acquire the skill sets to do all these things.
