What Are Breakaway Advisors?

A breakaway advisor is a financial professional who leaves a traditional wirehouse or broker-dealer for an independent advisory practice. Every year, advisors leave or “break away” from large brokerage firms whose businesses may be built around selling financial products and services for commissions. These advisors then join or establish their own registered investment advisor (RIA) firms with a primary focus on providing fiduciary financial advice to clients.

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What Is a Breakaway Advisor?

In recent years, a growing number of financial professionals have chosen to leave the comfort and security of traditional, larger firms for independent RIA practices. These individuals, known as breakaway advisors, typically seek greater autonomy and the opportunity to provide client-centric services.

A 2023 report by Cerulli Associates underscores this trend, indicating that the number of independent RIAs increased by a compound annual rate of 2.4% over a recent 10-year stretch. Furthermore, the Boston-based firm estimates that independent RIAs will control 31.2% of assets under management by 2027.

The decision to become a breakaway is complex, driven not only by the desire for increased control over client interactions and freedom from sales quotas but also by the commitment to uphold the fiduciary standard.

For example, if you are a veteran financial professional who after years of feeling constrained by the sales targets and proprietary product push at a firm, you may decide to shift gears and open your own RIA firm. This transition allows you to provide unbiased advice without the pressure of selling certain financial products or the constraints of working within a larger institution.

Once an advisor joins or establishes an RIA practice, their focus may shift to services that include:

Why Advisors Choose to ‘Break Away’

A financial advisor smiles during a staff meeting at her new RIA firm.

Financial advisors operate within a dynamic industry where independence and flexibility are increasingly valued. Many are opting to “break away” from traditional broker-dealer or wirehouse models in pursuit of a business structure that better aligns with their professional aspirations and ethical standards.

To encapsulate why advisors may take the leap toward independence, here are five common reasons:

Increased autonomy in decision-making and business practices
The potential for higher income without traditional firm restrictions
An escape from sales pressure and product pushing
Freedom to customize investment strategies for clients
The capability to form closer, more transparent advisor-client relationships

This shift is partly driven by the desire for autonomy and the potential for higher income without the encumbrances of a larger firm’s structure. Yet, it’s important to acknowledge that while many advisors aspire to increase their income, it is not guaranteed.

While working for a conventional broker-dealer, advisors might encounter constraints in customizing investment portfolios for their clients due to the firm’s pre-approved product lists or an emphasis on proprietary products. Such limitations may contribute to conflicts of interest, leaving advisors and their clients in a less than optimal position.

In stark contrast, independent advisors have the liberty to craft investment strategies tailored to the specific needs of their clients, free from corporate directives. This can not only foster stronger advisor-client relationships but also enable the RIA firm to use fee structures that potentially minimize client costs and ensure a more direct alignment of interests between the advisor and their clientele. These factors contribute significantly to why many advisors are choosing to break away and establish their own independent practices.

As advisors weigh these considerations, it’s essential to recognize the potential challenges, such as the need for robust infrastructure, compliance oversight and effective business development strategies that come with establishing an independent practice. Yet, the benefits of autonomy, personalized service, and the potential for alignment with client interests paint a compelling picture of the independent advisory landscape.

What to Consider When Leaving a Brokerage Firm for an RIA

A financial advisor opens the door to his new office at the RIA firm he recently joined.

Beyond the financial capital that opening a new business would require, there are several foundational considerations the advisor should keep in mind:

Fiduciary Duty

While brokers are typically held to Regulation Best Interest, RIAs are bound by a fiduciary duty – the highest and most stringent professional standard a financial advisor can abide by. This higher standard requires RIAs to prioritize client interests above their own, disclosing potential conflicts of interest transparently and recommending investments that align with clients’ financial goals and risk tolerance. Embracing fiduciary responsibility not only fosters trust and credibility with clients but also sets a strong ethical foundation for the RIA firm.

Compensation Structure

Transitioning to an RIA also means a reevaluation of compensation models. While traditional brokerage firms often operate on a commission basis, RIAs usually embrace a fee-only structure – charging clients a percentage of assets under management, a flat fee or an hourly rate. Some RIAs, however, may choose a fee-based or hybrid model, which combines elements of commissions and fees. This requires a delicate balance to maintain transparency and avoid conflicts of interest.

Legal and Regulatory Requirements

With the shift to an RIA, advisors face a new landscape of legal and regulatory requirements. This starts with registration, whether with the SEC for larger firms or state securities regulators for smaller practices. The filing of Form ADV, which discloses business practices and potential conflicts of interest, is a critical part of an RIA’s registration obligations. Advisors must uphold rigorous compliance standards, including regular updates to compliance materials and periodic examinations.

Operations and Technology

Lastly, advisors must consider operational adjustments, especially in terms of technology. RIAs often leverage sophisticated platforms for portfolio management and client reporting. Moreover, robust cybersecurity measures are paramount, as RIAs are charged with the critical task of protecting sensitive client data. Establishing strict cybersecurity protocols and conducting regular reviews are non-negotiable aspects of the RIA landscape. While this infrastructure was likely provided by the brokerage firm where the advisor previously worked, they’ll need to establish it when opening their own independent RIA.

Bottom Line

Leaving a large brokerage firm to establish or join a registered investment advisor (RIA) firm is a significant step for financial professionals seeking greater autonomy, independence and alignment with fiduciary principles. However, it also presents numerous considerations and challenges that warrant careful attention and planning.

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