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Going independent has its perks, namely freedom, flexibility and control over decision-making in running your business. The question is, which path should you choose: Independent Broker-Dealer or Registered Investment Advisor? Comparing the advantages and disadvantages of an IBD vs. RIA model can help you decide which one makes the most sense for you.
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Understanding the Independent Broker-Dealer Model
Independent broker-dealers operate in the same way as full-service broker-dealers, with one significant difference. An IBD is not affiliated with any specific investment company or bank, which allows it to offer a broader range of products and services to its clients.
There are two ways advisors can go independent as a broker-dealer:
- Join an existing broker-dealer
- Start an IBD of their own
Joining an existing firm is usually an easier path, as you don’t need to handle any of the paperwork or filing requirements to form a new business entity.
You can work as an independent contractor and enjoy flexibility in choosing which type of clients to work with and the products or services you offer. All of the back office tasks are handled for you, and you can run your business within the broker-dealer’s compliance model while having access to the firm’s tech tools.
Starting an IBD yourself means assuming full responsibility for filing the necessary paperwork and funding the startup capital needed to get the business up and running. You have control over your fee structure, which may be commission-based, fee-based or a combination of the two.
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What It Means to Be an RIA
Registered investment advisors provide clients with financial advice, including investment advice. RIAs are regulated by state agencies and the SEC and their clients are served by investment advisor representatives (IARs). An IAR must hold one or more securities licenses, and they may also have a professional certification, such as a Chartered Financial Analyst (CFA) designation.
Advisors who are interested in the RIA model may choose to:
- Join an existing RIA
- Partner with an RIA aggregator
- Start an RIA firm
Of these options, starting an RIA offers the greatest degree of freedom and autonomy.
You can develop your business model and brand based on your specific goals and cultivate your ideal workplace culture from the ground up. You can decide which tools you’d like to incorporate into your tech stack, choose the type of clients you want to offer your services to and build your team as you go. Independent advisors also have full control over the fees they charge and the hours they work. However, you must follow strict compliance rules governing everything from financial reporting to campaign contributions to marketing.
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Comparing the IBD vs. RIA Model
Deciding whether to go independent as a broker-dealer or registered investment advisor hinges largely on your career aspirations. When comparing the two, it helps to consider the types of clients you hope to serve, how you plan to structure your fees and the startup requirements. Here’s how the two compare, side-by-side.
| IBD Model | RIA Model | |
|---|---|---|
| Activities/Services | Primary activities include making investment recommendations and buying or selling investments on behalf of your clients | RIAs can assist with asset allocation, retirement planning, tax planning, estate planning and wealth management |
| Registering Entity | SEC and state regulators in states where they conduct business | SEC if AUM exceeds $110 million; otherwise, state registration is permitted |
| FINRA Membership | Required | Not required |
| Regulated By | FINRA and the SEC | State regulators or the SEC, depending on registration status |
| Ethical Standard | Under Regulation Best Interest (Reg BI), IBDs may only recommend investment products to their clients that are in their best interest. | RIAs are fiduciaries, meaning they’re held to the highest ethical standards and must act in their clients’ best interests at all times. |
| Compensation | Fee-based, though commissions are permitted | Fee-only; dual-registered firm can also earn commissions |
Both IBDs and RIAs may serve institutional and individual investors. Either type of advisor may choose to niche down and focus on a specific type of clientele; for example, you may choose to target high-net-worth clients or clients who work in a particular profession, such as physicians.
Startup Costs for an IBD vs. RIA
In terms of getting started, there are different paperwork filing requirements you’ll need to complete as an IBD vs. RIA. Most independent broker-dealers must register with the SEC and join a self-regulatory organization (SRO). FINRA registration is also required.
How much does it cost to start an independent broker-dealer or RIA? Here are some of the typical costs advisors pay.
| Fees and Expenses | Cost |
|---|---|
| Securities License Exam Fees 1 | Securities Industry Essentials (SIE): $100 Series 7: $395 Series 63: $147 Series 65: $187 Series 66: $177 |
| FINRA Membership Fees | $7,500 to $55,000 application fee, based on IBD size; not required for RIAs 2 |
| SEC Registration Fees (IARD Filing Fee) | $40 to $225, depending on AUM 3 |
| Business Formation Fees | $50 to $200 for LLC formation; 4 $50 to $300 to form a corporation (note that entity formation fees vary by state) 5 |
| Technology | $1,000 to $10,000 6 |
| Marketing and Branding | $1,000 to $2,000 7 |
| Insurance 8 | Errors and Omissions Insurance: $287/month average General Liability Insurance: $41/month average Business Owner’s Policy: $64/month average Worker’s Compensation Coverage: $41/month average Cyber Insurance: $76/month average |
| Net Capital Requirements 9 | $5,000 to $250,000 for IBDs; RIA thresholds vary by state |
| Cash Reserves | $10,000 (to cover personal and operating expenses until the business begins generating revenue) |
According to AdvisorLaw, RIA startup costs typically average $25,000, though your actual cost may be higher or lower. There’s no minimum AUM required to start an RIA, though you may need to meet AUM thresholds to partner with certain RIA custodians. If you’re hoping to drum up new clients quickly, you may consider investing in lead generation services.
SmartAsset’s Advisor Marketing Platform (AMP) offers a smarter way to attract clients and increase AUM. You can get matched with investors monthly and you’ll have access to automated tools you can use to nurture relationships via text and email. Leads are vetted to ensure they fit your ideal client profile. Schedule a free demo today to learn more.
Frequently Asked Questions (FAQs)
Do IBDs and RIAs Need Professional Certifications?
Professional certifications are not a requirement to register as an independent broker dealer or investment advisor, however, they can be helpful in establishing your credibility and attracting clients. When comparing certifications, consider what type of clients you plan to serve and what expertise you may need to help them develop and implement their financial plans.
Can an RIA Also Be a Broker-Dealer?
Yes, an RIA can also be a broker-dealer if they hold dual registration status, which is also referred to as hybrid registration. Dual registration can offer advisors flexibility in how they generate revenue, more choices in the range of products they offer to clients and a potentially larger pool of clients to choose from.
Is an RIA Better Than a Broker-Dealer?
Whether an RIA is better than a broker-dealer is subjective and typically depends on what a client needs and expects. A client may prefer to work with an RIA if they want reassurance that their advisor follows the highest ethical standards. On the other hand, they may choose a broker-dealer if they prefer more control over their investments with self-directed trading.
Bottom Line
Choosing between an IBD vs. RIA model begins with assessing where you are in your career now and where you want to go. Going independent as a broker-dealer may be more appealing if you’re used to a commission-based fee structure at your current firm and want to retain that model for yourself. Starting an RIA, on the other hand, could be a better fit if you’re hoping to build a book of business around high-net-worth clients.
Tips for Growing Your Advisory Business
- Marketing is essential for helping your new firm stand out when going independent. Some of the most popular ways to promote your business include social media, email newsletters and digital ads. If you’re looking for a streamlined solution, you might consider partnering with an advisor marketing platform. SmartAsset AMP helps you grow your client base with leads while giving you the tools you need to nurture those relationships. Schedule a demo to learn more about how the platform works.
- Compliance is an important part of starting an advisory firm, whether you choose the IBD or RIA route. SEC rules require both broker-dealers and registered investment advisors to have a chief compliance officer (CCO), which may be yourself or someone else. Compliance software can make it easier to ensure that your firm is following all applicable regulatory guidelines.
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Article Sources
All articles are reviewed and updated by SmartAsset’s fact-checkers for accuracy. Visit our Editorial Policy for more details on our overall journalistic standards.
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