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 work the same 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.
Under Regulation Best Interest (Reg BI), IBDs may only recommend investment products to their clients that are in their best interest. This expands on the previous suitability standard for broker-dealers, which only required that investments be suitable for a client’s needs. Independent broker-dealers are subject to regulation by the Financial Industry Regulatory Authority (FINRA).They must also register with the Securities and Exchange Commission (SEC).
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 at the federal level by the SEC.
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.
RIAs are fiduciaries who are held to the highest ethical standards. As an independent RIA, you’re also subject to exhaustive compliance rules.
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
- The amount of red tape you’re comfortable cutting through to establish your business
As an independent broker-dealer, your primary activities revolve around making investment recommendations and buying or selling investments on behalf of your clients. Some broker-dealers also offer market research, portfolio management and financial planning. You may earn fees, commissions or a mix of both for your services.
RIAs can offer a broader range of services, including:
- Asset allocation
- Retirement planning
- Tax planning
- Estate planning
- Wealth management
High-net-worth clients may gravitate towards your services if you offer a comprehensive approach to financial planning. Rather than earning commissions, you’ll get paid by charging fees for the advisory services you offer. A typical fee structure is 1% to 2% of assets under management (AUM).
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?
The total price tag could easily top six figures, so it’s important to consider where your capital will come from. Startup costs can include:
- Exam fees for the Securities Industry Essentials (SIE) exam and the Series 7 exam, if you don’t hold those licenses already
- FINRA registration fees, including the New Member Application fee, which can range from $7,500 to $55,000
- Business formation fees, which may run several hundred or several thousand dollars
- State registration fees
- First-year operating costs, which can include leasing premises, purchasing equipment and supplies, hiring employees, payroll and marketing costs
Independent broker-dealers are also subject to net capital requirements under the Securities and Exchange Act. The minimum requirements range from $5,000 to $1.5 million, depending on how your business operates.
Now, what does it cost to start an RIA?
RIA startup costs typically run in the $10,000 to $50,000 range when you factor in securities exam fees, registration fees and business formation fees. There’s no minimum AUM required to start an RIA, though you may need to meet AUM thresholds to partner with certain RIA custodians.
The SEC does not require RIAs to meet net capital requirements. However, states can impose net capital and/or net worth requirements on registered advisors. The minimum amount is typically around $10,000.
Frequently Asked Questions (FAQs)
What Is an IBD vs. RIA?
IBD stands for independent broker-dealer; RIA refers to a registered investment advisor. Independent broker-dealers are subject to regulation by FINRA while RIAs are regulated by the SEC. An IBD must adhere to the best interest standard when recommending investments, while RIAs are held to a fiduciary standard.
What Is the Difference Between an Independent Financial Advisor and an RIA?
An independent financial advisor offers services to clients with no affiliation to any specific brokerage firm, bank or insurance company. An RIA is a registered investment advisor. Financial advisors who are thinking of going independent may choose the RIA path or opt for an independent broker-dealer model.
What Is the Difference Between RIA and IAR?
An RIA refers to a legal entity that exists to offer financial advice to clients. RIAs must register with the SEC or state regulatory authorities as determined by assets under management. An IAR is an independent advisor representative who works in an RIA to offer advice to clients.
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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