Pursuing a career in financial services affords opportunities to explore different paths. Some advisors choose to join wirehouse firms, while others prefer an independent RIA model. Comparing the advantages and disadvantages can be helpful if you’re planning out your next professional move.
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What Are Wirehouse Firms?
A wirehouse is a full-service firm that provides an extensive range of financial products and services to clients. Wirehouse firms employ financial advisors who work with clients to offer personalized investment advice. Wirehouse advisors may also advise clients in other areas, such as estate planning or tax planning.
Some of the largest wirehouse firms in the U.S. are Morgan Stanley, Bank of America Merrill Lynch, Wells Fargo and UBS. Each one operates as a registered investment advisor and registered broker-dealer.
Wirehouse firms often work with high-net-worth individuals and institutional investors. They may cater to clients seeking wealth management services or access to alternative investments such as private equity or private credit and hedge funds. As such, the fee structure is typically based on assets under management (AUM).
Wirehouse Firms vs. Independent RIAs
Working at a wirehouse firm differs from the independent RIA model in several ways. Some of the most notable differences lie in how the two are organized, how advisors are compensated and the degree of freedom you have in directing your career.
Organization
As a wirehouse advisor, you’re considered an employee of the firm you’re working for. You can leverage the firm’s name and branding to build your client base, which can be helpful if you’re new to the advisory space. Wirehouse firms can assist with key activities, such as:
- Administrative tasks
- Client acquisition
- Client retention
That type of support leaves you free to focus on serving your clients, building your professional network or enhancing your education. Your firm may decide which clients you work with and offer incentives to recommend its proprietary products and services.
As an independent RIA, you’re the owner of your own financial advisor business rather than an employee. You’re free to choose your business model and the clients that you work with. You also have control in deciding which products and services to recommend to clients.
Administrative and operational tasks, such as lead generation and advisor marketing, are your responsibility. You may work alone or hire a team. You might also outsource certain tasks to third-party service providers or utilize artificial intelligence (AI) for wealth management, allowing more time to work with clients.
Compensation
Wirehouse firms use a grid payout system to determine financial advisor compensation. Earnings may be based on gross production or production credits; the former measures the amount of revenue you bring in, while the latter measures the commissions earned on products sold.
The grid payout model incentivizes advisors to generate more revenue for the wirehouse. As gross production or production credits increase, the advisor can claim a larger share of earnings.
Grid payout models can be complex and sometimes confusing, and they’re not uniform. Individual wirehouse firms decide how to establish grid payout parameters and when to update them. That can make it more difficult to estimate your earnings from year to year.
Independent RIAs typically base compensation on assets under management. You’re not sharing revenue with an employer; instead, it all comes to you. You are, however, responsible for covering the firm’s operational and administrative costs.
If you’re employing a team within your firm, you can decide how to structure compensation according to your chosen business model and company culture. For instance, you might offer a base salary along with bonuses or other incentives.
Flexibility
As a wirehouse advisor, your employer firm largely determines how you work. That includes the business model you follow, the type of clients you work with and the compensation structure you’re subject to. You may be expected to hit quotas when selling the firm’s products or be limited to a certain range of investments you can recommend.
The firm chooses which technology tools you and its other advisors can access. The firm owns your book of business, though broker protocol rules may allow you to take client information with you should you decide to move to an independent firm.
Independent RIAs can make those decisions for themselves. You can choose what kind of working schedule to follow, how to market your business and what to include in your tech stack. You must follow RIA compliance guidelines, but you’re otherwise in charge of deciding how to run your business.
Which Is Better, a Wirehouse Firm or RIA?
Whether it makes sense to choose a wirehouse firm or go independent may hinge on where you are in your career and your professional goals.
Wirehouse firms may appeal to financial advisors who are just getting started, as they allow access to a built-in client base. You might find that particularly beneficial if you’re interested in working with wealthier clients without the marketing challenges that go along with attracting those clients.
Working in a wirehouse also frees you from many of the nuts and bolts tasks that go into running an advisory firm. You don’t have to worry about choosing a business model, hiring a team or setting up an office space. Everything you need to serve your clients is already in place.
An independent RIA model can prove more challenging, as you’ll need to build your client base and establish systems for running your business. However, it could also prove more rewarding both financially and emotionally if you’re able to serve the clients that you want, in the way that you want.
If you’re thinking of starting an RIA, consider the registration requirements and costs that are involved. You’d also need to determine what client information you’d be able to take with you, if any, when moving from a wirehouse firm to an independent advisory.
Frequently Asked Questions
What Is the Difference Between a Wirehouse and an RIA?
A wirehouse is a broker-dealer firm that offers a variety of financial products and services, often targeting high-net-worth individuals and/or institutional investors. An RIA is a registered investment advisor who operates independently to offer financial advice to clients.
Are Wirehouse Advisors Fiduciaries?
Fiduciary advisors are ethically bound to act in the best interests of their clients. Wirehouse advisors may be fiduciaries, though not always. Registered investment advisors, on the other hand, must always act in a fiduciary capacity.
What’s the Difference Between an RIA and a Broker-Dealer?
RIAs are registered advisors who are bound by a fiduciary duty and are subject to state and federal regulatory guidelines. Broker dealers buy and sell securities on behalf of their clients and are not required to follow a fiduciary standard.
Bottom Line
Wirehouse firms have some advantages, providing office space, administrative assistance, and clients. But there is an argument to be made for striking out on your own, depending on your goals. Ultimately, it’s important to choose the path that best aligns with your needs and vision.
Tips for Growing Your Advisory Business
- Having a marketing strategy can go a long way in helping you scale your firm. One of the biggest challenges is deciding which marketing channels are best suited to promoting your business. If you’re looking for a simpler solution, you might consider partnering with an advisor marketing platform. SmartAsset AMP gives you the tools you need to nurture leads without taking time away from the clients you’re already serving.
- If you’re thinking of starting an RIA, it’s helpful to have an idea of what it may cost. Some of the most common startup expenses include registration fees, legal formation fees and attorney fees, if you’re consulting a legal expert. You may need to lease or rent office space, purchase equipment, invest in digital ads and other marketing campaigns, and hire staff. Creating a tentative startup budget can offer a starting point for deciding how to finance your firm’s launch.
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