Broker-Dealer vs an RIA: What Financial Advisors Should Know

This guide outlines key considerations, common obstacles and options for financial advisors transitioning from a broker-dealer to a registered investment advisor (RIA) model. We’re here to help you find your way at C2P.

What Should Financial Advisors Know About Transitioning From a Broker-Dealer to an RIA?

Transitioning from a broker-dealer to an RIA means moving from earning a commission for buying and selling products to a fee-based professional advice model. You have two ways to form a full-service RIA:

• Large firms can register under the Securities and Exchange Commission (SEC).
• Small firms can register with their home state.

Traditionally, these financial advisor services would require a Series 6 or Series 7 license to transact in those securities and earn a commission. Instead, you’d get a Series 65 or Series 66 license or a professional designation like a Certified Financial Planner to become a full-service RIA representative.

What Factors Should You Consider When Leaving Your Broker-Dealer?

Higher consumer demand for advisors transitioning from a broker-dealer to an RIA proves you have solutions. RIAs offer more flexibility and allow customization of their services and client relationships. However, broker-dealers provide firms with structure and a network of products. Almost every broker-dealer in the country has an RIA opportunity. Most broker-dealers are looking at attaining dual licensure to take advantage of that platform. When transitioning to an RIA from a broker-dealer, you must remember something crucial. If you leave your broker-dealer, you have a 5-year window to find another broker-dealer without taking the Series 6 or Series 7 again. Most brokers don’t want to walk away from their licensure because it’s difficult to obtain. If your license expires, you must retake the exams. Another reason advisors choose to leave their broker-dealer and migrate to the RIA model is because many don’t allow any tax management advice. That applies even if it’s in the client’s best interest.

How To Update Your Business Practices To Be an RIA

In the 1970s and 1980s, most clients worked with a stockbroker who bought and sold stocks on their behalf. They had to partner with a broker-dealer to facilitate the transaction. Let’s say you buy and sell an investment: stocks, bonds, variable annuities, mutual funds or alternative assets. You’re going to earn a commission. To do so, you need to affiliate with a broker-dealer who can facilitate the transaction and pay out the commission. As far as financial advisor compliance goes, broker-dealers follow the suitability standard, and RIAs follow the fiduciary standard. The suitability standard is more lenient than the fiduciary standard in terms of your obligation to make recommendations in the client’s best interest. On the other hand, RIAs work within financial advisor compliance rules to develop fee structures that match clients’ needs:

• Flat fee model
• Hourly rate
• Percentage of AUM

These models help ensure transparency and better align compensation with the value you provide clients. You’ll also need to update your financial advisor marketing strategy, plan, materials and more to reflect the changes within your practice.

Read our free advisor marketing guide: 11 Digital Marketing Tips for Financial Advisors.

Is There a Way To Transition to an RIA Without Leaving Behind Trailing Income?

Suppose most of the business is on the RIA platform. Why do some financial advisors choose to maintain their broker-dealer licenses instead of other routes, like streamlining offers through the SEC? When you transition from a broker-dealer to an RIA, you probably don’t want to walk away from any prospective revenue embedded in your business model:

• Variable annuities
• Alternative investments
• Mutual funds
• C-share funds
• Variable universal life insurance
• 1031 real estate transactions

Many advisors also consider the legacy aspects of their business when evaluating transition strategies. Perhaps they built it up over decades with transactional registered products, like commissionable variable annuities. Maybe they built with alternative investments, like non-traded real estate investment trusts (REITs) or oil and gas investments. They’d lose the corresponding trail revenue if they didn’t maintain that relationship. This could be hundreds of thousands of dollars they’d abandon if they left their broker-dealer. This handcuffs them to the broker-dealer because they still have to service those clients, although the business’s future is advisory.

How To Save Your Trail Revenue

The good news is that there’s a simple way to migrate your business if you choose to move to an RIA. Some RIAs have a broker-dealer partner that manages the asset transition program. This allows them to shift all their broker-dealer business over without losing out on income and starting from scratch. Prosperity Capital Advisors (PCA), part of C2P, provides an asset transition program that gives you leeway. You can move your business (e.g., 529s, mutual funds, variable annuities) over to the broker-dealer. They then put a home office employee as the agent of record on that account. Then, PCA is hired as the RIA, and you become the broker representative so you don’t lose any trail revenue.

Book a free call with one of our business development representatives to learn more about different financial advisor solutions.

Is a Transition to an RIA Model Right for You? 7 Steps To Check

Consider important factors beyond initial structural changes as you think about the transition from broker-dealer to RIA. Those insights help you determine whether the change is fit for your financial practice.

1. Recognize Signs It’s Time for a Change

Recognize signs that your current broker-dealer model may no longer serve your goals before making a move. Alanah Phillips, MBA, an advisor advocate and matchmaker in the financial services industry, spoke on this topic in an episode of The Rainmaker Multiplier On-Demand podcast. She believes that being aware of certain indicators can help you decide whether it’s time to find new opportunities. Here are a few signs that change is near and necessary:

• Feeling undervalued or uncelebrated in your current firm
• Experiencing excessive control over your time and financial decisions
• Having limited opportunities for professional growth
• Facing pressure or fear tactics discouraging exploration of alternatives

2. Develop a Clear Vision

Before making any transitions, define your unique ideal working scenario. Consider how you want to structure client relationships. Envision your ideal day-to-day operations. Identify current pain points that a change could address. This vision guides your decision-making process and helps you evaluate potential RIA opportunities.

3. Evaluate Your Current Situation

Thoroughly assess your present circumstances. This includes a number of steps:

• Consider the timing of a potential move.
• Examine existing team dynamics and professional relationships.
• Address any financial obligations, such as outstanding notes or practice purchase agreements.
• Identify non-portable products in your book of business that may need attention.

You’ll gain a clearer picture of what transitioning from a broker-dealer to an RIA could look like for your practice.

4. Find the Right Fit

Evaluate your potential RIA partners carefully. When exploring RIA options, it’s important to find a solution that complements your circumstances:

• Risk tolerance and capacity
• Long-term professional goals
• Desired level of independence and support

This may involve researching different RIA models and speaking with advisors who’ve made similar transitions.

5. Understand the Transition Timeline

Plan your transition timeline realistically. The process of transitioning from a broker-dealer to an RIA can vary significantly. While some situations may require a quick transition due to external factors, a more measured approach often allows for better preparation. Transition timelines can range from a few months to several years, depending on your practice’s complexity and chosen RIA model.

6. Consider Industry Trends

Be keenly aware of ongoing shifts in the financial services landscape as you contemplate a move. Many independent broker-dealers are evolving to offer more RIA-like services. Meanwhile, insurance-owned broker-dealers may face unique challenges in keeping pace with technology and regulatory changes. Understanding these trends helps you make wiser choices about your future business model.

7. Maintain a Growth Mindset

Stay open to learning about different business models as you consider your options. Additionally, regularly assess whether your current situation meets your professional goals. Remember that exploring options is part of fulfilling your fiduciary duty to clients, ensuring you’re in the best position to serve their needs.

Key Takeaways

Transitioning from a broker-dealer to an RIA is a major decision — one that affects your revenue model, client relationships and long-term goals. By evaluating your current structure, clarifying your vision and understanding the financial implications, you’re better equipped to choose the right model for your practice. C2P provides flexible RIA transition support, trail revenue preservation tools and turnkey growth platforms designed for evolving advisory practices.

Contact C2P for Broker-Dealer to RIA Guidance

See what we can do for you at C2P! We’ll walk you through the key differences between the RIA and broker-dealer models and help you determine which best supports your goals. Additionally, we’ll work with you to explore our TAMP offerings. Book a call with our advisor growth specialist today, or contact us with questions.

Financial Professional Use Only

The information provided in this presentation is not intended as investment advice or legal advice. C2P provides information for informational and training purposes only. This presentation’s information was accurate at the time the material was created. Tax laws and rulings can frequently change. Please discuss the client’s current situation with an accountant or tax advisor.