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The Fiduciary Narrative and the Real Reasons Advisors Start or Join RIAs: Survey

This is the "major factor" behind so-called breakaways.

Public relations professionals routinely send journalists announcements that financial advisors have started their own RIA or joined one. Often, those notes include statements from the advisors about why they chose to make the move.

"My decision to go independent was arrived at by simply considering my future and what kind of opportunities I wanted to have available for my clients," an advisor said in an email that RIA Intel received in December.

That’s about as honest and revealing as they come.

In addition to general information about the advisors and their new firm, many of the public announcements almost formulaically explain the decision was made to better serve clients, especially as a fiduciary. That might be true but it’s only part of the narrative.

Cerulli Associates, the Boston-based research and consulting firm, partnered with the Investments & Wealth Institute (formerly IMCA), and the Financial Planning Association, to survey advisors working at independent broker-dealers asking why they were interested in transitioning to an independent or hybrid RIA. From a list of 13 reasons explaining why they would potentially leave their firm, the most popular “major factor” in the decision was money; 43% of advisors said a “100% payout” was the top factor.

Other reasons that advisors considered major factors were greater marketing flexibility (35%), increasing the financial value of their practice (32%), a belief their current broker-dealer was not adding enough value in relation to cost (28%), and a lack of flexibility regarding fee levels and structure (28%).

The betterment of clients was considerably less important in comparison. Only 16% of advisors said major reasons to move were the opportunity to “operate exclusively as a fiduciary” and the “appeal of independent model to clients,” respectively. 

In the same survey, 35% of advisors said the opportunity to “operate exclusively as a fiduciary” was “not a factor.” The survey was conducted in 2019 and the results were published Tuesday.

The results suggest advisors are taking clients into consideration, like almost all of them claim. Compensation is not the only thing causing them to switch companies. But it’s hard to deny their priorities as they consider to start or join an RIA. 

Few advisors at independent broker-dealers are considering starting their own RIA; 33% are “somewhat serious” and only 8% are “seriously considering” it, according to Cerulli.

A report last fall suggested advisors seek new employers to diversify the investments they can offer clients and prospects, because some investors, especially the wealthiest, request or require more complex portfolios. But Cerulli’s latest study shows the “ability to build custom model portfolios” is the least important reason advisors consider an RIA, at least out of the list of reasons presented to them. Although, it’s possible advisors already have the necessary ability to build portfolios and aren’t worried about losing it.

What they are worried about is starting or joining an RIA and assuming greater responsibilities for compliance. The Cerulli survey found that was a “major concern” for 52% of advisors considering a transition. Nearly as many (49%) were also concerned about greater regulatory liability as an independent advisor. Some were also worried about no longer having the support of their broker-dealer employers if they went independent.

Those worries are not stopping advisors from starting or joining RIAs. The number of so-called breakaway advisors departing broker-dealers continues to rise. “There’s no doubt that the allure of independence is increasingly evident to advisors,” Brian Hamburger, CEO of MarketCounsel, a business and regulatory compliance consultant to financial services firms, told RIA Intel last year.

As of year-end 2018, there were over 17,000 RIAs primarily focused on private wealth management managing an aggregate of $4.8 trillion, according to Cerulli.

“Overall, potential breakaway advisors favor starting their own RIA over joining an existing firm, which speaks to the drivers of advisor movement to the independent space,” according to the Cerulli report.

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