It’s never problematic. You’ll find that advisory practices that actually do both, will most certainly favor one platform vs. the other.



In cases, however, where you are providing an RIA product to a client, and at the same time administering a BD product (i.e. existing VA contract) outside of your RIA practice, you should advise your client that you are acting through the BD side of your business structure, and that you are being paid a commission (or trail) to handle that product.



It’s very rare for my practice to intentionally create a client relationship that utlizes both sides… RIA and BD. You can usually service the needs of the client fully within one. But, in order to accomodate clients with tax issues within trail products, or clients who have VA contracts that are still within a surrender period, you’ll need to be flexible.



I guess… yes… you’ll have to switch hats. Not a big deal, really, IMHO.



C

WHICH HAT WOULD NO LOAD ANNUITIES FALL UNDER? THAT WOULD BE RIA, RIGHT, IF NO COMMISSION AND FEE-ONLY? (AS OPPOSED TO THE EXISTING B/D ANNUITY TRANSFERED IN)

Yes… no load annuity contracts would fall under the RIA, and not the BD. They are listed on our client statements, and billed as an advisory asset.



C

THAT WOULD SEEM TO BE A HUGE SELLING POINT: NO CDSC

Hey, there’s a button on your keyboard named “Caps Lock”.  Giver 'er a whirl.

THAT WOULD SEEM TO BE A HUGE SELLING POINT: NO CDSC

I think Captain is right looking back at annuity history.  They were used for tax deferral.  And death benefit.  Those were the big selling points.  The last few years have changed that with the onset of the living benefits.  I’ve sold one annuity this year based on the death benefit feature.  And it was an MAV plus type of feature. 

[quote=Captain]It’s never problematic. You’ll find that advisory practices that actually do both, will most certainly favor one platform vs. the other.



In cases, however, where you are providing an RIA product to a client, and at the same time administering a BD product (i.e. existing VA contract) outside of your RIA practice, you should advise your client that you are acting through the BD side of your business structure, and that you are being paid a commission (or trail) to handle that product.



It’s very rare for my practice to intentionally create a client relationship that utlizes both sides… RIA and BD. You can usually service the needs of the client fully within one. But, in order to accomodate clients with tax issues within trail products, or clients who have VA contracts that are still within a surrender period, you’ll need to be flexible.



I guess… yes… you’ll have to switch hats. Not a big deal, really, IMHO.



C[/quote]

Captain,

Can you elaborate a bit more on your experience with FIMRA compliance when most of your business is fee through the RIA?  How much of an added burden/hassle is it, especially if the b/d business is pretty much limited to servicing existing trails or occasional new VAs?  And does your b/d take a cut on your fee revenue as well, or just on your commmission business?

yeah, it wouldn’t seem worth it to bpther with FINRA regs if you’re doing RIA SEC reg biz

Sure thing.



We have a BD relationship that takes nothing from our RIA relationship. They get copies, electronically, of all our RIA client statements, etc., and have a duty to oversee that business. But, again, they take nothing. They allow us to piggy-back their e-mail archiving system - we pay a small charge each month, but all of our e-mails are kept through their system at a minimal cost.



As for compliance, we have a CCO (Chief Compliance Officer) within our RIA. He’s an individual who carried branch mangement responsibilities while we were at the wirehouse. As for compliance through FINRA… it’s been a minimal overlap with our existing RIA clients. We have to maintain different files for BD clients, and that’s pretty much it. As for hassle and burden… it’s barely noticed. We have an annual branch audit from our BD, and still have to take the mandatory CE credits to keep our licenses active. It truly is a small, small part of our time.



When we were setting up our firm, the whole dual BD/RIA thing was a concern. We thought it would be messy, tough to keep things maintained, etc. But, I’ve gotta say… I was pleasantly surprised, and very happy with the outcome.



Let me plug our custodian for a second… They [Fidelity] are working on a hybrid model that will incorporate BD and RIA business all on one platform. It will be killer.



The BD takes roughly 10% of our trails and any commissions that get generated.



Hope this helps. For multi-person practices, it’s really a ‘divide and conquer’ mentality. Each gets a job, and it makes the whole situation much, much easier to deal with.



C

thanks- thats very interesting

Thanks, Captain.  That’s helpful information.  I appreciate it.

C just out of curiosity at what production point were you and your team at that made you switch to the RIA model and why did you choose that over going to a established Indy firm and getting a 90 percent plus payout?

DD -



Total production was around $2 million for our group. Each member was around $300k to $400k in production. I admit, those numbers aren’t huge by any means. But, we certainly made them work without sacrificing a thing.



Why do the RIA vs. the BD? We were really interested in creating model portfolios that could be managed on a discretionary basis. Most BDs had the ability to create the models, however, they lacked the ability to allow for the management of hundreds of portfolios simultaneously. Since we wanted to leverage our time without focusing on the mechanics of investing our clients’ funds, this was a great way to go. RIA custodians offered this type of trading platform, and it truly is a blessing. Most, if not all, the clients we manage money for really don’t care about the names of the funds… they care that we do a good job. So, that being the case, we’ve created 6 discretionary portfolios, done risk assessments of our client groups, and made model allocations based on those risk assessments.



Continued - The RIA format was just more freedom for us. We designed our marketing materials, created our own website, and made our own brand. We don’t have to worry about a BD firm changing the rules on our group. We wanted everything within our own control.



Also, we did a bunch of separate account business. When we ran the numbers with LPL, and the other firms that had a BD affiliation, they just didn’t work. BD’s, on the separate acccount business, just wanted to retain too much of the fees. At the end of the mathmatical equation, even they (the BD’s) admitted that they weren’t the best solution for advisors doing separate account business. At the end of the equation, their 90% payout was far, far less. So, we just couldn’t justify going through a BD.



We are custodian neutral - if we have a client that wants us to manage an account through a different custodian, we can do it. Schwab, Fidelity, TD, Merrill Lynch, where ever… we can do it.



At the end of the numbers, we didn’t see 90% payouts on our managed account business, and there were too many situations where the BD held back additional revenues and calculated the 90% on a smaller number. So, at the end of the day, the 90% figure just wasn’t 90% for us. We went through the due dilligence process 3 times (revisiting some firms over and over again), and we didn’t see the benefit. We love running our firm the way we want to, without a hint of conflict of interest (i.e. having the ability to charge commissions).



A note on our payout - After all the fees have been collected, and the expenses have been paid, we stand at an 85% payout. That’s net $$'s, with everything paid for. I thought it was better to start at 100%. BD’s play games with numbers (we all know that).



A note on being an RIA - You aren’t sitting in your office at 8:00 worrying about everything, biting your nails about your compliance issues, and straining to find the time to pay the bills for your office. It’s more a myth, than anything.



At the end… I just didn’t want a middleman between me and my revenue stream who was trying to maximize THEIR profit.



Good times,



C

C thanks for the clarifying.  Just a couple of questions about your discretionary models.  If I understand it right you have and develop your own asset allocation models within the entire universe of everything offered.  If that is the case and you have your own models with etfs, funds, etc. is that basically a fund of funds that is completely discretionary and allows you to make moves for say 300 clients and just allocate everybodys’ portfolio once when you need to make moves.  Case in point we just reallocated for  08 and dropped a fund that we feel relies to much on financials it also had horrific performance that wasn’t why we dropped it though.  It was irritating going through that process numerous times and doing it once woud have been great.  Or are you including your own allocation with an amount allocated to SMA’s and combined you make moves with both of these.  If the second is the case then I definitley understand why you went RIA since each BD has selling agreements with x amount of SMA managers.  Just out of curiosity as well at your RIA would you be allowed to actually start your own mutual fund as a separate business and still have your RIA.  If you are doing your own models it seems it might not be a bad idea to go that route eventually if you are having good success with your own allocations.  My team and I are probably ten years away from looking at the RIA model so thanks for humoring my questions. 

[quote=DodgerDraftpick]  Just out of curiosity as well at your RIA would you be allowed to actually start your own mutual fund as a separate business and still have your RIA.  If you are doing your own models it seems it might not be a bad idea to go that route eventually if you are having good success with your own allocations.  My team and I are probably ten years away from looking at the RIA model so thanks for humoring my questions.  [/quote]

While Captain will no doubt answer in due course, I thought I’d at least respond to your mutual fund question.

In a word, don’t.  You may be ABLE to start a mutual fund, but with all the regulatory and legal requirements, you need to attract lots of assets to break even.   If you think FINRA regulations are a pain you ain’t seen nothing yet, believe me!  You’d need significant scale to go that route profitably.  Way too many stumble into that area having no real idea, get up and going, attract $1 or 10 or $20 million, lack the publishable track record and resources to market and gain sufficient distribution, struggle along losing money, and finally close or sell to another firm for a pittance.

 I’d say keep your eye on the ball and don’t get distracted by the mutual fund fallacy.

Good info just curious if anyone knew a major producer who after many years involved decided to give that road a shot, and yes I agree you better have major assets to make that work.

Dodger,

Doubtless someone somewhere has done what you say, although I can’t think of a name off hand.

Beside the regulatory & cost issues I mentioned, you need to realize the significant differences between the retail financial services industry that you are familiar with, and the institutional side.  I don’t have the time to go into detail now, but suffice it to say that those who actually manage the funds or portfolios are NOT ‘producers’ or marketing/sales people.  These are portfolio managers whose full time job is running money according to their given style.  Obviously it is possible to move between one track and another, but it is not common.  Portfolio managers usually come up through the analyst ranks; the business development people have different skill sets and handle most of the sales & client servicing.

Think of this analogy: in the retail world most FAs operate like a GP.  In the institutional world, there are specialists under one umbrella.  It’s not impossible to move between areas, but it’s not common and it taks a lot of time & effort.

Here’s my question: what exactly are trying to accomplish?  If your dream is to run a mutual fund as a portfolio manager, why are you working in retail?  Pick your poison and drink it.   If you don’t know where you want to go, any road will get you there.

Hope that helps.