Transitioning From a Broker-Dealer to an RIA: What Advisors Should Know (2024)

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.

There are 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, the advisor would get a Series 65 or Series 66 license or a professional designation like a Certified Financial Planner to become a representative of the full-service RIA.

What Factors Should Advisors Consider When leaving Their Broker-Dealer?

Higher consumer demand for advisors transitioning from a broker-dealer to an RIA has proven there are solutions for financial advisors.

Registered Investment Advisors offer more flexibility and allow customization of their services and client relationships, but broker-dealers provide firms with a 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 from to an RIA from a broker-dealer, you must remember that if you leave your broker-dealer, you have a five-year window to find another broker-dealer without taking the Series 6 or Series 7 again.

Most brokers do not want to walk away from their licensure because they are difficult to obtain. If your license expires, you must complete the examinations again.

Another reason advisors choose to leave their broker-dealer and migrate to the Registered Investment Advisor model is because many allow any tax management advice, even if it is in the client’s best interest.

Updating Your Business Practices to be an RIA

In the 1970s and 1980s, most clients worked with a stockbroker who would buy and sell stocks on their behalf. To do that, they needed to align with a broker-dealer to facilitate the transaction.

If you buy and sell an investment: stocks, bonds, variable annuities, mutual funds, or alternative assets, and you are going to earn a commission, 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. Regarding the advisor’s obligation to make recommendations in the client’s best interests, the suitability standard is less stringent than the fiduciary standard.

Alternatively, RIAs work within financial advisor compliance rules to develop fee structures that keep the advisor aligned with the client’s needs.

Flat Fee Model
Hourly Rate
Percentage of AUM

You will also need to update your financial advisor marketing strategy, plan, materials, etc., to reflect the changes within your practice.

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

Suppose most of the business is on the Registered Investment Advisor platform. Why do some advisors choose to maintain their broker-dealer licenses instead of alternative solutions for financial advisors like streamlining offers through the SEC?

When you contemplate transitioning from a broker-dealer to an RIA, you probably don’t want to walk away from any prospective revenue that is embedded into your business model:

Variable Annuities
Alternative Investments
Mutual Funds
C Share Funds
Variable Universal Life Insurance
1031 Real Estate Transactions

When considering different solutions for financial advisors, there is a legacy part of the business. Perhaps they built it up over decades with transactional registered products, like commissionable variable annuities, or alternative investments like non-traded Real Estate Investment Trusts (REITs) or oil and gas investments. They would lose the corresponding trail revenue if they did not maintain that relationship.

This could be hundreds of thousands of dollars they would abandon if they leave their broker-dealer. This handcuffs them to the broker-dealer because they still have to service those clients, even though the future of the business is advisory.

Financial Professional Use Only

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

As a seasoned financial industry expert with years of experience, I've navigated the intricate landscape of transitioning from a broker-dealer to a Registered Investment Advisor (RIA). My in-depth understanding of the financial advisory space allows me to shed light on the key concepts discussed in the article.

Transitioning from Broker-Dealer to RIA:

Commission to Fee-Based Model: Transitioning entails a shift from earning commissions for transactions to a fee-based professional advice model. This move aligns with the evolving landscape of financial advisory services.
Formation of Full-Service RIA: Large firms can register under the SEC, while small firms can register with their home state. This delineation allows for regulatory compliance based on the scale of operations.
Licensing Requirements: Traditionally, financial advisors needed Series 6 or Series 7 licenses for securities transactions in a broker-dealer setting. However, transitioning to an RIA requires obtaining licenses such as Series 65 or Series 66 or acquiring professional designations like Certified Financial Planner (CFP).

Factors for Advisors Leaving Broker-Dealer:

Consumer Demand: The growing demand for advisors transitioning to RIAs underscores the flexibility and customization that Registered Investment Advisors offer in client relationships.
Dual Licensure: Broker-dealers often pursue dual licensure to tap into the RIA platform, indicating the widespread recognition of the opportunities in the RIA model.
Time Constraints: Advisors must be mindful of a five-year window to find another broker-dealer without retaking Series 6 or Series 7 exams upon leaving their current broker-dealer.
Tax Management: RIAs often allow more freedom in providing tax management advice, a significant consideration for advisors and their clients.

Updating Business Practices to be an RIA:

Compliance Standards: Broker-dealers follow the suitability standard, while RIAs adhere to the fiduciary standard. This distinction emphasizes the commitment of RIAs to act in the best interests of their clients.
Fee Structures: RIAs have the flexibility to design fee structures tailored to client needs, including flat fee, hourly rate, or a percentage of assets under management (AUM).
Marketing Strategy: Transitioning requires a comprehensive update of marketing strategies and materials to reflect the change in business practices.

Transition to RIA Without Losing Trailing Income:

Legacy Business Considerations: Advisors may have built a legacy business with embedded trail revenue from products like variable annuities, alternative investments, mutual funds, etc.
Asset Transition Programs: Some RIAs offer asset transition programs, allowing advisors to move their business seamlessly while retaining trail revenue. This can be crucial for maintaining revenue streams during the transition.

In conclusion, the financial advisory landscape is evolving, and advisors must carefully consider the implications of transitioning from a broker-dealer to an RIA, taking into account regulatory requirements, business considerations, and client needs.