(Dynamic Advisor Solutions) To run your practice as an Investment Advisor Representative (IAR), or as a Registered Investment Advisor (RIA): that is the question.

Advisors contemplate these models like dental-aisle shoppers pondering the ever-expanding sea of toothpaste, toothbrushes, mouthwashes, floss, whitening strips and everything else in-between the teeth and gums. The options seem endless with enough varieties to make anyone wonder what’s best.

Like the toothpaste aisle, RIA vs. IAR options span a variety of different platforms and models, making the decision for advisors harder than ever before. It’s no longer as simple as tucking in under a small RIA firm or developing the team, technology and custodian relationships to establish your own RIA, Dynamic CEO Jim Cannon noted in his opening remarks on Dynamic’s January Resource Call, a panel discussion: “IAR or RIA? Which Path is Best for Your Practice?”

(If you missed it and want to catch up, I bet Dynamic would be happy to help.)

Cannon acknowledged, “Those two paths have greatly expanded over the past five years and now there’s a number of platforms like Dynamic that support advisors in a variety of ways so making that decision doesn’t necessarily have to mean that you’re taking on all the responsibility as an RIA…and it doesn’t necessarily mean that if you’re an IAR, you’re stepping into an environment where you’re restricted and limited.”

“When talking with advisors questioning, ‘What’s the best model for me and my practice?’ many advisors come to the realization that it’s not about the structure per se, it’s about the design of the practice, the types of clients they want to work with, the services they want to provide and what’s the best way to tackle that,” said Cannon.

During the recruitment process, Dynamic team members have deep discussions with advisors to help determine which model is best for them. Many practice considerations are taken into account, such as:

• What do you want your business to look like in three to five, 10 years?
• How are you going to market your firm?
• What are your team members’ skillsets?
• Do you have other resources that can support functional requirements and administrative responsibilities? (e.g., accounting, billing, reconciliation, E&O, cyber insurance, ERISA Bonding)
• What’s your experience level? (e.g., managing custodians, technology, compliance, investment management)
• What area of the practice do you most enjoy? What’s the best use of your time?

IAR vs. RIA: Advisor Perspectives

Vince Esposito, AIF®, WMS
Founder and Managing Partner, Fair Street Advisors, Guilford, Conn.

Vince Esposito started his career in the early 90s with American Express Financial Advisors. As a wholesaler during the second half of the decade, he worked with many advisors across the country and learned the different ways of doing business as a financial advisor. After earning his Accredited Investment Fiduciary® (AIF®) and working for a broker-dealer, he left to start his own RIA in 2010, which was, in Esposito’s words, “a royal pain…”

“I spent an inordinate amount of time doing things like wrestling with technology…it was a time drain that drained a lot of energy. Also, I was the chief compliance officer which was taking away from my best use of time…I did not enjoy those parts of the business.”

Esposito joined Dynamic in 2014 through a partner relationship, which he describes as a “rough decision” at the time because he felt like he was giving something up, going from his own RIA to an IAR of Dynamic.

“Looking back, I agonized over it, but it (IAR) was definitely the right call for me.”

Esposito credits his relationship with Dynamic for there being “more pluses than minuses to doing business as an IAR.”

Mark Laughton, CPFA, C(k)P®, AIF®
Vice President, Quintes, Watsonville, Calif.

As a third-party administrator (TPA), Quintes is focused on retirement plans such as 401(k) and 403(b) plans. As Mark Laughton explained, they formed an RIA around 2016 based on laws in California “on how you can receive revenue for retirement plans.”

According to Laughton, they were also seeking a firm to help them grow on the wealth management side, where they also had experience. While managing around $1 billion in the qualified plan space, the Quintes team reached out to Dynamic to help leverage the back and middle office as well as help on the portfolio management side.

In exploring both the RIA and IAR models, “For us it came down to the complexity of all the different ways we receive compensation,” noted Laughton.

On the advisor side, on the commission side, insurance-type products, fee-based products, the TPA side…this list goes on.

“For us, we felt more comfortable staying as an RIA, leveraging some third parties to help us… that’s not necessarily easy or fun, but we also didn’t necessarily want oversight on our TPA business.”

Laughton credited the Dynamic team for their guidance and support “as we build out our wealth management practice and how we can enhance our qualified plan business.”

A point to distinguish, noted Jim Palumbo, Dynamic principal and chief marketing officer, is that Dynamic runs across cases like Quintes where an advisor already runs a very large business that’s related to their RIA.

“Mark’s comments really feed into the question of your business goals, ‘What business do you see yourself running three to five years from now?’ For Quintes, the RIA really served a specific purpose,” said Palumbo.

Mark Johnson
Partner, Fortress Asset Management, Salt Lake City, Utah

Mark Johnson started his career at Fidelity Investments in the early 90s and after eight years, he decided to make a change. Johnson went into banking, working at Zion’s Bank in Salt Lake City where he met Brock Bowden. By 2011, Johnson and Bowden left Zion’s to become independent advisors and partners at Fortress Asset Management.

When the RIA vs. IAR model question came up, “We really looked hard at it,” Johnson explained, realizing he didn’t want to risk losing a month out of the summer involved in an audit.

The partners asked other advisors at firms of the same size for their thoughts on what model was best. “Their take was, it’s much easier to affiliate then to start up your own RIA,” Johnson said.

It came down to Johnson and Bowden determining what they do best and executing on it. They knew they were best in front of clients, who tend to be business owners which can take a lot of time, explained Johnson. “Let other people do what they do well, and it’s really allowed us to grow.”

Fortress has an additional advisor on the team, as well as a Client Services manager and Chief Investment Officer.

Johnson noted other benefits to forming an IAR: “We liked having at an arm’s distance things like compliance and billing. And an added value along the way, not only from the administrative side, but also we’ve gone to Jim (Cannon) with product solutions, things we’re wrestling with. It’s nice to have his perspective on a number of different ways people are doing it.”

RIA Responsibilities Checklist: Cybersecurity, Technology and Compliance

Dynamic Chief Operating Officer Craig Morningstar and Chief Compliance Officer Cherie Jolly joined the resource call panel to discuss cybersecurity, technology and compliance as key factors when considering the RIA model. They provided a checklist in these four critical areas:

1) Cybersecurity: A New Responsibility for RIAs

• Increasing business risk with more bad actors and increasing regulatory oversight
• Changing landscape with tech vendors and buyer beware cyber tech providers
• Shifting fraud risks by custodians and increasing requirements of RIAs
• Increasing client notifications by RIAs’ requirements and risk coverages
• Rapidly evolving SEC requirements based on ongoing industry risk findings
• Growing complexities of real risk protection vs. on-paper vs. required documentation
• Required understanding of IT, cyber, documentation, audit and SEC knowledge
• Lacking functional sources that meet SEC outlined requirements

2) Technology Considerations for RIAs

• CRM
• Portfolio Management System
• Billing System
• Client Portal
• Financial Planning
• Document Management
• Encrypted Email System and Archiving and Review Processes
• Vendor Due Diligence

3) RIA Compliance Requirements

• ADV Filings and Registrations
• E&O Insurance
• Compliance Program
• Testing and Monitoring
• Policies and Procedures: Code of Ethics
• Documented Annual Review

4) Ongoing Review and Monitoring of:

• Marketing and advertising
• Outside business activities
• Personal accounts/personnel transactions
• Social media accounts, email messages, etc.

Jolly also cited a growing list of events over the last two decades that resulted in far-reaching compliance rules and regulations that have shaped Dynamic’s “culture of compliance.” 

Sorting Through the Options

Serving both models, Dynamic helps advisors set up their own RIAs and provides services to them. There are good reasons to consider the RIA model, noted Cannon. Among them: securities commissions (which aren’t allowed under Dynamic’s RIA), broker-dealer commissions, outside business activities and disciplinary history that can sometimes be an impediment to joining Dynamic’s RIA.

When it comes to the RIA vs. IAR route, “There is no universal answer as to which is better,” said Brad Wales, founder of Transition To RIA and guest panelist. “It comes down to the particular needs and goals of each advisor.”

Talking with many advisors from various firms and affiliation models through his business, Wales added that there is no ultimate pattern…there’s misconceptions out there about the IAR model. “There are a lot of flavors and options out there—in theory 20,000-plus RIAs are out there—you could join any one of those and they’re all going to have different value propositions.”

Wales calls Dynamic’s RIA option a “purpose-built solution that caters to the advisor that wants the benefits of having their own RIA but without as many of the responsibilities—or as some might say, headaches—of running it themselves and it ends up being a good solution for them.”

For Wales’ clients, the majority of advisors that come to him “assume” they want to go the RIA route and while many of them ultimately do, he educates them on the IAR options that are available. “The key is sorting through and understanding them, I encourage all advisors to take the time to determine what’s best for them.”

Is there consistency among advisors who choose to set up their own RIA?

Wales explained it’s typically the advisor that feels “burned by their current firm and it doesn’t matter how great of a solution like a Dynamic IAR might exist, it’s a mental block at that point and they’re not going to want to be under someone else’s, as they say, ‘control.’”

Another example, according to Wales, are those advisors who love the idea of putting together a technology stack themselves. “But for those that don’t want to piece the technology together and still want their own RIA, that’s where Dynamic Advisor Solutions comes in.”