1. BD Income’s Overall Contribution to Your Total Revenue
If commissions and/or trading income represent less than 10% of your total revenue, then you should seriously consider dropping the BD license. Your compliance and FA/broker expenses alone may well exceed what you’re taking in from the FINRA registration. This seems simple and obvious, but many hybrids originally operated as a broker-dealer, and the transition to (RIA) exclusivity can be daunting and sometimes difficult to implement in practice. The good news is that transition costs are one-time; whereas, the forgone compliance expense associated with dual registration is an ongoing benefit.
2. Top Line Exposure to Bear Markets
It’s been over nine years since we had a sustained market downturn. We’re probably overdue. Many hybrids have been transitioning toward the RIA model for quite some time but are reluctant to drop the BD license because it offers some cushion against falling advisory fees when AUM plummets with the market. The asset-based revenue model has been great for FAs largely invested in equities since the Financial Crisis, but that won’t always be the case. Commissions and trading income aren’t completely market proof but do offer some hedge against revenue declines from down markets. If your firm manages mostly equities and primarily charges asset-based fees, you may not want to totally abandon your BD status just yet.
3. Emphasis Clients Place on the Fiduciary Standard Over the Suitability Standard
Many years ago most your clients probably didn’t know or care about the distinction. Now your best clients, and particularly your best prospective clients, likely are not only familiar with these terms but understand the implications. If your hybrid is not technically a fiduciary, you may want to change that before ditching your BD license.
4. The Costs (and Headaches) Associated with Dual Registration
I think most industry participants would agree that less is more when it comes to regulatory oversight, and several clients have told us that FINRA compliance is more burdensome than the SEC’s. Devoting capital and resources to compliance matters can be a huge distraction. Abandoning the BD license could be a quick fix if it’s not doing much for you in the first place.
5. Your Firm’s Identity
Do your clients and other stakeholders see the company as an advisory firm or broker-dealer? Are you operating as a fiduciary for clients or selling proprietary products and/or executing trades on their behalf? Either route may have served you well in the past, but it may be time to choose a path. Acting as a fiduciary to some (but not all) clients could lead to conflicts of interest and confuse your role to prospective clients. Picking a side would clarify this message and potentially land more business from investors looking for an RIA or BD firm but not necessarily both. If, on the other hand, a hybrid culture has been instilled across the firm for quite some time, it may not be worth the hassle or cost to go the exclusive route.
Undoubtedly, there are other things to keep in mind if you’re thinking about going exclusive. You can take some comfort in knowing that you’re not alone. Industry consultants Cerulli Associates estimates that hybrids have grown to roughly 15% of the industry, up from 7% in 2004 as BD-only firms have declined in number while fee-only RIAs have grown more modestly in recent years. Still, this trend is probably not sustainable with a looming Advisory Rule, so you need to be thinking about your options if you haven’t already done so.
