How financial advisors are going full-RIA — with a 'brokerage'

A prospective client speaking with advisor Bill Rabbitt recently posed the foundational query that more customers are asking these days.

Private Advisor Group

"'Before we even talk, I have one question: Are you a fiduciary?' She said, 'I couldn't keep talking to you if I didn't ask you that question,'" said Rabbitt, the owner of West Hartford, Connecticut-based advisory practice WP Financial. "People are looking for that. They want that unbiased advice."

More financial advisors than ever before are answering in the affirmative with respect to every area of their advice. Planners like Rabbitt, though, represent a new and growing group of advisors: those who are registered only with a registered investment advisory firm — but one that also has an affiliated brokerage or uses the services of a company that has a brokerage.

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Retail clients would likely struggle to grasp the technical classification of this group of RIA-only advisors who use the services of dually registered firms. The increasingly popular practice further blurs the lines of the conventional industry divide with brokerages, as companies like LPL Financial, Wells Fargo and Commonwealth Financial Network confront competition from aggregators and platforms. The new forms of RIA affiliation reflect more potential options for advisors but greater complexity.

"When you sell to an aggregator you're giving up control to that firm. There are a lot of pros to that as well, because there's a lot of capital available on that side," said Jodie Papike, CEO of advisor and executive recruiting firm Cross-Search. "A lot of broker-dealers woke up five, six, seven years ago, and they could see the trend and they could see that more and more of their assets were going on the advisory side and more and more advisors were breaking away from FINRA."

The RIA-only movement

The number of RIA-only professionals — defined as investment advisory representatives of RIAs who aren't registered as brokers — surged by more than 50% in the past six years to 85,184 at the end of 2023, according to FINRA's annual industry snapshot reports. During that time, the share of professionals who were only registered as IARs expanded by 4 percentage points to 12% of the total number of registered representatives across FINRA and the SEC. 

That reflects faster growth than among the most common form of "dual" registration for advisors as brokers and IARs — a population that was up 11% to 319,597 over that six-year span. With a 45% share of all registered personnel (and taking into account that brokerage-only reps aren't considered advisors), those wearing both hats still represent the predominating classification in the profession. 

The exact number of RIA-only advisors using the dually registered firms as a custodian or as an RIA would be difficult to calculate. That's because they, in some cases, operate their own RIA firm, in others use a hybrid RIA that works with a dually-registered firm or, in a third group, the ones who use the corporate RIA of the dually registered firms. Those dually registered firms are increasingly willing to provide services to planners in any RIA capacity.

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For example, LPL and Commonwealth have rolled out new affiliation options; Wells Fargo and Raymond James are retaining custodial and technology relationships among some teams that have otherwise decamped from the firms; and companies like Steward Partners and the hybrid RIA used by Rabbitt's practice, Private Advisor Group, are offering a third classification option. They're evolving to better compete for advisor talent with RIA aggregators and platforms.

Out of more than 800 advisors with Morristown, New Jersey-based Private Advisor Group, 604 use the firm's hybrid RIA and LPL's brokerage, 118 use LPL's corporate RIA and brokerage, and a burgeoning group of 80 are solely investment advisory representatives of the Private Advisor Group RIA, according to CEO Frank Smith. Where some advisors find benefits with "some level of standardization" with a succession plan or some liquidity through a sale of their practice, others see greater value in the flexibility of controlling their practice's brand and equity, he said.

Private Advisor views the competition for talent as "not one option is better," but more of a question of, "What the advisory business is evolving to and how we can step in and help," Smith said. Advisors can choose their own professional classification adventures, in other words.

"We're actually appreciative of the fact that there are different business models out there, and we're not going to be the solution for all of them," Smith said. "We think that's a really interesting mousetrap compared to a vertical that says, 'This is our way of doing things, accept it or not.'"

Keeping up with the times

Waltham, Massachusetts-based Commonwealth services hybrid RIAs as well, as part of a group of more than 300 fee-only advisors managing $25 billion through the firm's advisory programs with the corporate RIA or external firms, according to Alex Hansen, the firm's senior vice president of RIA Solutions. The company is launching a new RIA called Continuum to appeal to "basically, the same target market that Commonwealth focuses on today," with "additional technology and custodial choice," Hansen said in an email.  

Commonwealth Financial Network

"While Commonwealth already has affiliation flexibility through the glidepath process allowing advisors to seamlessly move from dual registrant to fee-only, today the fee-only options are part of a dual registrant (broker-dealer/RIA)," he said. "As such, some of the disclosures and language we are required to use in our ADV and CRS doesn't really apply to our IAR-only advisors. For many advisors, that's not an issue, they have been dual registrants with Commonwealth and the migration to fee-only is an easy conversation with their clients. For others, a platform designed specifically for the fee-only advisor experience is more appealing, which is why we built Continuum."

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LPL's new Access Portfolio Program is adding to its many ways of working with advisors in the RIA channel. While hybrid RIAs can already use other custodians, this new option gives advisors on the corporate RIA a means of tapping outside custodians that rival LPL. 

"In response to requests from advisors, we are piloting a program that enables eligible advisors on LPL's RIA to custody assets outside of LPL, as needed," spokesperson Shannon Greene said in an email. "Providing this optionality serves to help our advisors grow their businesses with clients who are unable to change their custody relationship for various reasons."

Greene declined to answer further questions about the number of RIA-only advisors using LPL in some form or the details of the pilot program, which was first reported by Ignites, a sister publication to Financial Advisor IQ. 

The shifts in RIA classification can seem jarring to some advisors. 

"You're talking about old dogs here, and it's very hard to change course for some of us," said Rabbitt, a 31-year veteran advisor. He started in the insurance business before being an early adopter of the hybrid RIA model then dropping his FINRA registration altogether in 2016.

Those variances of technical classification — and the degree to which advisory practices handle compliance, technology and other burdensome tasks or pay part of their revenue to outside service providers — boil down to less significance than the most important concern of whether "we are really taking care of our clients like we all say that we are," he said.

"The best way to do it is an RIA, and everything else is a transition or a step to get to the best place. We've taken all of those steps. I started as an insurance guy that did no investment business," Rabbitt said. "We stepped into these different phases to get to this phase that we're at now."

Confronting misconceptions?

For advisors who need to make a succession deal or find liquidity, the dually registered firms can facilitate M&A transactions of any kind just as readily as the RIA aggregators. Private Advisor supported Rabbitt's deal last year when WP Financial acquired an advisory practice after the unexpected death of its president.

In fact, those planning to sell their firm some day may wish to disavow themselves of "a misconception" that outsourcing some needs "somehow devalues" an advisory practice to a prospective buyer, Smith of Private Advisor said.

"We actually view that as completely opposite. An investor or a buyer of a practice is going to be very concerned with the quality of earnings," he said, noting the pressures of cybersecurity and new regulations on top of the existing RIA compliance and risk burdens. "I would pay more as a buyer for something that had a greater track record of risk mitigation and scale around those things."

READ MORE: With Arnold out as CEO, can LPL keep up its growth trajectory? 

Cross-Search

In this murky picture in which dually registered firms and RIA aggregators and platforms look much more similar, it's no wonder that there is often "confusion in the marketplace on what independence is," according to Papike, the recruiter.

"A lot of advisors are intrigued by going RIA-only, and it's not necessarily for everyone. I think that a lot of education still needs to come around going advisory-only," she said. "It's so complicated that it's hard to explain all of it in a concise way."