Understanding Financial Advising Business Structures

Michael Gardia March 16, 2022

image of hands, pens, paper, financial reports over a cityscape 270049078
One of the great things about a career in financial advising is that it’s a big umbrella. If you want a regular schedule, you have options. If you want significant earning potential above all other things, you have options. You can assist with financial planning, offer investment advice, assist with budgeting and estate planning, and more. Then, there are the ways in which you can explore those roles, whether it’s with a firm or breaking away and forming your own RIA, or becoming an independent broker.

There’s a variety of options that offer freedom and flexibility, formal connections, and control. Understanding the options is key to knowing not just what interests you, but also what will help you achieve your goals and the goals of your clients.

Quick Links

Types of Business Structures and Financial Advisor Relationships

Not all financial advising relationships are alike. Similarly, not all relationships between advisors and the businesses they work for are the same. Whether working for a large wirehouse firm or breaking away to explore your options on your own, thankfully, financial advising relationships and financial advisors themselves are not one size fits all!

In fact, advisors can work for banks and larger institutions, traditional businesses like insurance companies, and more. However, for the purposes of our conversation here today, we’re looking really at the ways advisors can explore careers outside more traditional career trajectories and look at the options for breaking away. 

Advisors looking for independence can choose any of the following options for their business structures and relationships (which we’ll discuss more in-depth below):

  • RIA
  • Independent Broker-Dealer
  • OSJ

While each has its benefits and can possibly free advisors up to focus on their interests, each may limit options or aspects of the financial advising role they hope to explore or areas where they excel. Understanding the options completely is key to making the best decision for you.

What is an RIA?

RIA stands for Registered Investment Advisor and may be either a firm or an individual who is registered with the Securities and Exchange Commission (SEC). An RIA can be either a firm or an individual, so it’s an option for breakaway advisors who want to strike out on their own. 

One of the advantages of an RIA is the flexibility in services. While RIAs have a fiduciary responsibility to act in the best interests of their clients, they can offer a wide range of services from investments to estate and tax planning. That means individuals choosing this route can continue to offer broader financial advice.

RIAs earn income via a variety of fee structures, though fees are typically based on a client’s assets. Management fees, collected yearly, are based on a client’s assets. Clients with portfolios with assets exceeding $1.1 million may be charged performance fees. Asset-class-based fees assess fees based on the quantity and type of assets in a client’s portfolio.

Finally, some RIAs are switching to hourly fee structures which provide flexibility for clients who are then charged based on the services they use as well as the experience and expertise of the financial advisor assisting them with advice or transactions.

What is a Broker-Dealer?

Like an RIA, there are two types of broker-dealers, independent broker-dealers, and wirehouses. Independent broker-dealers sell the bundled products or services of others while wirehouses offer their own products to their clients.

The term “broker-dealer” comes from the dual role these firms or individuals play in the market. Their primary focus is buying and selling securities (stocks and bonds) for their clients, which means they act as a broker, or for their firm when they act as a dealer.

So, there are two important differences between a broker-dealer and an RIA, the first is that broker-dealers do not typically offer additional financial services such as advice on a financial plan, estates, or taxes. More importantly though, broker-dealers do not have a fiduciary duty to their clients. However, part of their role within financial markets necessitates that flexibility.

Broker-dealers are largely responsible, via their connections to investment banks, for keeping the market moving. Not only do they provide underwriting for securities, ensuring that there are securities to sell (and then offering those underwritten products to clients), but they also ensure the market keeps moving through the buying and selling of securities in general. Their own investments (as dealers) help keep the market active and robust.

This also means income potential is increased as broker-dealers earn on both sides of their business.

What is a Wirehouse Firm?

A wirehouse firm is, first, a type of broker-dealer. They are typically a national brokerage with offices all over the country. The term itself refers to a time when all of those offices were connected via the same “wire” to ensure each branch was receiving the same financial information as all the others. Wirehouses are a type of broker-dealer, though they often allow additional services such as financial planning based on the proprietary information and research compiled by financial analysts employed by the firm.

In addition to research provided by the wirehouse and access to their technology, wirehouse brokers also sell products and services affiliated with their specific wirehouse or firm. For example, a wirehouse like Merrill Lynch or Morgan Stanley have tailored solutions, products, and services that are designed specifically for wirehouse brokers to offer to their clients.

What is an OSJ?

OSJ stands for Office of Supervisory Jurisdiction. As the name implies, it offers affiliated oversight to independent broker-dealers, enabling them to focus on their services while the OSJ operates more closely with the advisors. OSJ’s may offer any of the services provided by the broker-dealers they are registered with. However, an OSJ’s primary responsibility is to ensure that any independent financial advisors operating under its oversight are abiding by all federal, state, and Financial Industry Regulatory Authority (FINRA) regulations. 

OSJ’s can be a valuable tool for breakaway advisors looking to become independent as the OSJ can provide oversight, compliance, and some administrative assistance, particularly when it comes to client communication needs. Additionally, OSJ’s may also help with lead generation, prospecting, and mentoring. For breakaway advisors, it may be advantageous to join up with an OSJ to remain independent but have it feel as if they have the support of a larger firm.

woman-smiling_450499730
Why Your Financial Advisor Business Choice Matters?

One of the biggest factors that will influence your choice of platform will be your goals and the role you want to play in the lives of your clients. For example, if you’re looking to provide financial advice and planning as a primary service with investment advice coming secondary, or perhaps not at all, an RIA may be your best option. In other words, the structure you select may dictate the functions you can perform.

Further, the amount and type of support you’ll need or want may dictate your choice as well. For example, those who are truly seeking independence and are interested in building the business side on their own may find an OSJ is too involved in their business and other options may be more suitable. 

This decision will have a lasting impact on your goals and career, your business, and your clients, so knowing which structure to choose is vital.

man and woman work over financial reports 200024314
How to Choose the Structure that Works for You

As with many other choices you’ll make in your career, choosing your platform requires going back to basics. Whether at the start of your career, mid-career, looking to break out on your own, or late-career and looking to secure your legacy, many of the questions you’ll want to ask yourself are the same.

  • What are your career goals?
  • How much time do you want to devote to the business side of advising?
  • What kind of work/life balance do you hope to have?
  • What kind of role do you want to play in your clients’ lives?
  • What do you value most in your career?
  • What are your strengths and weaknesses?
  • What skills do you need or want to develop?
  • Are you a mentor or do you need one?
  • Where are you on your career path and how might this choice change your trajectory?
  • How happy are you in your current role? Is there another aspect of financial advising you’d like to explore?

There’s a lot to consider and a lot of questions to ask. Having help along the way can be invaluable. Because the team at FA Match has significant experience not just as financial advisors, but also as recruiters, we understand these questions and more. We pride ourselves on asking the probing questions and knowing the financial advising landscape well enough that we can help you find your horizon line.

If you’re ready to start talking about how FA Match can help you figure out your next steps, get in touch with us today. We’ve been there too and we’re here to help. Reach out to us today and let’s get started on your future!
New call-to-action