I recently completed my transition to a fee-only registered investment advisor (RIA) model of financial planning and investment advisory services.
For me, the journey has been one of finding ways to simplify my life and reduce conflicts of interest with clients.
Along the way, I discovered other reasons the RIA model works for me.
It has been a liberating, self-empowering professional and personal growth experience.
Dec. 31, 2013, was a milestone on my journey. It was the day that my Series 7, 63, 24 and 66 licenses lapsed. That meant I could no longer easily be affiliated with a broker dealer (BD). For the first time in my career, I was truly flying solo. It turned out to be a non-event. The sky didn’t fall. No seismic shift happened. Jan. 1 was just another day in my business world, with a predictable cycle of revenue, reporting and client reviews.
A slow, careful transition process
My successful transition from dual licensing to a fee-only model was planned and executed over several years.
In the years after 1987, when I was licensed by the National Association of Securities Dealers, Inc. (NASD), I was affiliated with ten BDs. (NASD has since become FINRA, the Financial Industry Regulatory Authority, Inc.) Some gave me access to resources to learn my trade/craft — for which I am grateful. Looking back, all have changed their name, merged or gone out of business. I have changed, too, and adapted within the financial services industry. However, I am relieved that I no longer have to deal with the complications of explaining the change to clients and the inevitable time and cost of repapering their accounts with each BD switch. Still, looking back, it’s hard for me to believe that I changed BDs on average once every 2.4 years.
In addition, working with a BD can be a convoluted process. To keep the financial planning fees paid by clients, my first BD required that I become a registered investment adviser. While the BD required investment advisory fees to go through the BD payout grid before being re-allowed, I saw the potential for the RIA entity to serve in that capacity one day. Looking back, this requirement was fortuitous — and a key factor that eventually led me to where I am today.
Steps in the transition process
Transitioning from dual registration (i.e., the BD’s FINRA and corporate RIA registration) to a fee-only RIA was a process that began several years ago. I emphasized my fee-only investment advisory business, and educated clients and prospective clients on the benefits of a low-cost investment portfolio consisting of mutual funds and exchange traded funds (ETFs). I added value by developing an Investment Policy Statement for each client, elements of which included: monitoring, rebalancing, location optimization and tax loss harvesting. I also introduced a behavioral coaching approach I call WealthCouncil, to keep clients focused on the things that are important to them. I found that when people listen to the stories of others, and share their own, there is a potential for positive shifts in financial behavior.
At the same time, I deemphasized selling illiquid commission-based direct participation programs, such as REITs, equipment leasing and energy limited partnerships. I challenged myself to find listed substitutes for these alternative investments, which generally have high expenses consisting mostly of commissions. I also deemphasized selling commission-based life, disability and long-term care insurance products, and then allowed my life insurance license to lapse.
Completing the transition
After several quarters, my corporate profit and loss statement showed that commissions from product sales could be more than offset by revenue gained from advisory fees. The additional revenue for no longer getting a “haircut” from the BD helped when I finally made the transition. I conducted due diligence on independent custodians, and selected and affiliated with discount broker Charles Schwab & Co. The firm was helpful and supportive with the transition. I reworked my ADV form and Financial Life Planning and Investment Advisory Agreement to reflect the fact that my client relationship was with my corporate RIA rather than with the BD. I also introduced two fee schedules: the traditional assets under management model and a flat retainer.
Clients want to know how their advisor is compensated. The RIA model gave me the ability to clearly and unequivocally tell my clients that I am paid by them only — not through a BD and the commissioned sale of a product or services. Although I am comfortable with my direction, I was still nervous about approaching my clients to explain the change. My concerns proved unfounded. Most clients expressed gratitude for the full disclosure, which refreshed and reinvigorated relationships.
I still use my product knowledge in developing financial planning recommendations for clients. But now the relationship is clearer and easier to explain. Now there are no commissions, no BD oversight and a significant reduction in conflicts of interest surrounding compensation.
The transition follows the course I set for myself many years ago, when I completed my certified financial planner (CFP) designation and committed to help families develop their own road maps to their financial goals and objectives. It has been a rewarding career and my chosen way to making a living. When clients engage me in this process, we commit to the relationship with a written document that I call our Financial Life Planning and Investment Advisory Agreement.
Taking on additional responsibilities
I did assume additional responsibilities by moving to a fee-only system. They include responsibility for the firm’s compliance and due diligence. I feared that this would be expensive and time-consuming. However, since non-listed REITs, energy partnerships, and other commission products are no longer part of my offering, my compliance requirements are not as onerous as I had expected.
Researching and securing an appropriate errors and omissions policy with tail coverage was part of my compliance education. Now I attend quarterly meetings of RIA firm compliance officers to stay current on compliance issues. I am hands-on — assessing risks to the firm and filing required disclosures on the Investment Advisor Registration Depository website as well as with state regulators. As a former due diligence officer, I am careful with the products and services I offer. I am careful with how I present and market my services. Now I guide the firm to take appropriate measures to address due diligence, marketing and ethical issues, using my own moral compass. While not a fiduciary when I was part of a BD, I always considered myself a fiduciary. It is part of who I am and in the client’s best interest.
Developing and following procedures applicable to my firm have helped my company become more efficient. It is an ongoing process. We no longer have to fit into a broker dealer’s systems and way of doing business. We now independently research and deploy systems that work best for the firm.
Creating a team
Learning to manage a RIA business is different from being a registered representative. I am more creative in how I view the business when considering future opportunities. Meeting production requirements to reach BD sales goals for contests or trips (possibly involving conflicts of interest) or reaching the next level on the payout grid have given way to more independent thinking about what is important.
In making my transition, I expected that the human resources composition of the firm would remain the same. That is, that the firm would remain a solo practice consisting of just me and an assistant. However, I was surprised to discover that there are like-minded advisors out there who value and understand the benefits of the fee-only RIA model. As a result we are growing and looking to add capabilities and business continuity. This also addresses the concerns of clients who wonder what will happen if I am no longer available to take care of them or their family?
Each team member is respected and valued for who he or she is and what that individual does to build the business to achieve his or her desired quality of life—and each is commensurately rewarded. The pieces are in place to support future team members. Group benefits are offered. Equity ownership and planned succession are part of the strategy.
The surprise to me in making my transition is that I am not alone; there are other advisors who want to make the transition to a fee-only RIA. I hope my experiences and story will help encourage others to make their own successful transition.
Hillel Katzeff is a financial life planner and owner of HK Financial, Inc. Registered Investment Adviser [email protected] 858-550-0425