When financial advisors decide to go independent, one of their most important choices will be choosing a broker-dealer and/or a custodian.
When choosing a broker-dealer, David Hoff, president and chief executive of First Heartland Capital, a broker-dealer in Lake Saint Louis, Mo., suggests that advisors ask themselves the following questions:
1. Is the broker-dealer truly independent?
Some broker-dealers that promote themselves as independent may be owned by an insurance company or other financial institution, which may promote subtle or not-so-subtle incentives to buy their proprietary products, Hoff says.
2. Is the broker-dealer ownership stable?
It is very inconvenient and time-consuming to change broker-dealers. When choosing a broker-dealer, most representatives desire a permanent home for a broker-dealer and never have to change, Hoff says.
3. Will the firm have a relationship with the owners of the broker-dealers?
The firm should be able to share successes and challenges with the people who determine the broker-dealer’s policy and strategic direction.
4. What help can the broker-dealer provide in transitioning existing accounts to the independent relationship?
Most broker-dealers in the independent space will have a transition team to help advisors transfer existing accounts to the new relationship.
5. What is the firm’s compliance record?
Make sure that the firm has a clean compliance record.
On the custodian side, Mary Ann Buchanan, chief executive and founder of RIA Match in Vienna, Va., which provides solutions for succession and growth, suggests the following questions:
1. Is the advisor choosing between a broker-dealer or a registered investment advisor model?
Advisors need to consider whether they want to be fiduciaries with an RIA or agents of a broker-dealer. Although advisors can be hybrids whose businesses include both RIA fees and broker-dealer commissions, they need to determine based on the breakout of their business's revenue and future growth which path is best.
2. What are the core capabilities, products and services of the custodian?
It is important to confirm that the custodian can support business needs such as banking, international clients, alternative investments or a robo advisor.
3. What technology does the custodian provide, and does it align with the advisor’s business needs?
Test-drive the custodian's proprietary technology, and see how it integrates with the other technology being used. Does the custodian offer bundled technologies such as financial planning and portfolio accounting at a discount?
4. What is the pricing of the custodial trading and products that the advisor's firm requires?
Can the firm negotiate pricing based on custodial needs? Compare the pricing and services among custodians.
5. Is the culture and brand of the custodian a good fit for the advisor?
The custodian will be a long-term business partner so make sure that the relationship will endure and support the direction of the firm's business growth.
Whichever advisory path an advisor picks there is no right or wrong choice. But make sure that the match is right not only for the current business model but the future vision.
Bruce W. Fraser, a New York financial writer, contributes to Financial Planning and On Wall Street.
This story is part of a 30-day series on going independent.