In recent years, a significant trend has emerged in the world of financial advising. An increasing number of financial advisers are making the bold decision to part ways with their FINRA (Financial Industry Regulatory Authority) member broker/dealer firms and, instead, opt to start or join a registered investment adviser (RIA). This transition has been fueled by several factors, including regulatory changes, the allure of independence, and the growing realization that the RIA model may offer a more client-centric approach to wealth management. In this article, we’ll delve into the reasons behind this shift, using data from the Investment Adviser Industry Snapshot 2023, and explore why financial advisers are choosing to embrace the RIA model.

FINRA AND THE RIA MODEL

The financial advisory industry’s regulatory landscape has a profound impact on advisers’ choices, and the shift from a FINRA-member broker/dealer to the RIA model is driven by stark regulatory differences. FINRA, known for its stringent oversight, has traditionally operated under a suitability standard, providing investments’ appropriateness for clients. However, this standard did not explicitly require advisers to act in their clients’ best interests at all times. Recent years have seen FINRA adopt Regulation Best Interest (Reg BI), aiming to align recommendations with clients’ best interests. While well-intentioned, Reg BI compliance can impose heavy administrative burdens, complicating advisers’ adaptability to market changes.

Concurrently, concerns about FINRA’s authority have arisen, with claims of arbitrary disciplinary actions. The organization’s perceived lack of oversight and power abuse has raised questions about its role in the financial advisory landscape. In contrast, the SEC oversees RIAs’ adherence to a fiduciary standard, which demands that advisers act in their clients’ best interests. RIAs are held to higher standards of transparency, conflict mitigation and client-centricity, which resonates with advisers seeking a more client-focused approach. This regulatory disparity has driven the trend of advisers transitioning to the RIA model, emphasizing the importance of regulatory frameworks in shaping the industry’s direction.

INDEPENDENCE AND FLEXIBILITY

Also enticing to financial advisers is the autonomy and flexibility that come with the RIA model. As registered representatives of broker/dealers under FINRA, advisers often work within a structured framework that can limit their ability to freely choose investment strategies and products. In contrast, RIAs have more control over their business operations and can tailor their services to meet their clients’ specific needs.

Furthermore, the RIA model allows advisers to choose from a broader range of investment options, which can be particularly appealing in a rapidly changing market environment. This flexibility enables RIAs to pivot swiftly and thereby capitalize on emerging investment opportunities, ultimately benefiting their clients.

CLIENT-CENTRIC APPROACH

The core ethos of the RIA model is a client-centric approach. RIAs are legally bound to act in their clients’ best interests, fostering a relationship of trust and transparency. This client-first mentality can be a significant selling point for advisers looking to differentiate themselves in a competitive market and start an RIA.

This article was excerpted from a blog post written by AdvisorLaw. Read the complete article on the AdvisorLaw website here.