Succession Planning for Hybrid RIAs

With the hybrid RIA taking off as a business model, there’s been much discussion in recent years centering on the importance of independent broker-dealers remaining business model agnostic. Hybrid advisers—those financial advisers who provide both fee and commission based services, see the benefits of having a personal independent registered investment adviser firm while doing their commission based business through a broker-dealer partnership. Others choose to do business as an investment advisory representative under their broker-dealer’s corporate RIA relationship.
Whatever the case, these independent broker-dealers must remain committed to supporting the business model that is unique to the financial adviser since they, ultimately, are the ones that know what works best for the clients they serve.
A point often overlooked, however, is how this business model impacts the financial adviser’s succession planning considerations. Every single financial adviser must consider specific sets of succession planning issues before choosing a business model- whether it be a hybrid RIA firm or a hybrid adviser working as an IAR under a corporate RIA.
Financial advisers that operate under a corporate RIA may have vastly different succession planning considerations from advisers who manage their own RIA. In fact, these two diverging business models within the hybrid advisory space, the argument could be made that it’s, even more, crucial for hybrid advisers to understand the implications of the business model of their choosing as far as succession planning goes.
Here are three key succession planning considerations to keep in mind when choosing whether to start your hybrid RIA firm or work through an IBD’s corporate RIA:
Default ownership of account relationships–
It’s crucial for financial advisers under an IBD’s corporate RIA to have an advanced agreement in place—such as a buy-sell. This would protect the ownership of the accounts if the adviser were to pass away or become disabled. Otherwise, the corporate RIA usually takes ownership of the accounts. And while corporate RIA’s or affiliated IBD’s usually have an internal mechanism to monetize accounts, it can often result in a reduced valuation of assets as well as a delay of compensation to the financial adviser’s beneficiaries.
Financial advisers who have their own RIA skip this issue entirely since the issue of account ownership is clearly defined. The RIA owns the client relationship, so there is a seamless transition to surviving partners. It should also be noted that the RIA firm structure provides a clearer pathway for heirs to gain financial benefit in the absence of a buy-sell agreement.
In an IAR structure, clients tend to identify with the individual adviser, versus the corporate RIA entity. This adviser represents the brand and becomes the primary focus of the relationship. Clients tend to feel a closer individual connection with their adviser in this business model, versus working with a broader entity.
If a financial adviser dies or becomes disabled in this scenario, it may potentially be easier for RIA firms to retain client relationships, since changes are, at least in theory, much less likely from a business structure continuity standpoint.
A corporate RIA structure can often provide financial advisers working as IARs access to capital funding resources to facilitate succession planning.
For advisers who have their own RIA firms, funding a succession plan may be more difficult– the options are frequently more limited. Hybrid advisers who are looking at establishing their RIA structures, therefore, need to choose their independent broker-dealer partner very carefully.
Within the hybrid advisory space, one business model is not inherently better than the other, and independent advisers have leveraged both RIA and IAR structures with great success. It is simply vital for you to clearly understand the impact of which business model you choose and in particular within the lens of succession planning.