Concerns Over Compliance Responsibilities Cause Pause for Broker-Dealers Considering Independence

Over the last several years, there has been a continuous trend of financial advisors seeking to transition to the independent business model – either as a hybrid (where they would remain associated with a broker-dealer) or fully independent (at an RIA-only firm).

The reasons for the push towards independence include more autonomy, a higher payout, and other factors. However, a large number of those considering a move like this are also considering the risks associated with such a move. The hesitation to transition is due to several key considerations, such as:

  • Can or should I maintain affiliation with my current firm?
  • What is the best affiliation structure for me?
  • What are the operational risks and responsibilities I would face as an independent adviser?
  • What knowledge and resources do I have available to address those risks and responsibilities, especially in matters related to:
    • Compliance
    • Cybersecurity and other technologies

Broker dealers seeking to transition to Registered Investment Advisers (RIAs) should be aware of the many changes such a transition will bring. By understanding the various structures under which they may transition to, and the regulatory obligations required under each structure, these factors can help advisors to determine what is the best option for their business.

Independent RIA: A fully independent RIA has complete control of their business, and the freedom to operate as they want, pursuant to SEC and/or state regulations. There also is a  potential to earn more as an independent RIA. However, higher rewards may equal higher risks, as an independent RIA takes on all operational and compliance responsibilities, including fulfilling regulatory requirements as determined by the SEC.

Hybrid RIA: Hybrid RIAs get the benefit from both worlds – while generally independent as an RIA, but under an independent contractor model with a broker-dealer. Generally, under this model the advisor will receive a portion of their commissions through their broker-dealer, but generally receive higher revenues from their advisory business. This means that Hybrid RIAs may have less earning potential and freedom, however, one key aspect of this structure is that Hybrid RIAs have guidance from their broker-dealer relationship on compliance responsibilities required by FINRA, and often have guidelines on what they can/cannot do through their independent RIA.

Jacko Law Group has worked with broker-dealers and investment advisers for nearly 20 years, helping them with a range of services, from entity formations and registration, to regulatory compliance matters, regulatory exams, succession planning, M&As and other business transitions. We assist our clients with developing a compliance program that meets the regulatory requirements of the SEC and the states and provide Mock Exams to prepare our clients for Examinations. In addition, we provide experienced legal counsel and representation for our clients in the event of regulatory examinations, customer complaints or enforcement actions.

If you are considering a transition, please feel free to get in touch with our team at 619.298.2880 or email for more information.

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