By Thomas Goodson
What do cassette tapes and compact discs have in common with Super-OSJs?
They are once-essential innovations that now struggle for relevance. Tapes and CDs, for that roughly 20-year interregnum between vinyl records and digital audio formats, were, one after the other, the primary ways that audiophiles accessed music.
Similarly, for a time, Super-OSJs provided a crucial access point in the wealth management industry. Situated between registered representatives and their broker-dealers, OSJs provided more responsive service to the reps, along with supervision and compliance support, and as frontline recruiters for the firms. OSJs went home with their fees, and most everyone was happy.
It’s different now, with technology enabling broker-dealers to provide the support and services to their advisors directly, and most firms—again, leveraging technology—recruiting reps without need of an intermediary. It’s becoming harder for OSJs to justify their slice of revenues, which themselves are shrinking due to fee compression.
What’s a middleman to do?
The hybrid RIA model provides a way forward for OSJs seeking to redefine their value propositions, regain their relevance in a changing industry and position themselves for long-term growth and success.
OSJs’ Achilles Heel
The only way to maintain relevance with advisors is to provide them something of value. With the tide of advisors shifting towards advisory models, OSJs risk being left out in the cold if they don’t put themselves in a position to support advisors doing fee-based business.
Establishing an independent RIA while maintaining a Super-OSJ office and the existing relationship with broker-dealer, enables firms to meet advisors where they are in terms of establishing the right model for themselves, whether it’s as a dual registrant or purely as an individual advisory representative of the RIA.
But this is just the tip of the iceberg. Much of the true value of setting up an independent RIA lies in the fact that it can be structured as a business entity. The Achilles heel of the Super-OSJ model is in the independent contractor relationship that representatives have with the broker-dealer.
Broker-dealers are required to pay their 1099 contractors individually, not any business entity like an LLC, partnership or corporation. As such, most of the value of the revenue reps generate through client service accrues in reps’ books of business, not with the Super-OSJ office, which essentially provides a set of services that, while necessarily, are not irreplaceable.
Put another way, while the Super-OSJ office provides required supervision and may offer additional services that help its advisors, it’s ultimately not a business entity that holds much value.
This has implications. It means that a Super-OSJ office isn’t likely to garner outside equity investment or be owned by multiple shareholders.
An independent RIA, on the other hand, can be structured as any kind of entity with multiple ownership—limited liability corporation, an S-Corp or a C-Corp. Each structure carries with it specific requirements of owners, but the common thread they have the potential to be cash-generating entities and are inherently valuable.
As such, an independent RIA can receive investment from sophisticated partners, such as private equity investors, family offices and even broker-dealers. It can also get creative with ownership structure by, for example, offering equity to its IARs, as we have done at the AmeriFlex Group.
This IAR-ownership model, we’ve found, resonates strongly with advisors who are closing in on retirement and who may have spent their careers as reps on someone else’s corporate RIA platform. Being able to buy into an independent RIA is a way for advisors to participate in the growth that they are supporting through the client service they provide, while, as an IAR, still leveraging the services they lighten their administrative burden.
An advisor-ownership model also gives would-be hybrid RIAs something they wouldn’t have been able to command if they were only Super-OSJs: Relevance with advisors.
In the end, this is an example of what the versatility of the hybrid RIA model can enable—a way not just to attract advisors, but to retain them. Being a hybrid RIA can help firms go beyond the transactional relationships between Super-OSJs and reps and enlist partners in every sense of the word, who (quite literally) have a vested interest in the success of the firm and will stick with it for the long term.
Thomas Goodson is president of The AmeriFlex Group, an advisor-owned and -operated hybrid RIA in Las Vegas with more than $4 billion in total client assets.