How Brokers And Agents Can Get Paid Directly For Delivering A Financial Plan

(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)

#OfficeHours with @MichaelKitces Video Transcript

Welcome, everyone! Welcome to Office Hours with Michael Kitces.

So for today's Office Hours, I want to talk about a topic that's kind of near and dear to my own heart, which is getting paid for delivering financial planning, and particularly, like, a financial plan. And the challenges that crop up for advisors who work under a broker-dealer or an insurance company, who may be doing financial plans but can't necessarily get paid directly for them.

And this is a question I'm hearing more and more these days. Usually, it goes something like this:

"Dear, Michael, I work for an insurance broker-dealer where we do a lot of financial plans for clients and get paid by helping clients to implement the plan with our insurance and investment products, and I'd like to just charge separately for the financial plan because the planning is a lot of work and not every client necessarily follows through with implementation, but my broker-dealer says I can't. How do other advisors do this? Is my broker-dealer just overly restrictive?"

This is a great question and an increasingly common one that I see as more and more advisors focus on financial planning and doing plans and not just products and implementation alone. And it's a big deal because it actually strikes at the very heart of the different ways that advisors can be licensed and registered to deliver financial advice.

Getting Paid For Advice Requires An RIA [Time - 1:24]

So the most basic level, anyone that we call a financial advisor is usually licensed and registered in one of three ways.

1. You passed your Series 6 or Series 7 exam and became a registered representative of a broker-dealer

2. You passed your life and health license to become an insurance or an annuity agent

3. You passed your Series 65 and work under a registered investment advisor or RIA for short

And most of us know that these licenses are the ones that dictate what kinds of solutions you can or cannot sell to your clients. If you want to get paid insurance and annuity products, you need an insurance license. If you want to get paid to sell investment products at a broker-dealer, you need your Series 6 or 7, and if you want to get paid to manage a discretionary portfolio, you need your Series 65 and you need to work for an RIA.

But the Series 65 and becoming an RIA is actually more than just getting paid an AUM fee for managing a portfolio, the reality is that getting paid for any type of investment advice including getting paid for a financial plan that includes some investment advice because technically, you really truly actually can't get paid for a financial plan through a broker-dealer. And while we often call ourselves financial advisors when working at a broker-dealer, legally, you are not in the business of advice at a broker-dealer, you are a registered representative for the broker-dealer to sell their securities products. In fact, under the Investment Advisers Act, you can't give advice at a broker-dealer that's more than solely incidental to the sale of the company's brokerage products and services, or you'd have to become an RIA anyway.

And the same is true if you're an insurance or an annuity agent. If you're only doing business with a life and health license, you can absolutely implement those insurance and annuity products, but you can't charge people for a financial plan because you need a Series 65 and be working under an RIA to actually get paid for the advice itself.

Becoming A Dual-Registered Or Hybrid RIA [Time - 3:07]

Now that being said, it's not uncommon for advisors who work at broker-dealers to actually charge for a financial plan. Because especially over the 10 past years, a growing number of broker-dealers also own an RIA or a registered investment advisor under their broker-dealer umbrella and allows their advisors to be what's called "dual-registered," as both a registered representative with their broker-dealer and an investment advisor representative or IAR of their corporate RIA. That's one of the advantages of taking the Series 66. It's effectively a combination of the Series 63 you need for a broker-dealer and the Series 65 you need to work for an RIA, all merged into one.

And so in essence, what happens is that you do your securities products while you're wearing your broker-dealer hat, and then you take off that hat and put on the corporate RIA hat to get paid for your financial plan under the broker-dealer's corporate RIA. Which means it may seem like your client is still making out the check to the broker-dealer to pay for the financial plan, but they're actually not paying the broker-dealer, they're paying the broker-dealer's corporate RIA subsidiary. Because getting paid directly for financial advice can only occur under an RIA.

Now alternatively, some advisors who work with a broker-dealer also form their own standalone RIA in order to get paid for financial plans. Because again, you do need to be associated with an RIA to get paid for financial advice, but you don't necessarily have to be under the broker-dealer's corporate RIA. You could be a hybrid advisor that's a representative of both the broker-dealer and your own independent RIA as well, but if you're registered with a broker-dealer, you would need to disclose your outside RIA as an outside business activity, and you would need approval from your broker-dealer to have that OBA permitted.

And so in practice, not all advisors at a broker-dealer can actually be a hybrid with their own RIA because not all broker-dealers are willing to approve that OBA. In some cases it's simply because they don't want the risk that you'll do something inappropriate that could come back to the broker-dealer, especially if you are getting paid for financial advice to the same clients that are also buying securities products from the broker-dealer, and the broker-dealer has to worry about what kind of cross-selling maybe happen and whether it needs to be supervised more.

In other cases, the broker-dealer will say they'll allow it but insist that they have at least some level of supervision of your outside RIA to make sure there isn't inappropriate cross-selling, which means you'll have to pay them a portion of your outside RIA revenue for that oversight. Or in some cases, the broker-dealer may say that they'll allow it but that you have to do it under their corporate RIA so that they can have better oversight of your activity.

And especially in recent years, FINRA and the SEC have been really scrutinizing hybrid and dual-registered advisors and asking lots of questions about, "How do you determine for the next client whether they're going to be a broker-dealer client or an RIA client?" Like, "How do you decide whether they're going to pay a commission or an investment advisory fee, particularly with investment solutions? And when or how are you determining the clients always steer to the right entity and the right solution?" That's become now a significant regulatory concern.

Financial Ramifications Of Dual-Registered Corporate RIA vs Hybrid Independent RIA [Time - 5:54]

Nonetheless, the fundamental point is that if you're at a broker-dealer or an insurance agency and you want to actually get paid directly for a financial plan and giving financial advice, you need to be associated with an RIA. And if you're under a broker-dealer, you're going to have to get approval from your broker-dealer and structure it in a way that the broker-dealer allows, whether by setting up your own independent RIA if the broker-dealer will permit you or registering under their corporate RIA. But the reality is that they control it as long as you register with the broker-dealer.

And the reason this distinction matters, particularly about whether you're going to have your own outside independent RIA as a hybrid or be dual-registered under the corporate RIA is kind of twofold. Number one, the nature of compliance and oversight is a little bit different. If you're dual-registered under the corporate RIA, you're fully subject to their compliance and oversight. You have to say what they do under the corporate RIA. So you have to use their processes and systems, you have to use their software. If they want to throw an arbitration clause in their agreement, you have to follow their arbitration clause.

And, of course, that's already how you have to operate when it comes to using them as a broker-dealer, but the distinction is that when you have your own independent RIA, you have more control over this. You still have compliance obligations, but you can structure your agreements and your offering and your systems and your processes and your technology however you want. And while the broker-dealer does at least have some basic level of oversight obligation, some broker-dealers are willing to be relatively hands-off for advisors who want to create their own independent RIAs. But in essence, it's the question of how much control you want to have.

The second reason the distinction matters between being dual-registered under the corporate RIA or being a hybrid with your own independent RIA is the money. Because when you're under a corporate RIA, you typically get paid based on the same payout grid that the broker-dealer uses for all the revenue you generate. So they collect the revenue, they remit the share to you and then they keep the rest as their compensation for the costs of their platform, their compliance, their oversight and the rest.

By contrast, when you have your own independent RIA, you typically get to keep more or all of your own revenue. Of course, now you'll also have to handle your own compliance, but the reality is that if you're only doing financial plans, there isn't necessarily a lot of compliance to implement because you're not doing trading and execution and a lot of the stuff that has more burdensome RIA compliance. In fact, in theory, you get to keep 100% of your revenue because it's your RIA and simply pay your compliance and other expenses from your RIA and revenue.

Now, as I mentioned earlier, a lot of broker-dealers do charge some kind of a kludge called an oversight fee on your outside independent RIA, but the cost tends to be cheaper. You might have a 5% oversight fee from your independent broker-dealer of your outside RIA, but if you work under their corporate RIA, they may keep 10% or 20% of the revenue you generate or sometimes even more, which means the more planning fees you do, the more appealing it is to do it under your own corporate RIA, where the broker-dealer takes less of your revenue, and then make it up while covering your own expenses. But if you're large enough, you'll more than cover the additional expenses with the additional revenue that you get to keep.

Now, on the other hand, from the broker-dealer's perspective, the fact that they can't collect or justify collecting the same amount of revenue from brokers who have an outside RIA is itself becoming a major point of contention at a lot of broker-dealers because it's in their financial interest for you to use their corporate RIA, where they can participate in more of the revenue, and while as the advisor, of course, we want to keep as much revenue as possible for ourselves.

And so you'll often see broker-dealers require that you use their corporate RIA and not have your own outside independent RIA. They'll say it's because they can't do a proper oversight, but the truth is other firms aren't having that much trouble doing the oversight. It's because they want to participate in the revenue and hopefully will be able to deliver enough value with the compliance and the rest of their platform and all the other services they give to justify the bigger slice of revenue that they take.

But in turn, that's actually created a marketplace for broker-dealers that are, call it "hybrid-friendly" and are willing to let you have your own outside independent RIA. And they take a much smaller slice of the revenue in that arrangement for only more basic oversight or in some cases don't take any slice of the revenue at all, but they're willing to do it because that attracts strong RIAs that still have some need for a broker-dealer relationship, and they just are willing to settle for whatever broker-dealer business comes along.

In fact, I'm seeing more and more financial advisors now make decisions about whether they want to stay with the broker-dealer or switch or break away or become a standalone RIA or give up the broker-dealer license all together based on how much flexibility and control they either want or can get with their RIA in charging planning fees while under a broker-dealer umbrella.

Although with a recent FINRA proposal to eliminate the requirement for broker-dealers to oversee outside RIAs, I think it's just going to become more of a hot-button issue in the coming years. The good news is that it will reduce the costs and pressure on broker-dealers to oversee outside RIAs. The bad news is if they don't have an excuse to oversee outside RIAs, they kind of lose their excuse to charge a percentage of the outside RIA's revenue. Which means I think a lot of broker-dealers are probably going to start changing their policy and requiring their brokers to use their corporate RIA instead, where they can get paid or you may have to find a new broker-dealer. So stay tuned. Watch for announcements of this as it plays out over the next year or two.

How Do You Want To Get Paid For Financial Planning? [Time - 10:42]

But ultimately, the point again is just that in order to get paid for delivering a financial plan, you need to be an investment advisor representative under an RIA. Either your broker-dealer's corporate RIA or your own independent RIA, if your broker-dealer will allow it, or by breaking away from the broker-dealer altogether and just becoming an independent RIA. But getting your Series 65 and operating under an RIA is an absolute requirement if you want to actually get paid a fee for a financial plan.

And then you have to go through the process of navigating, will your broker-dealer allow it? Do they have a corporate RIA option? Will they allow you to have an outside RIA? Do they have production requirements under the broker-dealer before you can shift to their fee-based or financial planning division of the broker-dealer? What scrape will they take? And what value will the broker-dealer provide in terms of both bearing the compliance burden, providing the technology and allowing you to be efficient in charging for financial plans?

In point of fact, the whole trend towards brokers also charging fees is why we're seeing such growth in the broker-dealer RIA model right now. It's part of actually why we launched AdvicePay, because of the growing demand for large enterprises. Both independent RIAs and broker-dealers with corporate RIAs have lots of advisors and need to have a system for charging clients financial planning fees, especially when they need to pay with a credit card or a bank account ACH because they're not buying a product or investing with the advisor, so you won't necessarily have an account to bill them from if you're going to charge them for planning. Because if you're doing just occasional one-off planning fees, it may be straightforward to have clients write a check, but if you're going to do a lot of financial planning and charge more, and especially ongoing retainer fees, finding technology to help with this actually matters.

But in any event, I hope it's just some food for thought around the challenges of trying to charge financial planning fees in a broker-dealer or insurance environment and why from a legal perspective it's so important and necessary to pass your Series 65 or your Series 66 if you're going through it on the broker-dealer side, and either have your own independent RIA or be dual-registered under your broker-dealer's corporate RIA.

This is Office Hours with Michael Kitces, normally 1 p.m. East Coast time on Tuesdays, but as you can see from the background, I'm traveling this week, so here we are on Wednesday instead. But thanks for joining us, everyone, and have a great day.

So what do you think? Have you ever had a challenge with a broker-dealer or insurance company that wouldn't let you actually charge a fee for your financial planning advice? Have you ever changed broker-dealers just to find one that would be more willing to accommodate your desire to deliver fee-for-service financial advice? Please share your thoughts in the comments below!