James Poer, president of NFP Advisor Services Group, said, "As financial advisors seek the best path to position their practices for long-term, profitable success, a major consideration is whether to affiliate with a corporate RIA or to establish and run an independent RIA. Both choices offer meaningful benefits and associated challenges, but ultimately the best structure will vary by practice and can only be assessed by closely evaluating the economics and operational setup of the practice as well as the personal preferences of the firm principals."
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The study, commissioned by NFP Advisor Services Group and produced by leading independent research firm Aite Group, reveals that the choice to be an independent or corporate RIA can have long-term effects on a practice, including the potential to influence the practice’s valuation at the time of a sale or during a succession period. It is important for advisors to understand the differences between corporate and independent RIAs, and the many pros and cons, including costs and benefits, of each structure.
Profitable independent RIAs require scale: Independent RIAs can achieve profitable scale once they have more than $200 million in assets under management, assuming business operations and expenses are managed efficiently. The tipping point could be even higher for advisors who lack expertise in business process and technology.
Revenue generation at corporate RIAs is comparable to that of independent RIAs: Revenues for advisors with a corporate RIA averaged $1.2 million vs. $1.3 million with an independent RIA.
Advisor income favors corporate RIAs for the majority of practices: When comparing annual income, advisors with a corporate RIA earn more on their books of business, particularly those with a book over $100 million but less than $1 billion.
Nonfinancial costs of independence: Compared with corporate RIAs, independent RIAs spend more time – and more resources – on compliance, technology and other operational aspects of the business. Advisors who must also focus on these aspects sacrifice time they could spend on prospecting and sales.
Poer concluded, "NFP strongly believes that both the corporate and independent models can provide the right solution for an advisor, depending on the firm’s size and business mix, which is why we are steadfastly committed to providing support for both models. However, it is critical for advisors to understand the distinctions between the structures, and consider their personal preferences and priorities so they can make the best decisions for long-term success."
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