Is Brokerage Independence Your Cup of Tea?

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Facing new regulations that may require brokers to follow a fiduciary standard whether or not they work at a major bank-a concern eFinancialCareers reported on last week, some brokers may be wondering whether becoming a Registered Investment Advisor is really something worth considering.

"There are three primary reasons why a wirehouse broker would seek to go independent," says Tom Nally, managing director of sales at TD Ameritrade Institutional in Dallas. For instance, they may want:

- More control over their own destiny, owing to the fact that brokers working for the big banks often have large amounts of their long/term compensation invested with the same firm they work for, which might be considered risky in this environment.

- Out of the high-pressure sales environment that's the hallmark of the big banks to push proprietary products or to have to kowtow to senior management. They may, in fact, prefer to "sit on same side of table as their client," says Nally, referring to the RIA model, requiring a fiduciary arrangement where brokers are working in their customers' best interest at all times-not just seeking out "suitable" investments which a large firm may just happen to have on its hard-sell agenda.

- To make more money as an independent, since they needn't share in the overhead of the wirehouse structure, including pay and benefits for thousands of staffers and major other major infrastructure costs.


On the other hand, those considering independence will have to forgo some fairly valuable insurance perks and other employee benefits.

Those starting their own RIA firms would need to purchase their own insurance and set up their own 401(k) plans, for example, though they may also decide to form alliances with existing RIAs which already make such plans available.

Before deciding to "break away," you'll want to think long and hard about whether you've been getting business based on your own efforts or someone else's, such as a mentor's.

There's a difference between being an advisor and being a business owner. Many advisors are from a pro-revenue generation but lack experience in operating a business. They may have trouble handling issues involving compliance, or leasing.

Breakaway brokers may also miss having access to the intellectual capital network available to large-bank employees. The built-in network of the big firms allows its professionals to refer elements of business to each other and confer with colleagues who are close by.

Being part of industry associations also gives you a network of professionals to bounce questions and ideas off, of course, and customers will be more likely to seek out and retain relationships with independent brokers who have credentials such as the Certified Financial Planner or the Chartered Financial Analyst designation.