AdvicePay Financial Advisor Community Blog

Why Broker Dealer compliance is important for a retainer model

August 21, 2018 By Alan Moore, MS, CFP®
Alan Moore, MS, CFP®

Broker-Dealer Compliance financial advisor business modelAs the shift toward a retainer model for financial advisors becomes more popular, broker-dealers have been presented with a new set of challenges. To remain compliant in a retainer model, they have to work with financial advisors to make sure the monthly fees that come out of their customers’ accounts every month transmute into valuable services. As a result, many broker-dealers have been hesitant to touch the retainer model. The reality, however, is that the industry is moving further in the direction of a monthly fee structure. This is particularly true when it comes to dealing with a younger set of clientele, where retainer fees for financial planning that have been extricated from asset management typically become a standalone service. Regulators in many states have already caught on to the trend, and those that haven’t are being pushed to do so. Broker-dealers are finding that they too have to follow suit, and are looking for methods to make the shift seamlessly.

Broker-Dealer compliance in the old model

Remaining compliant in the AUM (Assets Under Management) model is far less challenging for two primary reasons:

    1. The AUM model is commission based, meaning the value of service provided by financial advisors is implicit. Broker-dealers do not have to actively act as watchdogs to confirm with regulation legislation.
  • The AUM model does not charge for separate services. As the name suggests, the AUM model is primarily concerned with asset management. Financial planning is offered as an included extra, and not as a service on its own. For compliance purposes, the AUM model is far easier to justify.

Broker-Dealer compliance in a retainer model

When it comes to the retainer model, broker-dealer compliance is a little more difficult. Broker-dealers have typically been reluctant to embrace monthly fee payments. The primary reason for this is that they may feel they are losing a degree of agency. They have less control over the precise services that financial advisors are providing. The result is they have to monitor their advisors to ensure they are operating in a manner that regulators would approve of. They need to ensure their advisors either do not trigger custody over their clients’ funds at all or, if they have to, that they comply with the regulators’ prerequisites for doing so.

Putting the R in RIA

Because the financial advisor retainer business model is more complicated for broker-dealers to engage with, it is imperative that all their advisors are registered. If you are a financial advisor looking to operate in the retainer model, broker-dealer compliance depends on your compliance. It is acceptable that you be a hybrid or dual-registered RIA, as long as you have checked all the compliance boxes with your local regulator.

The retainer model has opened up a whole world in the financial services industry that can prove to be highly profitable if adopted correctly. Its assimilation into the industry is still at its beginning phases. If you would like to take advantage of this industry transformation, compliance needs to be at the heart of your operation. Contact your local regulator and find out the specific requirements of your jurisdiction. By not shying away from the compliance and regulation challenges, you are opening up a world of opportunity for your business.


Posted by Alan Moore, MS, CFP®

When life hands you limes, make margaritas. Alan’s entrepreneur journey began in 2012 after he was fired from his job as a financial planner and decided to start his own business. With his undergrad and M.S. in Family Financial Planning, Alan quickly put his business-building smarts and experience to work in helping other advisors start, run, and grow their own financial planning firms to serve NexGen clients. In 2016, he launched AdvicePay with partner Michael Kitces to operationalize the fee-for-service business model with technology that makes sense for the specific needs of financial planners. When he’s not starting companies, Alan lives openly as a self-proclaimed CrossFit junkie and dedicated snowboarder, a skill he is already passing along to his four-year-old son.

Topics: Compliance, Retainer Model