Episode 3 - Do I Need a Broker-Dealer?

[00:00:01] Speaker A: Hello and welcome, everyone. I'm Taylor Pancratz, and this is behind the breakaway. Together with my co host, Jason Barber, this show takes you behind the scenes of leaving your captive broker dealer firm and explores the world of RIa independence. [00:00:20] Speaker B: All opinions expressed on the podcast by the hosts and guests are solely your own opinions and do not reflect the opinion of uptick partners. This podcast is for educational purposes only and is not legal advice and should not be relied upon as a basis for any decisions. [00:00:42] Speaker A: Episode three welcome back to the podcast, the behind the Breakaway podcast, where we are your guide to RAA independence, your sherpa. You're breaking away, or you want to break away? You've thought about it, and we're here to answer all the questions that you've got regarding leaving your captive broker dealer firm. [00:01:03] Speaker C: Questions you have, questions you might not even know you have, but you should have, right? [00:01:08] Speaker A: It's a complicated thing. It's a scary thing. So let's talk today about do I need to have a broker dealer? If you're fee only, what does that mean? Do I have to give up all of my brokerage commission type business to move to an RAA fee only firm? What does that look like? [00:01:35] Speaker C: So I think what we probably should first start with is, what is a broker dealer? What is a custodian? What does it mean to be duly registered? For example, is something that I feel like whenever we were in the investigation phase of this whole thing, it didn't really make a whole lot of sense to me. How there's some types of accounts and some types of assets that a custodian would hold, and then there's some types of accounts and some types of assets that would be more so tied to a particular. To a broker dealer, I guess, would be the way to look at it. For example, the short answer to the question which is, do I need a broker dealer? We're a little bit biased, but we think that the answer is a resounding no, you do not need a broker dealer. I think, really, I said this one time, maybe on one of my drive podcasts or videos, that I think that a lot of the things about the financial services industry that the general public finds to be distasteful or unethical or bad or just unpopular are associated with broker dealers. Right? It's like they're just generally tied to that type of business, whether it be reverse churning, whether it be churning, reverse churning, whether it be kickbacks, revenue sharing, twelve b one fees, annuities, commissions that you get from annuities, 529 plans and a shares and C shares and share classes. Share classes in general, the entire concept of share classes and commissions that you pay on these share classes. And from a compliance standpoint, well, you sold this bond three years ago and you generated x percent commission or markup, and then interest rates go way down. And now you can sell the bond for a premium, but you can't generate another commission because you've already earned this markup. Three years ago, weren't you supposed to. [00:03:59] Speaker A: Hold that bond for your rest of your life? [00:04:01] Speaker C: You were supposed to hold that bond for 30 years. And that was part of the plan, was that that was the plan, even though it's in the client's best interest to sell the bond now because interest rates went down and my yield to maturity is substantially less than what I bought it for. And so it makes sense for the client to sell this bond and buy a fixed annuity, let's say. But heaven forbid you make another commission because that somehow is a red flag. I think just a lot of the things that financial advisors find distasteful and unfavorable when it comes to compliance and a lot of things that clients find to be unsavory are, again, largely tied to broker dealers and people's sort of businesses refusal to move away from broker dealers. And so we feel very strongly that broker dealers are not a necessity and that we're actually proud of the fact that we're not affiliated with a broker dealer, even though. What are the common misconceptions about, like, well, why do you have to have a friendly broker dealer? [00:05:18] Speaker A: Well, I think a lot of the misconception is from an advisor's perspective, they don't want to give up, or they think that they are going to have to give up a portion of their book of business to go fee only. [00:05:38] Speaker C: What does fee only even know, generally speaking, when you hear people say fee only, right. [00:05:42] Speaker A: So fee only in the RIA world means you do not charge a commission and you only charge the client for advice. They're paying you for advice. You only make money from the client. The client's the only one that pays you. So you don't have any type of revenue sharing or kickbacks is probably the best way to say it. No commissions. You're aligned with the client from a perspective of, I'm not trying to sell you something, I'm genuinely trying to do something in your best interest to make you more money. [00:06:27] Speaker C: When you do better, I do better. [00:06:29] Speaker A: Yeah, the fisher you do better, I do better. Every advisor wants to be fee only they just don't want to have to either have a conversation with the client. They're like, oh, man, the client is, I have a $10 million client or $5 million client, and they are only doing commission business with me. How am I going to charge them a fee on a five or $10 million account? [00:06:57] Speaker C: Because they think like, oh, well, they didn't want to pay. When I was at my previous broker dealer, when I was at Edward Jones, they didn't want to pay 1.35% on this account because they have these holdings that were long held positions. They're never going to sell them. Maybe it didn't align with a particular asset allocation. Somebody is really heavy on energy stocks, and they want to be heavy on energy stocks, and that didn't align with one of these other particular programs, et cetera. So they had to be in a commission based brokerage type account. Or again, maybe it was because the client prefers to do it that way, and some of the kind of the older school clients prefer that. And who should we be to say that that's not good for them? And so I think the big, to kind of finish what I think your thought was, was like, the big misunderstanding is that somehow if I go fee only if I drop my series seven broker dealer, then that $10 million client who's got a bunch of money in a brokerage account, that I'm not going to be able to service them, that I have to leave that client behind, which could not possibly be further from the truth. So why is that? I think ultimately, the big thing to understand is just, what is a custodian? All right, so a custodian, when you hear us use that terminology, we're talking about Pershing, Charles Schwab, Fidelity, Goldman Sachs, Raymond James, you name it. Right? And there's more out there, altruist. There's a variety of them out there. And the custodian currently could be, hey, that's your current broker dealer has a custodian, a fee only arm of their business, for lack of a better term. And so all that we're basically saying is, hey, if you've got money in this brokerage account at an Edward Jones, for example, and that client says, hey, I want to come with you, Taylor. That ultimately all that's happening is we're just opening up an account at Charles Schwab or Pershing or Raymond James, or wherever the custodian that you choose to work with, and those dollars get acaded from that account. That's a current brokerage account into the same joint account or IRA account or whatever the account type might be. And then from there, once those dollars are in that account, you get to decide how the client is going to pay you. Okay. And you have sort of ultimate flexibility on that, right? I mean, maybe the client, you look at it and you say, well, on average, this client was trading x number of times a year and it was typically $500 commission anytime that they traded. And they typically did about ten trades. So you negotiate a deal with the client to where they just pay you $5,000 a year to manage the account or less. [00:10:18] Speaker A: Or more. [00:10:19] Speaker C: Or you say, well, my typical management fee is one and a quarter percent, but in this case, it doesn't make sense for this particular client to pay that. And so we're just going to negotiate a deal to make it a quarter of a percent or whatever the terms are that make sense for you and make sense for the customer and the client to where they're not paying you more to come with you. You can negotiate a deal on a case by case basis. And so I think that is one thing that just for me personally was really kind of hard for me to wrap my mind around this idea of like if somebody's paying commissions at my broker dealer, but it's just stocks and bonds and cds and mutual funds and etfs and kind of all of the traditional vanilla asset class type investments. Those all can transfer into a fee only model at the custodian of your choice. And then you negotiate the terms with the client. [00:11:24] Speaker A: Right, exactly. So at the end of the day, the goal is that everybody wins. You've got the client wins because they can either be charged less than they're currently being charged for, sure, not more, but they're being charged less. You're now sitting on the same side of the proverbial table as them. [00:11:45] Speaker C: Right. [00:11:45] Speaker A: So if you have an idea, you want to sell something, you want to buy something, it doesn't come with this. Oh, by the way, this is now a commissioned trade that you're going to have to pay me for. So the client is going to enjoy that because now you're aligned. You're not selling them on this idea, you're aligned on the idea, and it's not going to cost them any more money. So the advisor wins there. And the advisor also wins because now you're taking the, from a compliance perspective, it simplifies your business tremendously to not have the FINRA oversight requirement that is required if you do have business at a broker dealer. Right. You don't have FInRA looking at. Are you churning or reverse churning? What was the commission on this? How long did you hold all these things? That drives every advisor crazy when they get a note from the compliance people or the supervisor people going, hey, you need to look at this, or why'd you do this? Et cetera. Most of the time it's because that's a FINRA rule or a FINRA thing to prevent people from unscrupulous advisors taking advantage of. [00:13:02] Speaker C: Exactly. [00:13:03] Speaker A: People that don't know any better. [00:13:04] Speaker C: Exactly. [00:13:05] Speaker A: So you just take that. There is no reason to keep legacy brokerage business because the client, it can be as cheap or free for the client. [00:13:17] Speaker C: Yeah, literally. Make it free if you want. [00:13:19] Speaker A: There is no reason why the client should object. The advisor should want to move their book all fee based and be actually fee only because it simplifies things and it just aligns everybody's value proposition and then it's so much cleaner. And the value proposition moving forward for the advisors makes so much more sense when you can look the prospect or client in the eye and say, I only work for you. Right? Not, oh, I only work for you as long as you are in a fee based account. But if you are in a brokerage business, well, then I kind of work for the broker dealer in that arrangement. But it's like, just simplify. Just simplify everything. Simplify the value prop to your prospects and your business model. [00:14:12] Speaker C: It's where the hockey puck's going. [00:14:14] Speaker A: Of course it is. Because every client that watches tv sees. [00:14:20] Speaker C: A schwab ad that's like, is your advisor fiduciary? [00:14:23] Speaker A: Is your advisor fiduciary? And they're like, fiduciary. At some point they're going to go, I want a fiduciary. Which is what we're seeing. [00:14:30] Speaker C: Exactly. And to your point, it's like every advisor, if you are a good advisor, should want that. Okay? You should want that. You just don't know how to do it. And so that's where uptick partners helps you do it. And so one thing I was going to mention that came to my mind is things like, for example, a common question might be, well, I've got some legacy mutual funds, and these are clients that bought this, a share mutual fund, 20 years ago. And it's so inexpensive for them to own this, or maybe there's big tax consequences to sell it, and so I don't want to sell it. So those assets they transfer in kind. Okay, so say somebody's got an a share mutual fund that. A share mutual fund transfers in kind to the new custodian, where then what typically happens is that there's what's called a share class conversion. Most people are familiar with this concept that share class conversion takes place typically at no cost to the client or very minimal cost to the client. And those a shares become, say for example, f three shares or f two shares where the client is no longer paying a twelve b one fee anymore. Okay. So it can literally benefit the client. And again, if you then say, well, I'm just going to charge the client a quarter percent advisory fee, they were paying that exact same quarter percent just in the form of a twelve b one fee, for example. But now the client's rate of return on that investment is going to be better. And so let's talk a little bit about insurance and annuities. So we know a lot about this subject. So I think that if there's anybody that can talk about an annuity business and how do you move in an annuity business? There's nobody, I would challenge anybody to compete with us in terms of the operating a fee only annuity business or transitioning a brokerage annuity business and brokerage insurance business into the fee only world. There can't be anybody else that knows more about this than us, right. [00:16:46] Speaker A: How it works with a fee only RaA that has annuity business on the books is that what you do is you leverage an outside company that basically does hold those annuity products and does hold your variable annuity or fixed annuity products. And they are the rep on the contract. But the client is going to see you as the, they're going to ultimately know that you're managing all of their money. But you just have this small sleeve of annuity business that this outside company is the registered rep on it, and then you're paid a management fee to give advice on the underlying holdings of that client's investments. So variable annuities, they've got holdings there that need to have some investment management perspective. That is what you're paid to do for those variable annuities. And that outside company pays you money to give advice. [00:17:58] Speaker C: A consulting fee? [00:17:59] Speaker A: Yeah, it's like an investment management fee that allows you to be fee only but still have eyes and control and visibility and service and everything that you would ever want to do for an annuity, you can do but still hang your shingle as a fee only firm because you're technically not holding those annuities. You've contracted a firm to do that for you, that's paying you money to help them manage it. For your advice on the investments, we've done that for hundreds of clients that have annuities. Nobody has had any issue with that. It's actually great because you have this other firm that's doing a lot of the minutiae details around these annuities. They do that for you, but you still have complete visibility into that client's whole financial picture and can see those annuities and the details around those things. [00:19:10] Speaker C: Yeah. So similar to how before we had one screen where I could log in, look at, hey, this is a client's holdings, this is their IRA account, this is their joint account, et cetera. I'm still going to have the same ability to where the data is being fed in from the annuity to where the client can see it when they log into their mobile app, when they log into the computer, and they say, hey, I want to see my investments and my performance data and all of that. They're going to also be able to see that for their annuity or for their life insurance policy, et cetera, the same way as before. Right, right. [00:19:50] Speaker A: So it's really no different than the client was used. Just, it's better for the advisor because it keeps you not having to deal with FINRA. [00:20:03] Speaker C: Exactly. [00:20:05] Speaker A: You are just supervised by the SEC and you lose a good chunk of the headache that FINRA provides. [00:20:13] Speaker C: And we can still sell new annuities, right. We can still provide access to new annuities, provide access to insurance policies, et cetera. But we don't get paid by the insurance companies for doing this and for offering this to our clients. We get paid directly by our clients, and we can be paid in a fee only type way on those assets. And so you can do 1035 exchanges from old annuity contracts that we may have been, I guess, polite way to look at it is maybe we were limited in the contracts that we were able to offer in our past world because maybe those contracts were the ones that the other contracts that exist in the world don't pay revenue sharing numbers. Right. And things of that sort to the broker dealers. And so, of course, the broker dealers are not going to offer. They're going to push their preferred product partners to the front of the list because they're getting kickbacks. It's kind of like when you go to Kroger on Super bowl weekend and toastitos has the end aisle. It's like, well, they're paying money for that access to know at eye level on the shelf. And so there's now a whole new world of annuity products, insurance products, et cetera, that we can offer to clients on a fee only basis that are better for them as well. And so that is really cool. 529 plans is another kind of a big common question is, hey, how do those work if I have 529 plans at my existing firm? But those are kind of more of a mutual fund commission type basis. We have different offerings there. Probably the two most popular ones in terms of fee only operation are going to be either my 529 that we offer and then the american funds platform, what is it, college America, they offer a really nice fee only type platform where you can offer clients access to the f two share class and no commission. [00:22:31] Speaker A: And the advisor can get paid. [00:22:33] Speaker C: Yeah, and the advisor can get paid. [00:22:35] Speaker A: So the bottom line, the take home is the biggest misconception is one I'm going to have to leave clients behind if I go fee only. That's simply not true. The other one would be, well, I might bring those clients, but I'm going to make way less money because I'm not going to be able to get paid on some of this book of business that I'm going to, even if I do bring it over, I'm going to get paid. And that's not true. You're going to be able to get paid in one way or another. [00:23:09] Speaker C: You're just giving up big commissions. You're giving up big commissions. But if you're wanting to act as a fiduciary, which we think that nine out of ten of the elite advisors in America want and desire to put their clients interest first, certainly anybody that we're interested in working with want that, then they shouldn't be. People that desire to generate big commission business, that's just not something that we think is. We think that that's a dying business maybe, would be the way to look at it. [00:23:46] Speaker A: Clients are moving away from that. They're moving away from that. They want a fiduciary, they want somebody, their interest, their interests are aligned. Yes, that's the great way to say it. And so that's what the fee only structure lets you say and look a client in the eye and they know and they understand. People understand very clearly when your interests align with theirs and they appreciate that. [00:24:23] Speaker C: Yeah. And so I genuinely, I've heard there's a lot of advisors, it seems like there's a lot of advisors that they make this transition and they're like, well, I need to be hybrid. And then after so many years, I'll eventually go fee only and it's just kind of like, but why? And it comes down to these, well, I can't bring all my business with me. Not true. Well, I'm going to make a lot less money. Not true. Right. So it just seems like, genuinely, why would you not take this opportunity? You're already going through a big transition and a lot of change with your clients that it just seems kind of like, why would you want to have to repaper twice? Okay, like, if you say, okay, well, I'm going to have my series seven and I'm going to go do that, and then later on I'm going to drop that and then I'll go, fee only. Well, guess what? You're going to have to do more paperwork, and the client's going to have to sign more paperwork to say, well, I'm going to change the agent on these annuity contracts from me to this other company. Now it's like you're going back to, why are you doing that? Right? Why is that good for the client? Why is that good for you? How do you explain that to the client at that time of like, well, this is really good for you? Because whenever I left my previous firm, I actually still wasn't really a fiduciary, but now I really am. It just seems kind of like you're having this opportunity to have a heart to heart conversation with each one of your customers. When you talk to them and they ask you why you left, which is inevitably going to happen, they're going to ask you, why are you leaving your current firm? And what are you going to say? Well, I'm taking a really big check. Well, I'm making more money. Well, I'm this, well, I'm that. Why don't you take this opportunity to say, I'm going through the fire right now because I believe that this is what is in your best interest. Okay. It is in your best interest for me to be a fee only advisor, and I could not be a fee only advisor at my old firm. Couldn't do it. And so it's just such a beautiful opportunity to be like, you're already going through this hellacious project. You might as well rip the band aid off and be fee only. [00:26:58] Speaker A: Yeah. And it helps you build your business back up after you've transitioned it and scale it in a way that now you have discretion on these accounts because you're fee only. Right. You don't have a certain segment, a small percentage of the book that's commission based. It's like, well, these people, I have to kind of carve out because I don't have discretion on their accounts. I'm going to have to call them or else that would be a whole can of worms. If you've got discretion on your commission based accounts, I can't even imagine how that would work. So it's like you're going to have to segment your book and go, well, this account right here, I don't have discretion on. I need to make sure I have a phone call with that person before I put. Why would you do that to yourself? To what? The only reason you would do that is because you don't want to tell the client that they're having to change from the way they used to do business to this new way of doing business when the whole reason is all good things. [00:28:07] Speaker C: Yeah. [00:28:08] Speaker A: It's like, what person is not going to understand that? Oh, these ashare mutual funds, we're just going to switch them over and we're going to change a share class to the cheaper share class and then I'm going to charge you a fee on the difference. You're going to pay the exact same. [00:28:23] Speaker C: Exactly. [00:28:24] Speaker A: And now if we ever want to do anything with them, it's not going to cost you any money. [00:28:28] Speaker C: Exactly. [00:28:31] Speaker A: So you just have to spend a little bit more time with that client that has maybe a hard time understanding that, but they're going to get it because at the end of the day, your intentions are going to shine through, which is, I'm doing this because I think it's in your best interest. Clients are going to, they might not understand it, but they're going to feel. [00:28:50] Speaker C: It because it is. And if they google it, they're going to read about the fact that this is in their best interest. And so another thing that just came to my mind, that was a question that we had a lot that I had a hard time kind of getting an answer to ahead of time would be donor advice funds. Okay, how do donor advised funds work? At our prior firm at Edward Jones, there was a whole platform that they were offered through, and I think that the clients were paying the advisor maybe like, it might have been like 75 basis points fee or something like that. This was something that took us a little while to get this figured out. And some of it, the cool part about it is that there's options, so you're not limited. Unlike our prior situation where we was like, well, this is the only offering. This is the only way you can invest the money. This is the only platform that's available to you, and this is the only fee that you can charge the client. And so now we have the ability to, you know, do we want to use Fidelity as our donor advice fund? Maybe we're custodying at Fidelity, maybe we're not. But maybe Fidelity has the best donor advice fund, for example, or Charles Schwab or Renaissance or you name. You know, the cool thing about it, too, is know, and this is just kind of a little bit of a personal decision that we made. But with fidelity, for example, we're not charging clients any kind of management fee on those donor advised funds assets. And that takes a little bit of money out of our pocket. But we felt like that was a good move for one, just purely from a put the client's interest first, right, and put more money back into the charities. One thing that is cool, however, is that trying to remember the exact rules on this, but each custodian is going to be different. But if there's enough money in the actual donor advised fund, then you have the ability to manage it just like any other account. Okay? And if you choose to charge a fee for that, say somebody's got a quarter million dollars in a donor advised fund, or I don't remember, let's just say that that's the limit. It's something close to that. Then you could actually invest that money and say, hey, we're going to have a part of that money in Tesla, right? Or part of that money in Google or Microsoft or Apple or, you know, this ETF or that ETF the same, or your own model ETF portfolio, the way that you want to build out your portfolio. So I think that's a really cool, unique feature that exists that didn't exist before. But the main thing to understand about it is that we've got a solution for that, too. Right? So there's not any asset that you can't manage as a fee only advisor that you could manage with a broker dealer. I just genuinely believe that a lot of this boils down to confusion and that there's just a lot of people out there that don't even realize that these companies exist that will take this burden off of your shoulders. And so they are told either by recruiters or they're told by other third parties or just from a lack of understanding and knowledge that you have to have a broker dealer, you have to have a friendly broker dealer, otherwise you're not going to get paid as much. Otherwise you're not going to be able to transition this business. And so then it's like, well, I'll start, I'll get a friendly broker dealer. I'll transition my business there and then over time, as I unwind that business and move more of that business into the fee only world, well, then I'll eventually drop my series seven and take that type of approach, which we just think again, is just a misinformed opinion in our mind. [00:32:49] Speaker A: Yeah, absolutely.