This is the 15th installment in a Financial Planning series by Chief Correspondent Tobias Salinger on how to build a successful RIA. See the previous stories here, or find them by following Salinger on LinkedIn.
Offices of supervisory jurisdiction, or OSJs for short, relate to registered investment advisory firms, also known as RIAs, in confusing yet important ways.
So the unfamiliar among financial advisors and other wealth management professionals (or any clients bold enough to try to understand the inner workings of the industry) deserve some forbearance. For those who want to learn, the process can often prove difficult because of the interactions between OSJs and RIAs. Simply put, any dually registered advisor — the industry’s most common regulatory structure, in which the advisor is a “dual” representative of both a brokerage and an RIA — must decide whether they will be supervised by the corporate office of those firms or by a third party called an OSJ.
In other words, these “hybrid” advisors (who are registered reps with an RIA overseen by the Securities and Exchange Commission for the purposes of their advisory clients and also registered reps of a brokerage in FINRA’s jurisdiction) need someone to supervise them under the compliance laws governing the industry.
Many hybrid RIAs (that is, an advisory firm that uses a brokerage or has one of its own) are OSJs. But not every OSJ is a hybrid RIA. It’s a wealth management paradox.
Lost yet? Take the easiest path and simply think of OSJs as effectively a “branch” or, more precisely, a “network” of independent advisors and their teams. Or just stick with the industry’s most frequently used but still vague synonym: “enterprise.”
OSJs began as a means of outsourcing compliance responsibility, but they now fulfill a bigger role as service providers to advisors on one hand and recruiting engines for independent brokerages on the other. They are key to grasping some significant aspects of the business models of giant independent firms like LPL Financial and Osaic.
And that’s why some OSJs turn into veritable “super OSJs” with hundreds or even thousands of advisors that have a lot of bargaining power with vendors and, sometimes, messy exits from brokerages or legal disputes with them or between each other. The question of whether to join an OSJ or to simply use the supervision of the corporate office of LPL or one of its rivals in the independent channels of wealth management comes down to the costs and benefits to advisors. They’re weighing incoming revenue and value against outgoing expenses and duties.
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Puzzled? You’re not alone
Prospective recruits ask Trisha Qualy, a managing partner of New York-based Affiliated Advisors (an OSJ that uses Osaic’s brokerage and RIA), how to grasp the concept of OSJs “all of the time, as advisors consider a partnership with our organization,” she said. While Affiliated isn’t itself an RIA (recall the paradox mentioned above), she explains OSJs by pointing out how the dilemma of whether to use one resembles the choice of whether to launch or join an RIA.
“OSJs are the right fit for advisors who want to spend the majority of time in front of clients. Creating your own RIA is the right path for someone who happens to be an advisor but also an operational professional, or they have someone on their team who is really passionate about that work,” Qualy said. “I don’t think either path is wrong. It’s more so about advisors being really honest with themselves about how they want to spend most of their time and where they want to make the most impact.”
About 125 advisors who have come to The Wealth Consulting Group, a hybrid RIA and OSJ using LPL, have been seeking “a community where they can collaborate” and a service provider with capabilities large enough that teams “can call on us for anything that they need,” said founder and CEO Jimmy Lee. Advisors who say things like, “‘just leave us alone, let us do our own thing,'” or “‘all we care about is the payout,'” would be better off somewhere else, he said. Planning-focused and growth-oriented teams that would be interested in letting the OSJ’s investment professionals manage some of the assets could find a home, though.
“We provide a platform of advisory investment strategies that we can deliver to our advisors at a lower cost than what is available out there in the marketplace,” Lee said. “We have a planning department that provides paraplanning and CFP services, and we do it as part of the overall package that we provide to the advisors.”
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Get everything in writing
To Jodie Papike, CEO of advisor and independent wealth management executive recruiting firm Cross-Search, the “first and most important element is, does it serve you?” she said. That could tie into an advisory practice’s operations or the financial terms of any agreements with an OSJ, as well as the desire to be part of “a smaller environment within a bigger environment,” a professional community within a giant firm. Most of the advisors she works with opt to use the corporate supervision rather than thinking about a third-party firm, but the issues are “so customized, in what makes the most sense for someone,” Papike said.
Cross-Search
If they do pick an OSJ, she recommended that advisors and their teams put every financial aspect of the relationship in writing, especially with respect to ensuring that they can take their clients with them unfettered if they leave the network someday.
“Those are your clients, your book of business. Without that being in writing, an OSJ can not only force you to have to leave the broker-dealer if you leave them — because the broker-dealer will always side with the larger group — but they’ll also make it more difficult,” Papike said. “It’s an outlier type of situation, but it has happened. So you just have to protect yourself.”
READ MORE: Should financial advisors be dually registered or RIA-only?
Crunching the numbers
To be sure, a possible OSJ relationship requires another layer of due diligence in the recruiting process for wirehouse breakaway teams or others in motion between firms. The payout, or the percentage of revenue that advisors keep after removing costs to external vendors, often becomes “the really easy thing to focus on,” Papike said.
However, other fees to advisors and the clients are “way more complicated than the payout discussion, but it’s equally and sometimes more important than what the payout is,” she noted. For example, administrative or platform fees represent typically the biggest one of those, at between 0.01% and 0.25% of client assets, usually depending on the size of the practice.
In terms of the payout, the traditional arrangement frequently calls for independent advisors to get 90% of the revenue after sending 10% to the brokerage firm, and the OSJ will take about 1% to 3% afterward. But the range of percentages of revenue going to either external party could shrink or expand, based on the size of the advisory practice and the spectrum of services involved with the two relationships. With OSJs, that starts at a “very basic” relationship that is “simply compliance” to many more types of services for an advisory practice, Papike said.
“There are all these different elements of what an OSJ relationship can look like,” she said. “If they’re going to be all-inclusive and provide everything to you like an office and infrastructure for that office, then it’s going to be more in the range of 15% to 20% to 25% of that revenue.”
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Going ‘full RIA’ with an OSJ
And that mix of services is shifting alongside the industry’s movement toward RIA business based on advisory accounts and away from transactional, sales-based brokerage products or holdings.
So, to further complicate the paradox cited above, many advisors are using hybrid RIAs in a way that enables themselves to give up their brokerage licenses and no longer be hybrid advisors — even if they’re at a hybrid firm. That isn’t technically a part of using an OSJ, but these service providers have identified the need, amid the profession’s succession challenges.
Asked how OSJs have changed over the past 10 to 20 years, Lee pointed to the industry’s transition to the RIA business and how that has become “more important, in terms of their business model” for many advisors. With the brokerage side turning into a smaller share of their revenue and often related to legacy commission business such as annuity trails, Lee’s firm presents the advisors with methods allowing them to “sell that business and monetize that piece of their business, without just walking away from it,” he said.
“They’re looking potentially for some services or more flexibility than an independent RIA might give them, on top of what they can get from an independent broker-dealer’s RIA platform,” Lee said. “Once the percentage of [brokerage] revenue falls below 10% of total revenue for an advisor, they start to think, ‘Do I really need my FINRA registrations?’ … I believe that a lot of these advisors will end up being RIA-only.”
READ MORE: What’s wrong with the big RIA model, straight from advisors’ mouths
One more way to understand OSJs
In the complex and highly specific factors involved with an OSJ decision, advisors should keep the professional development implications for themselves and their teams in mind, too. Affiliated Advisors has built internal training programs for advisors at various career stages, and over the next year the firm will roll out more career resources for support staff members who are often “an underserved market, in terms of professional development,” Qualy noted.
Many of the more than 130 advisors with the firm are solo practitioners who “really like being around each other” and “value learning from others” at events that are much smaller than those offered across every team at any giant brokerage, she said. So those OSJ service areas now include compliance, technology, operations, marketing and practice management.
For Qualy, the easiest way for advisors to comprehend OSJs may be to think about their own services to clients in comparison to self-directed investors.
“If you have a client, of course that client can self-direct their investments and work with Vanguard and call a 1-800 number. Of course you’re going to save some money by going down that path,” Qualy said. “If there’s value there, the advisors that we see in our community truly see us as an extension of their practices and a part of their team.”
