AnnuityFix is a new industry solution that pays RIAs to service their trails-paying annuities and mutual
funds under advisory contracts based on assets under management. AnnuityFix is the brainchild of
break-away RIAs who wanted a better alternative to dual-registration “friendly” broker-dealers.
Johnstone Brokerage Services (JBS) was developed out of necessity by RIAs who had $15 million in
annuity assets with an average trail of 1%. Originally, the Johnstone advisory team worked with Smith
Barney who later became CitiGroup and later Morgan Stanley Dean Witter, then with Wachovia who
became Wells Fargo FiNet (the independent RIA arm). The experience at each of these firms was
professional, fair, well controlled, and reasonably personal. Seeking greater flexibility, autonomy, and
control, the Johnstone team broke away to create their own RIA with Raymond James serving as the
custodian.
In order to retain and be paid on the $15 million in trails assets, the Johnstone team needed a broker-
dealer solution, because they could not be paid commissions without being registered representatives.
They chose one of the industry’s most recognized dual-registered “friendly” BDs and went through the
painful experience of repapering every annuity contract with the new BD. “Friendly” dual-registered
BDs have a reputation of supporting the dual registration advisors with minimal intrusion into the
separate RIA business, but the reality is that BDs cannot dilute their oversight responsibilities for dual-
registered advisors. In fact, an argument could be made that dual-registration BDs have a much more
difficult job of supervising the activities of an independent RIA, and thus, the systems necessary to
support dual-registered RIAs in this manner can feel more intrusive and arbitrary. The dual-registration
experience felt like a step backwards for the Johnstone team because they were still burdened with
compliance unique to BDs (and not applicable to pure 100% RIAs). Continuing education,
correspondence reviews, transaction scrutiny, client surveys, and various other compliance issues were
ever present in the dual-registration environment, so the team underwent a second change of BDs to
find a more accommodating “friendly” BD. The Johnstone team felt the first friendly BD cost them new
annuity business because each potential purchase was scrutinized and delayed until the deals went cold.
The team felt the second friendly BD cost them an entire quarter of trails due to a confounded
onboarding process. In just over a year, the Johnstone team had gone through two friendly BDs with
ever worsening experiences and mounting cost.
The unexpected frustration and costs of working with friendly broker-dealers was enough to inspire the
team to become Managing Principals and to forge their own BD with FINRA. Few people would take on
the task of creating a BD, but Grant Johnstone, the CEO & CCO, is also an attorney, so he rolled up his
sleeves and got to work. Creating a full-service broker-dealer is complicated, time consuming, and
intimidating, but Johnstone realized he only needed the BD to receive trails, because all new
transactions were being conducted under advisory agreements within his RIA. A BD that didn’t do any
new business was a much easier business to build and monitor. The extraordinary solution worked very
well for the Johnstone team, and they were dual-registered. Other RIAs came to Johnstone seeking a
similar solution, but they learned their BD couldn’t be rolled out to other RIAs without those RIAs
becoming dual-registered as well, and that would recreate the same dual-registration issues that
Johnstone had experienced with other friendly BDs. That is, Johnstone learned, in order to provide the necessary regulatory oversight, they would be forced to do all the same things the other friendly BDs
had been doing.
Not easily deterred, Johnstone began to consult securities attorneys, advisors, and regulators to better
understand the boundaries between BDs and RIAs. The most relevant rule is FINRA Rule 2040, that says
(paraphrasing) a BD cannot pay an unregistered person any compensation, fees, concessions,
commissions or allowances for activities that would require a registration. Selling or soliciting a client to
invest for a commission is clearly an activity that requires a Series 6 or Series 7 registration. However,
advising and analyzing for a fee only requires a Series 65 registration. RIAs may not be paid in any way
to solicit or sell investments; they may only be paid a fee to advise and analyze.
After a year of research and development, Johnstone released AnnuityFix, a turnkey solution that pays
RIAs to do what RIAs do naturally, provide advice and analysis. Through AnnuityFix, break-away advisors
assign their trails-paying books to Johnstone, and Johnstone becomes the BD and the RR. The BD then
receives the trails commissions. The BD is required to do very little to receive the trails. A BD is also only
held to a “suitability” standard of care from the time the asset is assigned to the BD. Johnstone felt
receiving these valuable trails and doing nothing was unfair to advisors and certainly not in a client’s
best interest. While not obligated to do so, Johnstone felt clients would be better served if he could hire
an RIA, at his own expense, to provide ongoing fiduciary client services. That way, the relationship
between advisors and clients could be preserved, and the annuities that clients liked could be preserved.
To legitimize the relationship and responsibilities in accordance with accepted compliance principals,
the BD signs an advisory contract with the RIA based on assets under management.
Johnstone wants AnnuityFix to be viewed as a solution for RIAs and their clients with no strings
attached. The AnnuityFix arrangements with RIAs are 30-day recurring contracts that either party can
walk away from at any time. Clients direct where they want their accounts and who they want as their
advisors, so RIAs can convert assets to advisory contracts, which cut Johnstone out of the mix, any time
they choose. In fact, Johnstone works with RIAs to convert as much of their former BD commission
business to RIA advisory business wherever possible. Advisory fees through AnnuityFix range from .17%
to .87%, and while this may seem low at first glance, consider that most registered representatives
working at wire houses are receiving 35% to 40% on trails that range from .5% to 1%, so that amounts to
roughly the same or greater dollars (35% x 5% = .175%). A dual-registered representative might receive
a much higher payout of 85% to 90% of all trails with a friendly broker-dealer, (85% x .5% trail = 42.5%
net to the advisor). This is a loose comparison of net dollars received for illustration purposes because
RIAs may not receive a percentage of commissions.
AnnuityFix is not a solution for every break-away advisor. It does not support any new investment
transactions. RIAs may only be paid for advice and analysis through AnnuityFix, so RIAs may not solicit
or make any new commissionable transactions. Those advisors who wish to supplement their RIA
practice with commissionable transactions must become dual-registered. But for the break-away
advisors seeking complete BD independence, AnnuityFix is an exciting new option.
