The world of financial services is populated by a broad spectrum of professionals and firms providing services and investments of all sorts.
Registered Investment Advisors (RIAs)
Registered Investment Advisors (RIAs) employ Series 65 investment advisor representatives who are paid a fee to provide advice and analysis. RIAs are bound to a fiduciary standard, meaning their recommendations must be in a client’s best interest.
Broker-Dealers (BDs) employ Series 6 and S7 registered representatives who are paid commissions to solicit and transact investments. Registered representatives (RRs) of BDs are bound to a suitability standard, a lower standard than RIAs, meaning their recommendations must be appropriate for their clients.
Dual-Registration is when an advisor is both a S6 or S7 registered representative and a S65 investment advisor.
Hybrid RIAs are RIA offices that allow their S65 investment advisors to be registered at an outside broker-dealer.
RIA-Friendly Broker-Dealers are BDs who allow their S6 or S7 registered representatives to be employed as S65 investment advisors by outside RIA firms. RIAs will often become registered with a small broker-dealer that caters to the needs of RIAs. Friendly BDs are required to supervise all transactions of their RRs, and that means the BD must supervise the transactions of the outside RIA. Despite the fact the RIAs would prefer to not have another layer of compliance supervision, Friendly BDs often charge a rake fee to conduct oversight of the RIA.
Fully independent RIAs
A fully independent RIA is a firm that exclusively offers advice and analysis in return for advisory fees. Their advisors are not required to have a S6 or S7 registration, because the firm does not charge commissions to solicit or transact investments.
A rake is when a friendly broker-dealer charges a dual-registered advisor a fee on the advisor’s outside RIA business. These fees can range from 1% to 5% or more.
Commissions vs Advisory Fees
Commissions are compensation for transactions, whereas advisory fees are compensation for advice. Transaction commissions may range from a flat dollar amount to a percentage of the assets being transacted. Advisory fees can be a flat dollar amount or a percentage of the assets being managed or supervised. If a Registered Representatives (S6 or S7) want to be paid to provide advice, they must obtain a S65, and if Investment Advisors (S65) wants to be paid commissions for transactions, they must obtain a S6 or S7. Most commissions are paid once up-front at the time of the transaction, whereas advisory fees are charged quarterly as long as the advice is being provided.
Trails Commissions vs Advisory Fees
Advisory fees are paid by clients who want advice on an ongoing basis. Annualized advisory fees range from 1% to 1.5% and are deducted quarterly (i.e. .25% to .375% every 3 months). If a client terminates the advisory relationship, the fees stop when the advice stops.
Trails commissions are compensation payments made to RRs for transactions that recur annually. Trails commissions range from .25% to 1.5% and are deducted quarterly, much like advisory fees. The client pays a higher internal operating expense for products that is used pay advisors trails commissions.
Unlike advisory fees, trails commissions continue to be paid to the advisor and the client continues to pay the higher internal expenses, even if the client terminates the relationship with the advisor. The client could fire their registered representative, and the RR would continue to receive the trails commissions and the client would continue to pay the higher internal operating expenses as long as the client owns the investment.
Trails commissions do not require the registered representative to provide any advice, analysis or any service whatsoever. RRs could conceivably recommend a trails paying investment and receive a commission for the rest of their lives without ever lifting another finger.
Many RRs are dual registered with a S65 and a S6 or S7 so the line between trails commissions and advisory fees can become blurred in the minds of advisors and their clients. Since trails-commissions and advisory fees are often the same cost to the client (roughly 1%), are both deducted quarterly, and are both recurring, clients and advisors often (wrongly) considered the trail commission to be a packaged advisory fee.
When RRs drop their S6 o S7 to work as fully independent RIAs, they can no longer receive trails commissions, even when the advisors continue to provide the same advice and analysis. AnnuityFix solves this problem.
AnnuityFix™ vs RIA-Friendly Broker-Dealer
AnnuityFix is an alternative to RIA-friendly BDs. AnnuityFix a service offered by a broker-dealer that allows S65 investment advisors to drop their S6 or S7 registrations and avoid BDs all together. An RIA-friendly broker-dealer requires investment advisors to be S6 or S7 registered, and as a RRs of the BD, those advisors must comply with the BDs compliance requirements and the BD may charge a rake to supervise the unrelated RIA. By contrast, AnnuityFix does not require a S6 or S7, doesn’t charge a rake, and doesn’t impose BD compliance on unrelated RIA businesses.
Through AnnuityFix, advisors assign their trails-paying investments to Johnstone Brokerage Services (JBS), and JBS becomes the BD and the RR. JBS collects the trails-commissions, and the advisor is hired by JBS to provide advice regarding the investment and serve as the relationship manager to the client. In this way, the advisor stays safely within the margins of their S65 regulatory authority. Advisors and clients have complete freedom to leave at any time.