To become an independent registered investment advisor (RIA), one of the many choices you have is whether to keep or give up your commission business. It’s not always an easy decision. There are many factors that need to be considered when determining whether to go the pure fee-based RIA or the hybrid RIA route. Read on for some questions to ask yourself before you make your decision.

What’s my asset base?
It’s important to consider how much of your assets are currently fee-based, as opposed to commission-based. And what’s your product mix? For example, are you locked into proprietary products? Or do you conduct a lot of variable annuity business, which might not be as compatible with a fee-only model?

Indeed, while many advisors believe the majority of their business should come from fees, that is not always the case. In the September 2010 TD Ameritrade Institutional and Registered Rep Advisor Evolution Study, advisors said that ideally 60 percent of their business should come from fees. Yet, in actuality, only 36 percent of their business is fee-based.

If you are a wirehouse advisor with 80 percent to 90 percent of your business fee-based already, it’s a different decision than if you’re 40 percent fee-based. “It’s tough to leave that commission business on the table,” says Victoria Bowen with Bowen Enterprises, a Boston-based consultancy to financial advisors.

How can I best serve my clients?
When you are contemplating making a move, it’s not all about you. It’s also about what’s best for your clients; so you need to consider whether you will be doing clients a disservice by putting them in a fee-based model.

Let’s say you have a client who averages $10,000 in commission annually. If you put him in a fee-based account, he could end up paying $30,000 annually in fees, which is not only bad for the client, but might arouse scrutiny from regulators, says Alan Foxman, an attorney with National Compliance Services Inc. in Delray Beach, Fla., which provides compliance services for advisors and brokerage firms.

You have to decide how many of your clients fall into this category and how committed you are to keeping those clients. Let’s say you have a client with $5 million in assets. He may not do a lot of trading, but you may want to keep him as a client because he’s a good source of referrals, it increases your assets under management or for some other reason, Foxman says. In that situation, you might want to keep him in a commission-based account to keep him happy and to stay free of regulatory scrutiny, he says.

What are my long-term goals?

Most advisors expect their fee-based business to grow over the next three years, according to the September 2010 Advisor Evolution study. Thirty percent expect that part of their business to grow significantly over that time period, while another 44 percent expect it to increase somewhat. An important question for advisors is how fast they expect to grow that portion of the business.

Mark Matson, President and Chief Executive Officer of Matson Money, an RIA based in Cincinnati, gave up his commission business 20 years ago after deciding he didn’t want to live his life on what he describes as a continuously moving treadmill. He didn’t want to work 60, 70 or 80 hours a week trying to make new sales. Instead, he wanted to make his money from recurring income.

So he gave up the commission business and went from $300,000 in commissions to nothing overnight. But, of course, not everyone can afford this cold-turkey approach. Some advisors might prefer to do it slowly, or not at all. “You have to be able to walk away and that’s where the fear comes in,” he says.

Will I make enough money to survive if I give up my commission business?

Many advisors simply can’t afford to take such a drastic leap. “It doesn’t make sense to take what might be 20, 30 or 40 percent of your business and flush it down the toilet,” says Jim Freeman, National Sales Manager at Cantella & Co. in Boston, whose firm has both RIA and brokerage capabilities.

Instead, some advisors choose a hybrid model, with the goal of moving more of their business to fee-based over time. Clients also may be more comfortable with this approach, as it gives them time to get used to a new firm before a new model is introduced.

What kind of business model am I comfortable with?

Ask yourself what kind of business you’d be most comfortable in. Do you relish the idea of having the most autonomy, a higher payout and feel comfortable completely on your own, making all your own decisions and paying for expenses? Or do you prefer to have a compliance department supporting you, having the ability to piggyback on errors and omission insurance, and giving up a certain percentage of commissions in exchange for sales ideas, compliance, legal and marketing support?

“There are some people who just want to do it completely by themselves. There are other people who feel more comfortable knowing that there’s somebody backing them, who can give them support,” Freeman says.

Even if you start your own RIA business, you can still affiliate with what Bowen of Bowen Enterprises calls an RIA-friendly broker/dealer. Many broker/dealers take a piece of the overall business, including the fee-based side; however, some smaller firms only take a piece of the commission business and let the fee-based business alone, which could be a viable option for advisors who want to retain the maximum on the RIA side, but also be able to take commissions, she says.

What are my future recruiting plans?

While your recruiting strategy isn’t as important upfront as getting your transition right and determining your fee structure, it is something to keep in the back of your mind. If you think you might want to recruit from wirehouses, being a fee-only firm could limit the talent tool, so it might make sense to have a commission option. Otherwise, “it may preclude advisors from going there when they can go someplace where they can do both,” Bowen says.

TD Ameritrade Inc. and third-parties mentioned in this article, including advisors named and any independent research entities, are separate unaffiliated companies and are not responsible for each other’s services or policies.

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