Dual Registration: Does It Make Sense To Separate?
Strategic Benefits of Splitting Your Broker-Dealer and RIA Entities
By Dan Garrett
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Regulatory Drivers Behind the Shift Away from Dual Registration
Regulators have sharpened their focus on dual registration, worried that potential conflicts of interest or blurred roles could harm investors. Recent Securities and Exchange Commission (SEC) examination priorities highlight scrutiny of on whether advisors clearly disclose which hat they are wearing (broker or adviser) when making recommendations and whether account type recommendations (e.g. rolling a brokerage account into an advisory account) truly serve the client’s best interest. Financial Industry Regulatory Authority (FINRA) officials have raised concerns about practices like “BD-IA arbitrage,” where an advisor sells a high-commission product in a brokerage account and then quickly moves the client into a fee-based advisory account.
Facing two sets of rules means two sets of exams, filings, and oversight, which can tax a firm’s resources. Handling compliance for both a broker-dealer and an RIA is costly and time-consuming as firms must satisfy both regulatory bodies. Separating the business may allow a firm to focus compliance efforts more narrowly and reduce overlapping regulatory complexity.
Why RIA Independence Appeals to Clients and Advisors
The wealth management industry has seen a clear trend of advisors gravitating toward the RIA model, largely due to its client-first, fiduciary approach. In a dually registered structure, advisers constantly balance between a suitability standard on the brokerage side and a fiduciary standard on the advisory side. This can be confusing for clients and advisers alike. By separating and perhaps emphasizing the RIA side, firms can clearly establish a fiduciary, fee-based culture that appeals to clients seeking transparency and trust.
Many financial advisors have been leaving traditional broker-dealers to launch or join independent RIA firms, a shift driven by the desire for more autonomy and a client-centric service model. A firm that separates its RIA business may better position itself to attract investment adviser representatives and clients who prefer the fee-only or fiduciary model, while still maintaining a broker-dealer entity to handle commission-based business when truly appropriate. This clear delineation can enhance client confidence that the advice they receive is aligned with their best interests.
Strategic Focus and Growth
Separation can be part of a long-term growth or exit strategy, aligning each side of the business with its optimal market opportunities. Operating a dual registrant can pull a firm in two directions. Each side (broker-dealer and RIA) has different revenue streams, product offerings, and business growth strategies. By splitting into separate entities, leadership can give each business a more focused strategy. For example, the RIA entity can concentrate on holistic financial planning and recurring fee-based revenue, while the broker-dealer entity can specialize in transactional business or brokerage services that complement (but remain distinct from) the advisory services.
Unlock Operational Efficiency and Long-Term Value
Separating the broker-dealer and RIA units also enables firms to allocate capital and resources more efficiently: each entity can invest in technology and personnel tailored to its specific needs, rather than one size fits all.
Position for M&A with a Split Broker-Dealer and RIA Model
This strategy may also make succession planning or M&A easier. Some firms separate their advisory arm if they anticipate selling it or merging it, given that RIA businesses often command higher valuations than commission-based businesses. Separating the units provides clarity for potential investors or buyers and can unlock value by allowing each segment to be valued on its own merits.
Key Factors to Weigh Before Separating Your Dual Entity
Deciding to separate your dual-registered firm into distinct broker-dealer and RIA entities is a significant undertaking. Here are key considerations and planning points:
Registration Requirements
Splitting often means creating a new legal entity for either the broker-dealer or the RIA. Filing a FINRA New Member Application for a new broker-dealer or submitting state and SEC registration for a new RIA can be a lengthy and detailed process, similar to a start-up, so ensure you plan for the time and expertise needed.
You will also need to update Form BD, Form ADV, CRD/IARD records, and likely craft new written supervisory procedures and compliance manuals tailored to each separate entity.
Separate Programs, Coordinated Oversight: Avoiding Compliance Gaps
Each entity will need its own dedicated compliance infrastructure. A separated broker-dealer and RIA cannot share one compliance program. Each must independently meet its regulatory requirements for supervision, recordkeeping, audits, and more. That said, coordination is crucial. If the same individuals are dually licensed (affiliated with both entities), you must establish clear policies about when an adviser is acting in which capacity and how conflicts are managed and disclosed.
Ongoing communication between the broker-dealer’s compliance team and the RIA’s compliance team is essential so that issues don’t slip through the cracks; otherwise, you risk doubling the workload or, worse, leaving gaps by assuming “the other side” is handling something.
Expect two sets of regulatory examinations. FINRA may examine the broker-dealer and the SEC (or state) may examine the RIA – sometimes simultaneously. Prepare for additional paperwork and potentially more time spent during audits, since regulators will be looking at each entity separately.
Update Your Tech Stack: Systems, Permissions, and Back-Office Infrastructure
Running two entities may require adjustments to your operational setup and technology stack. Consider whether your current broker-dealer and RIA activities are supported by the same systems (CRM, trading platform, portfolio management software, etc.), and if those can be partitioned or duplicated for a separate entity. You might need separate instances or databases to ensure client records, communications, and trading information are properly maintained for each entity. Permissions and access for staff will need to be configured so that each employee or adviser accesses the right entity’s data.
Managing the Ops Shift: Tech, Vendors, and Service Continuity
You will also have to handle back-office functions like accounting, finance, and reporting for two companies instead of one. This could mean hiring additional operations staff or outsourcing certain functions.
Vendor contracts should be reviewed – some contracts (like custodial agreements, clearing arrangements, or software licenses) might need new agreements to cover the new entity.
Ensuring continuity of service during the transition is paramount; a detailed project plan can help prevent operational disruptions as you separate the infrastructure.
Client Transition and Communication
Your clients’ experience should be at the forefront of any separation plan. If you decide to spin off the RIA, for example, clients with advisory accounts will likely need to sign new advisory agreements under the new RIA entity. Likewise, brokerage clients might receive updated disclosures or even transfer accounts if the clearing arrangement changes.
A clear communication strategy is critical to explain to clients why the change is happening and how it benefits them (for instance, greater clarity about services and fees, or enhanced focus on their needs).
- Clients should understand that they may now be served by two affiliated firms – one for brokerage transactions and one for advisory services – and what that means for them in practical terms.
- Reassure them that their accounts and assets will be handled with the same care and that the change is designed to improve service and compliance.
- Be prepared to address questions about differences in fees or protections (for example, explaining SIPC coverage under a broker-dealer vs. custodial arrangements under an RIA).
Proper timing and sequencing of client communications, along with training your advisors on how to discuss the change, will help maintain trust and retention through the transition.
Budgeting: Upfront and Ongoing Costs to Expect
Splitting into two entities will inherently introduce additional costs. There will be one-time expenses (e.g., legal fees for setting up a new entity and registrations, consulting fees for planning the transition, technology setup costs, etc.) as well as ongoing costs such as separate regulatory filing fees, possibly higher total minimum net capital if you keep a broker-dealer, two compliance calendars, and insurance policies for each entity.
Conduct a thorough financial analysis to ensure that the benefits of separation outweigh these costs in the long run. In some cases, firms find that eliminating redundant or low-margin business lines can offset the extra overhead.
Evaluate Resources and Staffing Needs Across Both Entities
Consider human resources. Will you need separate teams for compliance, finance and IT or can certain staff wear dual hats across the affiliated firms? Many firms share some centralized functions after a split, but those arrangements should be documented via service agreements between the entities to satisfy regulatory expectations.
Plan your budget and resources conservatively, and don’t underestimate the change management effort required. Your team will need to adapt to new workflows and possibly a new corporate culture as the firms begin to operate independently.
Partner for Success: How Expert Guidance Can Simplify the Separation Process
Choosing to separate your dual-registrant firm is a strategic decision that comes with both opportunities and challenges. With careful planning, firms can reap the benefits of a more focused business model, enhanced compliance alignment, and clearer value propositions to clients. However, it’s not a journey you need to undertake alone.
CRC | Oyster’s experts have decades of experience in both broker-dealer and RIA operations, compliance, and strategy. They understand the nuances of regulatory requirements, the importance of client communication during transitions, and the operational hurdles that need to be addressed for a successful split.
Our team can help you:
- Evaluate the Decision. We’ll work with you to assess whether a separation truly aligns with your firm’s goals. By analyzing your business mix, compliance pain points, and growth plans, we help you determine the best path forward, whether that’s separating entities, refining your dual-registration processes, or another solution tailored to your situation.
- Plan and Execute the Separation. If you decide to move forward, we will guide you through every step of the process. From drafting regulatory filings and liaising with FINRA and/or the SEC on new registrations to designing parallel compliance programs and supervisory structures, our consultants will ensure no detail is overlooked.
- Maintain Compliance and Efficiency Post-Split. After the separation, we continue to support your teams as the new broker-dealer and RIA entities take shape. CRC | Oyster will assist with updating policies and procedures, conducting training on new processes, and even providing outsourced compliance support if needed.
Our goal is to help your two new organizations establish strong, independent compliance cultures that also work together where appropriate. We’ll also look for opportunities to optimize operations – for example, identifying where technology or outsourcing can keep costs manageable across both entities.