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RIAs Recruiting Brokers: Probity Advisors Q&A

“RIAs that are able to replace product and third-party platforms with in-house, asset management services — all within a planning-based framework — are ideally positioned to recruit in a post-DOL world.” 
Chris Sorrow, Probity Advisors

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Chris Sorrow is the Chief Investment Officer of Probity Advisors, a Dallas-based RIA. Last year, Probity won Fidelity Investments’ Be Greater award for RIAs having $250 million to $1 billion in total assets under management.

Probity Advisors recently began recruiting breakaway brokers, which I found intriguing. I reached out to Chris to learn more, confident that he would have something interesting to say. Below is our Q&A:


Smartleaf: What led you to recruit brokers to your RIA?

Chris Sorrow: The new DOL rule puts $14 trillion in retirement assets into play, in search of newly compliant platforms. We see an incredible opportunity for individual advisors and independent registered investment advisory firms like ourselves: RIAs that are able to replace product and third-party platforms with in-house, asset management services  all within a planning-based framework  are ideally positioned to recruit in a post-DOL world.

What’s the basic pitch to brokers?

We give advisors and their clients a boutique investment experience managed exclusively by CFA Charterholders and CFPs. And we offer higher payouts. In doing so, we give advisors the opportunity to build independent businesses that are more easily transferred and that ultimately command higher multiples at the time of sale. We believe this is a compelling proposition to recruits at a time when compliance demands within their current firms are beginning to ramp up.

How can you offer higher payouts?

Using tools like Smartleaf, cross-custodial trading platforms, and various other integrations, we've been able to eliminate layers of what have otherwise become commoditized costs. By replacing the “product” component with fee-based, asset management services, we make room for ourselves to be compensated while also being able to offer individual advisors higher payouts and net compensation.

Product distribution in a brokerage environment is inefficient and our value proposition is to eliminate this inefficiency for the benefit of both the advisor and their clients. Using an existing mutual fund book of business as an example, we typically see the spread between what the client is paying and what the rep is earning being somewhere in the neighborhood of 73 bps. This is pretty consistent whether we’re talking about the average A or C share class book. If we’re able to wipe out the mutual funds and manage the assets in house for roughly 50 bps, we are paid for our services, and it still leaves roughly 23 bps to either increase the advisor’s compensation (holding the clients' cost equal) or reduce their clients’ fees (holding the advisor’s compensation steady).

What sort of terms do you offer to reps you recruit?

It depends on the composition of each advisor’s book, but if we are able to get compensated by eliminating product costs, we can offer advisors 100% payouts. We don’t have to make our living off the advisor’s piece the way most BDs do. The numbers work to our advantage when you consider that large wire house BD payouts are in the 40-50% range, and independent BD payouts are around 70-85%. For an advisor that already has a substantial book of advisory business, they are going to automatically step up their compensation by partnering with our firm.

Now, in fairness, not everyone is comfortable leaving the security of a large firm. There is a huge amount of marketing and branding that goes along with being part of these firms. On the other hand, what we continue to hear is that the marketing support, which ostensibly justifies the 50% haircut on payouts, rarely accrues to the advisors. We respond by offering higher payouts and by providing compliance and marketing support targeted on building the advisor’s own brand.

Do the reps you recruit set themselves up as independent RIAs or are they hired as employees of Probity?

We’ve offered both approaches. I think the more compelling case is to be completely independent by owning/acting as a referring RIA, and Probity would act as the subadvisor. I say this because it gives an advisor more control over their destiny and it eases the transfer process. An acquiring RIA would only have to worry about whether or not they were happy with the sub-advisory relationship, but they wouldn’t need to transfer assets just to get paid. It takes some of the pressure off revenue conversion to the new entity.

We’re willing to help set up a state RIA as long as the book is significant enough and the referring RIA is willing to operate in the model I’ve outlined  essentially being committed to utilizing Probity’s asset management and planning services.

If they’re employees, how do they sell their business?

We’ll offer to buy their book. Going in, we look for 1) an advisor who is aligned with our approach to wealth creation and our core values; 2) an advisor who is committed to acting as a fiduciary and to running a fee-only business; 3) an advisor who wants to stay involved with their clients for the next 3-4 years; and 4) an advisor who is not looking to simply cash out, but instead wants a lifetime perpetuity from the advisory compensation generated by their book. To help with that last point, we’ll assign an internal advisor to work with the retiring rep to make sure their book does not wane. We look at it like a quasi-defined benefit plan. The idea is to have an advisor join our firm early enough to stabilize their book, and then once they retire, we’ll keep paying them the advisor compensation generated from their book for as long as they live.

So, in a sense, you’re acting as a rollup?

I guess you could say that. Yes, but at the risk of sounding altruistic, the primary motivation wasn’t initially economic. The initial motivation was to solve the problem of continuity that many clients were beginning to raise with some of our older advisors. These advisors had spent a lifetime cultivating deep, personal relationships within their community. They were devoted to their profession and their clients, and they wanted to make sure that their clients would continue to be valued and receive personal service once they were no longer involved in the day to day. We have a special relationship with the reps, so we tried to find a model that allowed the advisor to maintain a presence and be compensated well beyond the typical retirement age, but at the same time have sufficient support from our junior advisors and staff to allow them to be less and less hands-on as they desire. It’s a good story. It provides for good outcomes for everyone, and fortunately, it happens to provide for good economics as well.

What about commission-based reps?

The new DOL rule is rapidly changing that landscape. Based on some of the recent conversations we’ve had, we are already seeing BDs drop richer A and C shares and limit new sales to classes that pay somewhere around a 2-3% load with 0.25% trail. And that is on the lowest breakpoint  declining as you go up in AUM. Furthermore, many BDs are making these changes firm-wide, not just on retirement assets. That is a 50% drop in upfront compensation for a rep that has typically dealt in A shares, and a 75% drop in run rate compensation for reps selling C shares. In our service-for-fee model, the rep has the flexibility to price their own services anywhere between 0-100 bps, but we tend to see our advisors price accounts in the 50-65 bps range. What all this means from a practical standpoint is that the breakeven time for commission reps converting to the service model has been shortened considerably  if not eliminated altogether. Former A share reps get the immediate step up in comp on their existing book, while C class reps can continue to charge what they were making previously if they so choose.

What are the challenges of converting a commission-based book to fee-based?

In the past, it was two-fold. The first was the huge disparity between upfront commission compensation and fee-based compensation. The breakeven to switching from commission to fee-only was just too great for many reps who didn’t already have $25 million in AUM or more. The new DOL rule significantly lowers this hurdle. The one challenge that remains, however, is the book’s composition and just how much product can practically be converted to service. Product vendors over the years have been very good using sales incentives and wholesaler support to continually market “better mousetraps” to clients. As a result, a commission book can be very fragmented. For example, we see a lot of variable annuities in commission-based books. RIAs don’t have a great alternative to a variable annuity when there are return guarantee features, surrender charges, etc. We’ll generally be able to convert 100% of the managed money, and traditional mutual fund business can be converted pretty easily, although that can sometimes be complicated by taxes.

Beyond having a more efficient cost structure, are there reasons to think RIAs will beat BDs?

Yes, I believe that RIAs have an inherent advantage over BDs due to their ability to originate and control their own advisory revenue, rather than having to rely on a third-party product to collect and remit revenue to them. The DOL rule now equalizes many of the historical differences between BDs and RIAs with respect to duties and disclosure, while at the very same time narrowing the compensation gap. I believe more focus will be brought on the value of the advisor, while the importance of product will be demoted. RIAs’ fee-for-advice orientation and their self-sufficiency with respect to revenue origination allows them to be more aligned with an increasingly aware client, and more nimble and independent in how they service those clients going forward.

Chris, thank you.

You can learn more about Probity Advisors at


For more on this topic, check out The Three Types of Wealth Management Firms.


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