Q47 – 10 reasons to NOT start an RIA?


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10 reasons to NOT start an RIA?

Transitioning your practice to your own Registered Investment Advisor (RIA) is not for everyone.  While there are significant advantages to doing so, particularly with respect to economics and flexibility, there are also new additional responsibilities that come with it.  Being your own RIA involves you wearing the hat of both a financial advisor, and also a small business owner.  When that is a good fit, the RIA model can be of tremendous value to you as an advisor.  However, it is important to first understand the relevant factors before you can determine if the RIA model is a fit for you or not.  All too often though, there is misinformation being shared about reasons to NOT move into the RIA model.  It is important to be aware of, and familiar with when (and why) these arguments are being made.

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Full Transcript:

Ten reasons you should not start an RIA. That is today’s topic on the Transition To RIA question and answer series. It is episode #47.

Hi, I’m Brad Wales with Transition To RIA, where I help you understand everything there is to know about why and how to transition to the RIA model.

So a fun topic today, we’re going to go over 10 reasons you shouldn’t start an RIA. And the reason I say fun is because these are 10 things – there’s certainly more than 10 – but 10 things I hear from advisors that people are telling them as to why they should not start an RIA.

There’s some validity to some of them, and others, quite frankly, there’s not.  We’re going to go over a quick 10 of them today to talk about these common examples or reasons given as to why you should not start an RIA.

And to be sure, I am not a believer that everyone should start an RIA. It does need to be a match for your practice, what you want to accomplish with your firm going forward, the types of clients you want to work with, and types of solutions you want to offer. And so, I’m not naive to the fact that thinking, oh, everyone should go RIA. That’s certainly not the case, and that’s something I help advisors with daily is to try to understand should they consider going down this path.

However, I do hear a lot of reasons of what people are being told of why they shouldn’t do it that arguably are not fair and accurate reasons to be given. And so again, we’re going to tackle some of those here today.

So going through 10 of them. Again, like I said, there’s arguably more than 10 bad explanations out there, but I did want to touch on a few here.

#1 – “You’re not 100% fee-based.”

Surely, unless you’re already or plan to be 100% fee-based, people are being told, “You should not start your own RIA.” And the reality is, that’s not accurate at all. Now, there are quite a few RIAs that are 100% fee-only which by design have set up their firm to only be fee-only, and that’s perfectly fine. That’s a perfectly acceptable way to set up your business model.

However, there are absolutely solutions available for advisors that want to have their own RIA and still be able to offer some amount of commission business, or maybe insurance business, or maybe other services as well. So do not think if someone says, “Oh, unless you’re 100% fee-only,” that the RIA model is not for you.

#2 – “You won’t have the resources that your clients are going to demand.”

What resources are you not going to have available to you if you go down the RIA path?! Anyone that tells you that, I would challenge you to say, what specifically are you referring to that if I were to go into the RIA model, I would no longer have available to me to offer to work with my clients, that maybe I have at my firm now?

And so, if someone wants to throw out a, “Well, you’re going to need trust services and capabilities.” Guess what, you absolutely can accommodate that in the RIA world. Or you need lending services, absolutely can do that as well. All kinds of things. You could run down the list.

I challenge you to do this. If anyone ever says to you, “Oh, you’re not going to have the resources that your clients, particularly your wealthy, your ultra-wealthy clients are going to demand,” I challenge you to find out, ask yourself, talk to someone like me and say, “Will I have access to these things?”

Maybe there was a time the ecosystem of what was available to RIAs could not accommodate a lot of that. But I challenge you to find one now that you cannot find in the RIA model that you have available to you now.

#3 – “The technology is not as good in the RIA model.”

Now, this one I would tell you, there was a time, and you have to go back quite a long time ago, that I think this was fair to use that explanation, that the technology’s not as good in the RIA model.

Part of why that is is if you go back 10, 20, 30 years ago type thing, as firms develop technology, it cost a lot of money, a lot of investment goes into making good technology. And 30 years ago, the RIA model was so new, so fragmented, there wasn’t enough users of any particular technology to be able to support the investment to make those tools on par with what the big traditional broker-dealer firms were able to do.

And so that broker-dealer firm, and to this day they still do this, is if a broker-dealer has 10,000 advisors, 15,000 advisors, their investment in their technology, they get to spread out over perhaps 15,000 advisors. And so, that provides them economies of scale to be able to invest these millions of dollars into developing great technology. And there’s a time that they had 15,000, and the RIA model did not have those kinds of numbers.

Now the reality is, that is completely switched now. There are now technology solutions that have way more users than 15,000 advisors using their application. So, ironically when that argument is used – oh, that technology is not as good – it’s actually no, the third-party technology solutions that support the RIA model actually have more users to spread that investment out across versus those traditional firms do. So they can, in theory, invest more into those platforms and improve them on a continuous basis.

So, don’t let anyone tell you that, oh, the technology is not as good. There was a time I think that was a fair argument. But that time is gone. Not the case at all anymore.

#4 – “You’ll have to do your own compliance.”

Absolutely, you will have to do your own compliance if you’re an RIA. Now you could join an existing RIA, and part of their value add is they do the compliance for you. So that’s certainly worth exploring as well.

But let’s say, you want to have your own RIA. And oh gosh, now I have to do my own compliance. But I would challenge you to consider this. You’re having to adhere to compliance now, right?

If you go into the RIA model you’re going to have compliance, yes. But the difference is in the RIA model, the way you accommodate that, the way you work through your responsibilities regarding compliance, is you work with specialty compliance consulting firms.

You pay them on the front end to help you set up your RIA, and you pay them on an ongoing basis to help you make sure you are staying compliant, with all of the rules and regulations that come along and the things you must do on an annual basis.

And yes, this would be new for you (as an RIA) that you have to go out there and you have to work with one of those partners, you have to pay that company directly.

Now, I always tell people – I did a whole episode on this – don’t think compliance is free for you now if you’re at one of the large firms. You’re paying for it, it’s just in your payout. That’s where you’re paying for that.

But one of the big differences in the RIA model where you go out there and source your own compliance consultant is now you, the advisor, are the client of the compliance consulting firm. That’s entirely different than how the arrangement essentially is with your current firm.

Let’s say you have a compliance question, or you’re trying to work through an interesting situation that you’re trying to do with your practice and you need creative thinking, creative solutions.

Now, we all have to play within the rules. But it helps to have a fresh mindset of how maybe something could be accommodated. If you don’t think your compliance consulting firm that you’ve hired is doing a good job in that regard, if they’re not being responsive, if they’re not being open to new ideas to help talk things through with you, guess what?

You can replace that compliance consulting firm. You can say they are not satisfying my needs, and I’m going to go find another compliance consulting firm that will be more responsive to my needs.

Try doing that at your current firm, you have no vote in that. Take it or leave it. If you’re at one of the large firms, your compliance department tells you what to do. And if they’re not responsive, you don’t really have much say in the matter. I mean, you can say something, but would that actually accomplish anything?

In the RIA model where you hire the compliance consulting firm, you do have a say. You can fire them and move on to someone else if they’re not fitting your needs.

#5 – “You will get audited.”

The SEC, if you’re big enough, or the state, depending on your size, will come in and audit you. Absolutely the case. But again, that’s why you have a compliance consulting firm to help you, to prepare you for when that inevitable day comes, you will be ready for it, and you will have the proper things in place to be able to manage that process.

Now, make no mistake, it still is a process. If you have the SEC come into your office and do an examination – if you’re at one of the large firms now, you are not having to experience that or not having the responsibility for it. I completely concede that point.

However, to give you some data, and this probably about 12 months old now, but I doubt it’s changed much, the last time I heard the SEC updated how many SEC registered RIAs they had examined that year, they said it was about 20% of SEC RIAs they had examined in that year.

If you do that math, that means on average, and there’s different variables that could change this one way or another, but on average, every SEC RIA is being examined once every five years.

So, I challenge you, for all of the benefits of having your own RIA, from economics, flexibility – I’ve done all kinds of episodes on that – would you be willing to take on a responsibility, that as of right now, happens roughly every five years?

Yes, it’s a responsibility. Yes, it’s something you have to take very seriously. Yes, you need to work with compliance consultants to manage it. But this is not something that is going to happen every quarter of every year. Again, on average, there’s differences why it might be more or less, but every five years. Some states I’ve heard go even longer than that sometimes between examinations.

So again, yes, it’s a responsibility. However, do not let anyone overplay just how big or small the level of responsibility of that is.

#6 – “If the market declines you, the RIA, will be stuck with all of the fixed costs of running a firm.”

For example, an office lease.  If the market goes down, you’re stuck with that. But hey, if you work for us, our big, large, traditional firm, we cover the office lease, you don’t need to stress about that. And mathematically, that is correct.

But I would ask you, does the market more often go up over time or go down over time? So yes, when it goes down, there’s some validity to that argument. But if you are playing the long game here, if you have 5 years, 10 years, 20 plus years left in your career, more than likely, no guarantee, more than likely the market’s going to go up more than it goes down.

As it goes up, you get to benefit from, as they say, operating leverage. Because while the market goes up, if you’re charging on a percentage of assets, as your revenue goes up, your fixed cost, an example is office lease, generally stays the same. Yeah, there’s usually annual increases that are there pre-built into a lease, but generally speaking, those are pretty fixed.

So, yes it’s a fair point to say, oh, if the market goes down, you’re not going to want to have that fixed cost. Again, I challenge you though, over the long term, is the market more likely to go up or go down?

#7 – “Your clients won’t follow you.”

If you go start your own firm, you leave our big firm, your clients are not going to follow you. Where I find that comical is if you’re at a firm that’s telling you that, and that same firm is out there recruiting advisors from other firms to bring them to their firm, do they not think that it’s possible for a good advisor that has good relationships with their clients, to have that advisor bring their clients with them?

It’s disingenuous when they tell you, “Oh, you, if you leave, you won’t be able to bring your clients with you. So, you don’t even want to try that.” Oh, but by the way, we’re out there recruiting other advisors, and as we bring them on, we absolutely anticipate them bringing their clients with them. Otherwise, we wouldn’t be recruiting them. It’s weird they forget to point out that part of the your-clients-won’t-follow-you argument.

#8 – “Do you really want to be responsible for when (for example) the Xerox machine breaks?”

That terminology is fairly outdated as thankfully we’re going to less and less hard copy paper things, and so the Xerox machine is not what it once was in a practice, but you can consider anything. If the internet goes down, do you really want to be dealing with that sort of thing?

If you have your own independent firm, you will have that responsibility. Now you might be able to delegate that to someone on your team to manage that, but even if you think okay, ultimately, if it rolls up to you, again, how often does that sort of thing happen?

And to be fair, it does. If you’re a small business owner, things come along, things get thrown your way that you must deal with. Lets put it in perspective though. Lets say you move into the RIA model, you are now going to have to have to deal with the proverbial Xerox machine issue.

Now, if your compensation by making this move would go up $1,000 a year, you might easily say, “That’s not worth having these potential headaches come along that I now have to deal with.” And maybe if it goes up $5,000, that’s still not worth it. For some of you $25,000. That’s still not worth it.

But at some point, I think everyone would agree, everyone has a number that if their compensation under this new model goes up enough, they are willing to take on some of these additional headaches or responsibilities that come along with it.

I challenge you, what is your number? If that math says you can make an extra $100,000 a year, an extra $200,000 a year – I’m not over-promising, each advisor situation is different, but the math does generally have a big gap depending on where you are now, to what could be achieved in that RIA model.

For that, you do have these additional responsibilities. But at some point, I would assume you would agree, that the additional compensation warrants having to have these additional responsibilities. Again, that might take more than $1,000, or $5000, or $25,000 a year. But at some point, you’ll probably say, okay, it’s worth me having to worry about the stupid Xerox machine going down from time to time.

#9 – “Any advisors that go to independent models are not good enough to be at the wirehouse firms or the traditional firms.”

It’s incredible, but you still hear this from time to time. Oh, that’s just for the dropouts, that’s for the flunkies. And I would say, look at the statistics, look at who is making that move. Very large advisors are making the move out of these traditional firms, billion-dollar plus advisors, billion-dollar plus teams that are making, have made, continue to make the move into the RIA model.

If supposedly the independent models available out there are just for the ones that can’t hack it, can’t cut it at these big traditional firms, all I’m going to say is why do we see a constant exodus of these large teams? Oftentimes it’s advisors/teams much larger than the advisors that are making these same comments about how, “Oh, they just can’t cut it!”

Apparently they can cut it, because they’ve grown billion-dollar practices (at one of the big firms) and they are now choosing to go to a more independent approach instead.

#10 – “If you leave, and you’re this smaller, independent thing, your clients are going to worry because if something goes bad or you do something wrong, they want to be able to sue that large firm with the deep pockets.”

I always find this one comical. So, let me get this straight advisor that’s saying this, part of your strategy is apparently you sit down with your clients and say to them, if you’re at one of these large firms, you say, “Hey client, just so you know, if I end up screwing you over, or I end up stealing money from you, the good news for you is you’re going to have the big firm behind me to sue, if and when that happens. But if you go over there, oh, that’s not going to be the case.”

No one is saying that to their clients at all. No advisor’s value proposition is, “Don’t worry, if I screw you over, you’re going to have a big firm to go and sue.” So don’t let anyone convince you that, “Oh, that’s going to be a big deterrent,” because no one’s using that to their advantage with their clients right now anyways. It’s not the case.

A couple things to wrap up with. I would challenge you to think through where you hear these 10 things being said. From the types of firms that say, “we offer the best solution for advisors. We offer the best platform. That RIA model, absolutely,” – for the various reasons I’ve noted – “that’s totally inferior. That’s not where you want to go. That’s where small advisors go.”

But it’s interesting, because those same firms do some amusing things, that I want to go through a couple of them. For instance, those same firms have a thing called deferred comp. So for some reason, their existing advisors, they take some of their income each year, against their will, and defer it years into the future.

Its sole purpose is to have handcuffs to keep the advisor at the firm. So it’s interesting. If the firm themselves are the superior place for an advisor to be and far better than these other options, why would it be necessary to have deferred comp? Shouldn’t advisors just want to stay there? That’s not necessary at all.

Another example, non-solicit agreements. If the RIA model is so inferior for both the advisor and the client, why would any of these firms need non-solicit agreements? Surely, if an advisor made the mistake of leaving our firm to go down the RIA model, surely the clients wouldn’t follow them because clearly, we provide a better value, better service, a better platform for the clients.

So why is a non-solicit even necessary, if supposedly you have the better offering as a firm and for the clients? Again, it makes you think.

And then the last example is the non-protocol firm. For those of you that don’t know the protocol, it is an agreement among various industry firms. It basically says, “If an advisor leaves our firm, goes to your firm, under certain circumstances, we agree we’re not going to sue each other over it.” And that agreement goes back a decade-plus.

But some of the large traditional firms have dropped out of the protocol program. And again, it begs the question, why drop out of it? If your platform is so appealing to advisors, why do you need to drop out of the protocol platform to try to make it harder for advisors to leave? Shouldn’t they already apparently want to stay with you? They would never want to go somewhere else because you are already apparently providing them the superior platform. Again, makes you wonder.

And to be clear, if you’re at a firm that’s non-protocol, don’t think that precludes you from making a move. It’s simply a different transition process than if they were protocol.

But again, it begs the question, why are these firms that say they are so much better for the advisors, so much better for the client, why do they feel it’s necessary to put these handcuffs in place, if what they offer is so much better than these independent paths, these independent approaches, for instance, with your own RIA?

As we wrap up, if you ever hear any of these comments being made, any of these examples being made, there’s two things that could be driving the motivation of that person making those comments. Whether it’s a fellow colleague advisor, it’s a branch manager, a complex manager, maybe the management at your firm.

Number one, have they ever been in the RIA model to begin with? And if they haven’t, it’s not their fault that they don’t necessarily know fully how it works. Why would they? That’s a big part of what I help advisors with. If you’ve never been in the RIA model, you haven’t necessarily been prepared to know how the economics work, and the flexibility works, how the responsibility works.

So, for them to give you advice, “Oh, don’t do it because of this, this, and this,” how would they know? They haven’t been in that world to fully understand it. Even if well-intended or not well intended, they possibly don’t have the knowledge necessary to be able to give you this advice in the first place.

And then the other part of it is, oftentimes those folks that are telling you these things, “Oh, this is why you shouldn’t do this” it’s because they have a vested interest with their compensation for you to stay where you are.

Whether that’s a branch manager, or a complex manager, or whoever all the way up the chain, they don’t want you to leave. Because if you leave, that’s less revenue for the firm, most likely depriving them of their compensation. So again, they have a biased reason to be telling you all of these horrible things about it.

Now, you might say, but Brad, you are biased to the RIA model. My whole firm is based on helping advisors understand the model and possibly move to it. That’s absolutely what I do.

What I would challenge you to, and I am not afraid to put this out there, is if you’re at one of the large traditional firms, and you’re thinking about maybe going into the RIA model, talk to me about the RIA model. All of the options, all of the ways it can be done, all of the benefits, all of the responsibilities. Again, there’s pros and cons to everything. Become informed.

And then separately, talk to whoever at your firm, your branch manager, your complex person, about your platform to the degree you don’t feel you already fully understand all of the benefits they’re providing for you and the responsibilities you have there.

I’m not afraid to suggest you do that. Absolutely talk to them. Absolutely understand the value they are providing you. Make sure you fully understand it. But then and only then, now that you have two complete pictures of what each scenario is, can you make a decision about which might be better for you.

Now, here’s the thing, have you ever seen a branch manager or a complex manager of one of the large firms tell you, “Oh, go talk to that RIA guy, go talk to Brad Wales. I’m not afraid that you’ll find the RIA model more appealing. So go ahead and have that conversation and then come back and talk to me.”

They don’t want you doing that. I’m not afraid to say it because I am absolutely convinced that for, I don’t want to say most, but a good number of advisors, again, not all, the RIA model is the better path once they understand it and once they understand how that process works.

I’m not afraid of saying learn about the RIA model, and make sure you fully understand everything you have to gain and benefit from your current firm. You should do that exercise.

At the end of the day, enough advisors feel the RIA model is better. That’s what drives my business, is that that exists. But again, I’m not afraid to suggest you do that.

The people that are telling you all these negative things, why are they afraid of you talking to someone like me? Why do we have to be careful about only talking on cell phones and personal email addresses? What do they have to be worried about, if supposedly they offer the superior platform?

With that, I hope you found this helpful. At a very high glance, went through 10 quick things. I’ve done a lot of episodes on each of these individual topics. I suggest you take a look at and dive deeper into them.

If you are not already there, if you head on over to TransitionToRIA.com, you can find all kinds of additional resources. All of my episodes are in video form, also in podcast form. I have whitepapers. All kinds of resources to help you better understand the RIA model.

The number one thing you can do to efficiently learn more about this is to go ahead and reach out to me. The top of every page has a contact link. Click on that, you can instantly and easily schedule a time to have a Discovery Call with me, and we can begin this dialogue to help you learn more about what the RIA model really is and how it compares to your current firm/model. Only then can you make a fully informed decision about whether this is something you should be exploring further or not.

With that, I hope you found today’s episode helpful, and I’ll see you on the next one.

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