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Also available as podcast (Episode #14)
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What level of bottom line income can I expect to earn as an RIA?
A reasonably run, reasonably sized Registered Investment Advisor (“RIA”) can generally expect to earn (before owner’s compensation) in the range of 60-70% of the top line revenue. Worth understanding though is what might cause you to fall towards one end of this range vs the other, and perhaps even fall outside of the range. It’s also important to accurately calculate your current affiliation model take-home compensation, before trying to compare it to what you might earn as your own RIA.
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Want to learn even more by better understanding what a transition to the RIA model might look like for your own practice? I encourage you to schedule a Discovery call, and I’d be happy to begin that conversation with you.
Full Transcript:
What level of bottom line income can I expect to earn as my own RIA? That is today’s question on the Transition To RIA video series. It is question #14.
Hi everyone. I am Brad Wales with Transition To RIA and today’s question is what level of bottom line income can I expect to earn as my own RIA? The reason I say bottom line income and not just payout is because you do have expenses. So the question is, how much can I expect to put in my pocket at the end of the day so that I can compare that to maybe what I’m receiving now to begin to look at what those differences might be?
This understandably is one of the most often asked questions I get. What can I expect to receive as my own RIA? You hear about how (the RIA model) is much better economically, but what can I really expect to see about that? I’m going to answer one pillar of that with this video, but I would encourage you, I do have a whitepaper that goes over 11 specific ways the economics of the RIA model are superior to other affiliation options. If you head to the website, TransitionToRIA.com, it has a link at the top, whitepapers, it’s easy to find. I encourage you to dive fully into all 11 topics to really see all those different benefits. We’re going to talk about one of them here, what does that bottom line income look like for me as my own RIA?
I would start by pointing out, the answer is yes. It is going to be more under almost every circumstance than what you are earning now if you are an employee model or an independent broker-dealer model. It is almost guaranteed to be an increase. I’m going to give you some numbers. But I do want to preface it though because it’s only fair to point out that yes, you will in theory make more money, but with that will come more responsibility as well. I don’t want to give an impression that it’s, oh, this is just more money and no other work or responsibility to come with it. To be fair, there is more responsibility of running your own firm, your own practice than there is if you were solely working for an employee firm.
However, with that comes enormous economic upsides. As well as enormous amount of additional flexibility, control and quite frankly, satisfaction you can have as an advisor with your own firm. So yes, it’s fair to point out that responsibility, but the rewards far outweigh that additional responsibility. Otherwise, quite frankly, there wouldn’t be this tidal wave of advisors moving to this model. And clearly, it speaks for itself.
Again, that’s part of what I help advisors with is to realize all of those benefits and then understand what the other side of the coin is with those responsibilities as well. I think it’s only fair to again, not just say, yeah, you’ll make more money, but with that will come some more responsibility as well.
Two questions, or two kind of angles to think about this question of how much am I going to make? That is the first question, how much will I make as an RIA? And then the second one is, well, how much are you currently making now in your current affiliation model? Let’s start with the second one and then we’ll loop back around.
In almost every economic-related conversation I have with advisors, I generally always bring this up and I say….“what are you being paid out now”, or…“what is your compensation like now?” And the answer is generally always that the advisor will quote their payout grid….“oh I’m getting 45%”, “I’m getting 40%” or whatever the case may be and they kind of quote that grid number.
In almost every instance when I walk advisors through this, they realize that that is not at all what they are receiving. That is kind of the printed rate. Almost in every circumstance, they’re receiving something less than that, sometimes meaningfully less than that. What I mean by that is most all firms have a grid, whether you’re an employee model or an independent broker-dealer model. And you look at that and you say….“wow, I’m receiving 45 cents of every dollar that comes in”. That’s the grid rate. But the reality is, and especially if you’re at one of the large wirehouse type firms, your comp plan is generally a couple dozen pages long. If all it was was looking at a grid table and here’s my production level and I’m getting 40%, that might be it. But clearly there’s more to those dozens of extra pages. All too often, I think advisors either overlook or they’re so frustrated by it, they don’t want to have to contemplate it.
A couple examples of where your production is being brought down. A lot of comp plans have where we do not pay anything, or maybe a reduced grid rate, but oftentimes 0% on accounts under $X. And there was a time maybe that was $100,000 and you think….“oh, I don’t have that many clients.” I’ve seen it though go up to $250,000. The question is, will that keep rising up? If you have any amount of clients and certainly if you have a number of them that are under that threshold, and you’re getting 0% on those fees that are coming in, you have to mentally adjust……“okay, I’m not getting 40% on those. I’m getting 0% and that’s X% of my book.” You have to consider that.
Other comp plans I’ve seen, they don’t pay on…I’ve seen it like the first 3% of production every month. And you say…..“okay, that’s only 3%.” But that’s 3% you’re not getting paid on. That’s 3% you’re not getting the 45%. That’s zero. You have to run that math and say….“okay, after I zero out that first 3%, and then I get 45% (after that), what is the actual aggregate math look like?”
Other comp plans have it where if you don’t have a financial plan with a particular client, you get a lower grid rate. Now nevermind the fact that arguably you and the client should be the ones that decide whether a financial plan is necessary or not. You shouldn’t have to arbitrarily make a financial plan because your pay is going to get docked if you don’t. But many comp plans have it. They say if you don’t do this with clients…and again, there could be very good reasons that you might want to do a financial plan with a client. It just seems prudent that it should be the advisor-client relationship that dictates that, not some comp plan.
To the degree you have a comp plan that penalizes you for that or another example of a penalty is where maybe if you haven’t referred, X number of banking products to your clients. Or leads to the banking team for checking accounts or things like that. If you haven’t done X number per month or per quarter, per year, oh, then we’re going to pull your grid down as well there.
Usually how they frame that, they don’t say, oh, we’re going to pull your grid down. They keep your grid where it is and they say, oh, we’ll give you a bonus of an extra 2% if you refer these banking products over. Keep in mind, saying you’re getting 40% and we’ll give you a bonus of 2% if you do these banking products, that’s effectively the same thing as saying your grid rate is 42% and if you don’t do this, we’re going to penalize you back down to 40%. So careful on the spin of how it’s presented that, oh, you get some bonus. It’s no, you’re getting penalized if you don’t do it.
Then a final example I’ll give is some comp plans say….“hey, if you need or want to discount the client’s advisory fee that you charge them for a particular account, off of the rack rates set by the firm, as you discount the client fee, that in turn will discount the grid rate you will receive on that revenue from that client.”
What I point out to advisors is you have to factor all of this in. When you say….“oh, my grid rate is 40%” or “45%”, again, that’s kind of the rate listed up on the wall. You have to factor in all this math of all the accounts you’re either not getting paid on, you’re getting paid a discounted amount on, and then run that math in aggregate. For an advisor that maybe thinks “I’m getting 45%”, in aggregate that might be 40% when you factor in all of these goose eggs you’re getting paid on some of the relationships.
If you want to say, well, how much am I going to earn as an RIA, mentally the reason you ask that and say, well, let me compare that to what I’m making now. So I encourage you, you need to determine truly what you are making now, not just what a grid rate shows.
I’ll tell you, I see this at all kinds of firms. This is not just a wirehouse thing or an employee model. I’ve spoken to many independent contractor broker-dealer advisors and I’ll be talking about the economic advantages of the RIA, and how you start at 100% payout and they say….“well I’m already getting 88% payout at my independent broker-dealer.” And again, all too often, that’s the stated grid rate and all too often in almost every circumstance where I ask the advisor….let’s step back, let’s think this through, that number comes down. Sometimes meaningfully down when you start factoring in all these other variables.
So just step one in the process. I encourage you to really think about what is your actual take-home pay, not just what the grid rate is. What are you actually putting in your pocket? And reminder, to the degree your firm also forces some of your compensation into a deferred compensation vehicle….again, that’s not going in your pocket today either.
The way to really calculate it is you look at the proverbial paycheck and you say how much actually went in my pocket versus what that top-line initial amount of fees that came in was? That is your take-home, not just the posted grid rate. So exercise number one is do that calculation to know your baseline, where are you now? And then compare it to in the RIA world.
A reasonably run, reasonably sized RIA can generally expect to take home, as we say, before owner’s compensation….so after you pay for all of your overhead, your variable expenses, those sorts of things….before you put a dollar in your pocket, can generally expect to receive 60% to 70%. So compare that to your take-home now, again, your true take-home and say….“how does that compare percentage wise to 60% to 70%?” I challenge you to run the math dollar-wise too. That can be a painful exercise to realize how much of a gap that really is.
The reason I say 60% to 70%, again, a range, there’s some folks that could be less, some folks it could be more but most fall in that range. That comes down to again, reasonably run, reasonably sized.
We’ll start with the size. You do need some scale in the RIA world to make it worth your while. Most of the costs of running an RIA are fixed costs. Paying for compliance, which I did a whole video on this just recently, you could find it on the website. That’s generally a fixed cost, whether you have $100 million, $200 million, $300 million in assets. That compliance cost doesn’t necessarily double or triple and so you do want some amount of scale to overcome these fixed costs of running an RIA. On the size-wise, again, you need to be reasonably sized and then reasonably run.
One of the main benefits of the RIA model is you get to decide how you put the cost structure of your firm together. Do you want a very fancy office on the 30th floor of the downtown building there in your town that’s overlooking the bay? Or are you more content with a more modest setting in a smaller type building? That’s going to drive your cost structure. That’s why there’s no definitive answer. The more you want to spend, that’s fantastic, you have the option to do that. But of course, that’s going to bring down your bottom line take-home that goes in your pocket.
The more conservative you can be on that spend and the more you can manage costs, that’s going to drive you to the higher range or potentially higher. There are some very successful RIAs, and I don’t want to oversell this, but that keep a very simple cost structure. They go above that 60% to 70% range. And then there’s other ones that are very cost heavy and they could come in below.
The beauty is, you have the ability to decide where you fall on that spectrum based on how you want to structure your practice. That’s a big part of what I help advisors think through is how do you set all this up? What are the variables involved and what are your options and decisions you have to make and how much control do you have to adjust those to reach the goal you want to from a compensation standpoint? And again, the beauty of it is, while there are a number of decisions involved in that, is that you have that control and that ability to drive that. That is one of the great benefits of the RIA model.
Bottom line, run the math. It will be a painful exercise, and if you do it truly, it’s a good amount of work to factor all your different accounts and the products and services you’re offering. But basically, under your current situation, what are you truly making currently? Then benchmark that against the 60% to 70% range of the RIA model. And again, convert that to dollars. That is what drives this all home more than anything.
If there’s a 20% gap, that’s great. But when you put that in dollar terms, if that’s $300,000 (per year), that starts to really ring some bells that….“wow, I need to explore this model. Maybe ultimately it’s not for me, but when there’s that big of a gap, I owe it to myself to at least understand it better, to make sure I’m perhaps making the right decision and staying where I am or perhaps this is a better path.”
With that, my name is Brad Wales. I’m with Transition To RIA, and this is the exact sort of thing I help advisors with. I want to help you understand everything there is to know about why and how to transition to the RIA model. The economics of all that, and how much you could reasonably expect to earn is absolutely part of that conversation. That’s absolutely what I help advisors with. And would be more than happy to walk you through all of that as well.
If you go, if you’re not already there, if you go to TransitionToRIA.com, I have lots of other videos. I have whitepapers I mentioned earlier, a couple whitepapers on economics. At the end of the day, the easiest, most efficient way to learn what this model could look like for your specific practice is to go ahead and reach out to me. You’ll see at the top of the website, there’s a contact link, click on it. You can instantly and easily schedule a specific date and time for us to connect. We begin to have this kind of conversation of….“hey, let’s look at what is your current situation? What are the variables you should think through such as, are you really getting the payout you think you are? And then what would it look like for your specific practice under the RIA model?”
Having that conversation doesn’t require you to actually make a change, but it does help you at least understand why you might want to be considering the change. And if it does seem like a good fit, again, that’s the second part which I help advisors with is how to actually go about making that transition. I’d be happy to have that conversation with you as well. Jump to the site, you can easily set up a conversation.
With that, I hope you found some value in today’s video and I’ll see you on the next one.
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