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Also available as podcast (Episode #115)
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How Does An RIA Payout Compare To A Broker Dealer Payout?
To compare payouts in the RIA model to the payout you are receiving in a different model requires several considerations. First, you must make sure you are correctly tabulating your current payout. The end result of such math is often quite different than what at first appears. Next, you need to understand the various ways payouts are expressed in the RIA model. Unlike the broker-dealer model, there is much less uniformity with how payouts are expressed across RIA firms. You also must consider the value and services an RIA provides to ensure you’re making an apples-to-apples comparison among different solutions. Finally, you want to consider how the resulting figures compare to your current payout, as well as other pathways you could consider for your practice.
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Full Transcript:
How does an RIA payout compare to a broker dealer payout? That is today’s question on the Transition To RIA question and answer series, it is episode #115.
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 your practice to the RIA model.
If you’re not already there, head to TransitionToRIA.com where you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of resources to help you better understand the RIA model.
Again, TransitionToRIA.com.
On today’s episode we’re going to talk about, because I get asked this often by advisors, what is the payout in the RIA space?
Part of the motivation for why an advisor might be asking is so they can compare it to what their payout is at their current firm. And so, we’re going to dive into typically what payouts look like in the RIA space.
I’ll start with two caveats about this.
First, what we’re going to talk about is if you were to join an existing RIA platform. I often refer to them as “platforms”, RIAs that were purpose-built to say to advisors, “Here’s everything we’ve built out. Here’s our value proposition. Here’s our pricing model. We’d love to have you take a look and see if this is a good fit for your practice.”
I’ve done several episodes on how to evaluate an RIA to join.
The reason I give this caveat is if you were to start your own RIA, which is another pathway available to you, that is a different economic structure. Often you’ll hear people talk about a 100% payout (with your own RIA.) Well, it’s not really a payout, it’s the fees you charge come to you as top line in revenue. You then have expenses you must cover. Again, that’s a whole other subject. I’ve done episodes on it.
But I want to acknowledge that because today’s topic relates to if you were to join an existing RIA, what the payouts typically look like.
Second, while I will give you some hard numbers, I also want to bring to your attention many of the variables involved, when I get asked this question, “what’s the payout?”
The easy answer is the ol’ “it depends,” which I realize is frustrating at times, or not very helpful. But what I hope to do on this episode, besides give you some hard numbers, is help you understand what some of the variables are that you need to factor in to make sure you’re making a fair comparison from what you have now and what a future path might hold for you.
With those caveats, first we want to make sure we’re speaking the same language when it comes to a “payout.” You always want to make sure you’re comparing apples-to-apples.
I don’t care if you’re at a wirehouse firm, an independent broker-dealer firm, whatever model you’re at, it’s generally not as simple as saying, what is my “payout” over here, and what is the payout with an RIA solution I could potentially join? You typically need to bunch together various fee structures to get a true apples-to-apples comparison.
The first tip is make sure no matter how the economics are built, you are putting them truly side-by-side and not just cherry picking on purpose or on accident, one number from one side and a different set of numbers from the other side.
At the end of the day, it doesn’t matter what these things are called, whether it’s called a payout or something else. All that matters is, how much are you charging and how much actually flows to you? You perhaps still have expenses to cover from that amount, but how much of the fee flows to you?
At different firms, there’s different things that take a slice out of the pie. There is the payout piece. But then there are also perhaps “platform fees” that might be charged or “advisory account fees” or “custodial fees.”
It doesn’t matter what your current firm or what future firm you might be part of calls it, you want to make sure you understand each of those pieces. Add them all up to get to an apples-to-apples comparison.
I see it all the time where an advisor will say, “well, that doesn’t impact my payout.” So let me give you an example using simple numbers.
Imagine at an independent broker-dealer, where the advisor charges (for simplicity) 1% to their client, and from that they get a 90% payout. So they feel they have a very high payout. But then it turns out there’s also a 25 basis point “platform fee” that their firm charges. Or maybe it’s called an “advisory fee” or something along those lines.
And so all of sudden the client’s not just paying 1%, they’re paying 1.25%. But the advisor is only paid from the 1% advisor fee. The payout is only on that amount, not the entire amount. And I’ll hear advisors say, “yeah, but the client pays that platform fee. I don’t pay it. That doesn’t come out of my cut.”
I always point out that needs to be reframed. If you as the advisor are charging 1%, and there’s a 25 basis point platform fee – and I’m not talking about for an SMA manager or something like that, sometimes it’s just platform fees that are in addition – all the client knows is they are paying 125 basis points, 1.25%. That’s what the client is paying.
In return, you are providing some amount of value, some amount of service for them for what they’re paying. They don’t care who gets what behind the scenes. They don’t care that your firm keeps part of it, and then part flows through a payout to you. All they know is they’re paying 1.25% and what they get in return.
You instead need to think of it as, for all the value and service I provide my clients, I’m charging them all-in (for example) 1.25%. How much of that flows down to me?
Almost every time I talk to a broker-dealer advisor, and we discuss what their payout is, and we run this math, they are not getting anywhere near what their “payout” grid states. I’ll typically see perhaps an independent broker-dealer advisor that has a “payout” of 90%, but when you run this math, only perhaps 72% of the overall client fee is flowing to the advisor.
So, the first part of this exercise is to recognize what the client pays, and how much is actually flowing to you. The latter can sometimes be meaningfully, if not significantly lower.
If you’ve done that exercise with your current path, what in turn might the figures look like on an RIA path?
A couple items before I give you some hard numbers.
First, as a comparison, to set up my answer for how it works in the RIA space, in the wirehouse world, the four major wirehouses, it’s pretty much all the same. It’s a payout percent. There’s a grid. If your payout is 40%, then they’re retained 60%. Again, could be other fees, could be deferred comp that’s taken out, all kinds of things. But they’re consistent for the most part in it’s a percent of the advisor fee. They have different percentages and different carve-outs, but the approach is similar.
In the RIA space, for better or worse, it doesn’t have that uniformity.
If you were to sell your practice to an RIA, that’s going to be an entirely different set of economics. If you were to join a W-2 model RIA, that’s going to have a different set of economics.
In the 1099 model, there’s a wide variety of how it’s expressed. Some firms express it as a percent payout. Others express it as the inverse. The math is the same, it’s just how it’s expressed. Instead of a (for example) 80% payout, they retain 20%. Again, that math is the exact same, it’s just how it’s expressed.
Other firms price it in basis points. They don’t speak of percentages of revenue. It might be 15 or 20 basis points, and here’s all the value and services we provide you for that.
Finally, there are some solutions that do a combination where it might be something like five basis points, plus 10% of revenues.
So, for starters, be aware different RIA solutions express it in different ways. If you’re comparing multiple solutions, and they are expressed in different ways, you always want to bring that math back neutral so you are comparing apples-to-apples.
Next, when you do get that number, you want to ask, “What do I get for that? What am I still responsible for on my own?
If it’s a 1099 model, for instance, usually you are responsible for your so-called “local expenses.” Your staff, your office, those sorts of things.
Where there could be some variability, for example, does the RIA include technology built into the pricing, or what technology might you have to procure on your own?
It’s important to have the apples-to-apples comparison. When you’re putting maybe two or three solutions side-by-side, you must even out those numbers and say, “If I’m having to cover something on my own, but yet their “payout” is higher than this other one, well, I have to account for that to have a true apples-to-apples comparison.”
Again, what are they providing for you? What are you still responsible for on your own?
One of the big examples of that, that can relate to an RIA that has a payout seemingly on the lower end of the spectrum, is does their offering include asset management?
Many of you manage the assets yourself. That’s part of your value proposition, all the things you do for your clients. Other advisors that’s not part of their value proposition, doing it themselves. They focus more on (for example) financial planning, and they use third-party solutions for asset management, which could be SMA managers, model marketplaces, etc.
Such third-party solutions come with a cost. I’ve done episodes on, for instance, “What is a TAMP?”
There are some RIA offerings where part of their value proposition is to do the asset management for you. They’ve built it into their pricing (payout.) If that is the case, you’re not having to factor yet additional basis points for whatever the third party asset management solution is.
If this is the type of solution you’re considering, you need to level those costs to compare it to other solutions.
Now, with all those caveats, all that background, I’ll give you some high-level numbers. Again, this is for more of a 1099 model. W2 or acquisition models are entirely different economics.
In the 1099 space, and again, they often express it differently, but when you run all that math, typically it ranges from 70 to 90 percent payout.
Now again, you likely have local expenses to cover after that. But to give you a high-level idea of typically what the range is, 70 to 90 percent.
Which you might think, “why in the world would I pay 70 if someone else is paying 90?” That’s all about what you get in return. That 70 might include asset management.
You also need to be careful about simply defaulting to the highest one. As to a degree, you get what you pay for it.
I once had an advisor come to me who was at an RIA and was complaining that he wasn’t getting very good service from them and he wasn’t getting very much value from them. As he was expressing this to me, and before I asked what the economics were, I already knew where it was going.
Turns out, even after all the math, he was getting something like a 94% payout. I said “well, what do you expect if they’re only retaining 6%?” They were providing some amount of services. They were doing the compliance. They provided technology. Those are hard costs. They must cover those costs, then they need money to be able to reinvest back into the platform, and then as a for-profit business they need to generate profit as well.
I don’t think that RIA was smart enough to realize what they were doing. There wasn’t any meat left on the bone. It doesn’t surprise me the service was lousy, because they weren’t retaining enough.
Now, this is not to say there aren’t some good solutions on the higher end of the payout range, but those might require that you handle more things at the local level. Maybe you’re fine doing that. Maybe you want to control more of those expenses.
But that’s why it’s important to dive into what exactly are they providing, and again, don’t just default to the highest payer. The devil is in the details.
And then a final thought on payouts.
Let’s take an example where a firm has an 80% payout. An advisor considering them might also be considering starting their own RIA. I help advisors down both paths, so this is not meant to steer you one way or the other.
In this scenario, I’ll sometimes hear an advisor say, “Well, I don’t want to pay a firm 20%.” Again, that’s the inverse of the 80% payout of this example.
The reality is though, you’re not paying them 20%. That’s technically how the math looks, but if you were to start your own RIA and put all the pieces together yourself and manage all the pieces yourself, there’s a cost to that. If you join them, they are taking some of those costs and those responsibilities off your plate. They are typically doing compliance for you. They’re typically providing you with technology, E&O, maybe marketing services, those sorts of things.
If you were to start your own, you must replicate those on your own. There are reasons you might decide to go down that path, but it is all going to have a cost.
To do a true apples-to-apples comparison of joining an RIA vs starting your own, you can’t just say, “I don’t want to pay them 20%.” You must determine how much it would cost to build it and manage it yourself. And you need to mentally factor in the intangible of, do you want to do it all yourself? When you add up that math, only then can you compare it.
To use a super simple example, maybe you run this exercise and determine you can do everything yourself (albeit not factoring in the intangible “cost”) for 15%. So, then the calculus is, they charge 20, you can do it yourself for 15. So really, you’re only paying them the difference. You’re paying them 5% for the luxury of not having to be responsible for doing all those things yourself.
For some advisors, that’s well worth it. Others want those economics, or have a need or want for their own RIA. The main point is, when you’re trying to compare starting your own RIA, versus joining one, you can’t just look at what you pay the existing RIA solution and not recognize, again, for apples-to-apples comparison, there are costs associated with running your own RIA as well.
The final takeaway I’ll leave you with, and this is not to give some sales pitch for my services, but hopefully you realize from this episode, there are a lot of variables that go into this.
Not only recognizing what your current situation is, but then what the future possible pathways into the RIA model look like and how all of those economics work, how all of those value propositions work, how all the pieces might come together.
I hope this episode has been helpful, but at the end of the day every advisor, every team situation is unique. That’s a big part of what I do is walking advisors through their specific situation trying to figure out which path you should even be exploring for whatever your different motivations are. And then if we conclude that joining an existing RIA is going to be the best path for you, how to compare them.
I’m happy to have that conversation with you as well.
First things first, as I said at the top, my name is Brad Wales with Transition To RIA. If you head to TransitionToRA.com, you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers.
At the top of every page is a Contact link. Click on that and you can instantly and easily schedule time to have a one-on-one conversation with me, whether you want to talk about today’s topic or anything else RIA related I’m happy to have that conversation with you.
Again, TransitionToRIA.com.
With that, I hope you found value with today’s episode and I’ll see you on the next one.
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