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Also available as podcast (Episode #123)
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What Additional Responsibilities Come With Your Own RIA?
TL;DR – The RIA model comes with many advantages such as better economics, more flexibility with your practice, etc. However, those advantages typically come with additional responsibilities as well. For most advisors, the biggest additional responsibility will be registering the RIA and managing the ongoing compliance of it. Other new responsibilities typically revolve around managing your local expenses such as an office, team members, technology, etc.
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Full Transcript:
What additional responsibilities come with your own RIA? That is today’s question on the Transition To RIA question and answer series. It is episode #123.
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 things to help you better understand the model.
Again, TransitionToRIA.com.
On this episode we’re going to talk about if you were to start your own RIA, what additional responsibilities come with that?
I’ll give you a couple motivations for why I want to make this episode, but one of the lead-in ones is there are a lot of people trying to scare advisors into not even considering an RIA path because of these (sarcasm) horrendous responsibilities you will have that you will not want to deal with.
They’ll tell you the SEC is going to destroy you, or you’re not big enough to go into that RIA model.
I hear from conversations with advisors and teams that reach out to me, they’ll often say… “so and so has said this,” is that accurate? And you must be careful who you get information from, as all too often, the source of such information is the advisor’s current firm.
Perhaps the advisor is at a wirehouse firm and they’re talking to a colleague or, probably not talking to the branch manager, but somehow if it were to come up and particularly a branch manager, has an incentive to keep you, the advisor, from considering other paths that might take you away from their branch that they’re responsible for.
So of course they’re going to make it sound like it is going to be a horrible thing. You’re going to spend all your time on compliance, and on and on.
We’re going to discuss the additional responsibilities, but oftentimes, again, it depends on the source, these things can be blown way out of proportion.
Now, that said, I am a big believer, if you’ve followed along my episodes, of always discussing both sides of the coin.
I talk a lot about the additional flexibility you achieve from having your own RIA. Typically the better economics, on multiple fronts, that comes with it. One of those even being the proverbial, if you have your own RIA, 100% payout. I just did an episode on do RIAs really get 100% payout? And sometimes you hear that being talked about by the pro-RIA crowd. And that’s all true.
But I am a believer in saying, let’s understand what those advantages are, and there are advantages, but what additional responsibilities come with obtaining those advantages? That’s what we’re going to talk about on today’s episode.
I’m going to give you a couple examples of some of the main additional responsibilities you will potentially have to take on that you potentially don’t have now, depending on your current affiliation circumstances.
I’ll lead into it by saying for some of you, you’ve already taken on some of these responsibilities, as perhaps you’re already with an independent broker-dealer type model. So you’ve already taken on some of these responsibilities. You just haven’t taken on all the responsibilities that come with the RIA model.
For others of you that are maybe in that W2 wirehouse, regional broker-dealer type model, there will be a several new responsibilities that will come with it. And again I’m going to chat about some of those here.
The biggest new responsibility that typically comes up, and it’s accurate from a responsibility standpoint, is having to do your own compliance. Again, we’re talking about if you start your own RIA, you will have responsibility for ensuring the RIA follows all the regulations that you must follow.
For those of you that are at an independent broker-dealer now, this is the biggest additional step you have not yet taken so far on your independent journey that you would be taking with your own RIA.
So, what is that additional responsibility?
First, it’s getting the RIA registered, creating the entity. Because remember, the RIA, the Registered Investment Advisor, is an entity, not a person. You might own the RIA, you might be a financial advisor underneath the RIA, but the RIA is a legal entity that must be created.
There’s a process for how to do that. Thousands of advisors have come before you. You just need to understand the process, who you lean on to help you. But standing up an RIA is a new responsibility, if you’ve never had an RIA.
Related, once you get an RIA registered, part of the responsibility of any RIA is there must be a designated Chief Compliance Officer, the CCO.
Now, if you were a very, very, very large RIA, you potentially have scaled to the point where you hire someone directly on your team in a standalone position to do this. At a certain size that might occur.
But your more typical RIA, measured in the hundreds of millions of dollars in assets, as an example, typically it’s someone on the team that gets to wear another hat as the CCO. It could be the main principal of the firm, or one of the principals, or maybe your lead ops person. But that is a responsibility that someone now must have.
It is the CCO’s job to make sure that the RIA is following the regulations that are required of any RIA. That is a new responsibility. Who’s going to be the CCO? How is that person going to fulfill their responsibilities?
Related further, another responsibility, the RIA is going to be examined by the regulators.
There are a couple variables that could impact this, but generally, if you have less than $100 million in assets under management, you’re likely to be regulated by your state. Above that, you’re going to be SEC registered and regulated by them.
Whether state or SEC, they will exam your RIA on occasion. It’s generally not some surprise thing – I did an episode of what you can expect during a regulatory exam – but it is a process.
The entire process usually lasts several months. They start with a data gathering process, there might be an on-site visit, follow-up questions, etc. They are seeking to make sure you are following all the rules and regulations.
That process is not typically an annual exercise. Typically, a new RIA generally can expect their first exam in the first year or two. And then after that, it could be, based on the averages occurring right now, potentially be five, six, I’ve even heard seven year range of how frequently your RIA might be examined.
If your RIA is more complicated, or deemed to be higher risk, you might be on the lower end of that or even less. Or you might be right in the middle of that. But you will be examined, and there is a process for how to get through an exam. But it generally won’t be every year.
If you’re currently at a broker-dealer, they’re doing that for you. This would be a new responsibility that you have with your own RIA.
So when I talk about…. how do you get the RIA registered, how does the CCO manage this new responsibility, how do you get through an exam – as I’ve talked about on several episodes, the way you manage that is to utilize the services of a compliance consulting firm.
There are some wonderful compliance solutions that you can hire to help you with everything from the registration on the front end, to making sure you are managing your compliance on an ongoing basis, and to help you through an exam when it happens
You do not want to attempt to do this entirely on your own. While you do have to wear the CCO hat – though there’s also a way to essentially have an outsourced CCO; I did an episode on that as well if you want to check that out – but you rely on these compliance professionals to help you manage the responsibility.
And keep in mind, there are over 30,000 RIAs. Not 30,000 advisors, 30,000 RIAs. There are hundreds of thousands of advisors within those RIAs. So this is entirely doable, provided you use the right resources, provided you understand what that responsibility is.
But it will be something most of you are not doing now, again, unless you have your own RIA.
The last thing on compliance – and I’m focusing mostly on compliance because it’s the biggest piece – some advisors say… “I don’t want to pay for compliance. Now I must pay a compliance consulting firm to help me with all this.”
I don’t care where you are now, what kind of firm you’re at, what kind of affiliation model, you are already paying for compliance now. Maybe you don’t have to be the CCO as someone else is, and someone else is going through the monthly and quarterly tasks that must be done. But guess what, they’re not doing that for free. You are paying for that typically in the inverse of your payout.
If you’re with a traditional broker-dealer, you get a payout. You don’t get an itemized bill for what the inverse of that payout is for, the piece they retain. But that’s for everything they’re providing for you.
For some of you that might be an office, that might be technology. Compliance is one of those things. So, you are already paying for compliance. You just don’t get a bill for it. You have no control over it. You don’t control if they’re providing you good value with how they’re helping you try to stay compliant as a financial advisor. It’s entirely different in the RIA space.
So don’t conclude you don’t want to pay for compliance. You already are now.
Ok, that doesn’t cover everything to do with how to manage compliance as an RIA, but I wanted to put that one out as typically the biggest new responsibility advisors and teams have when they start their own RIA.
There are several other items that could be new responsibilities for you as well. Which if you’re already with an independent broker-dealer or some sort of independent affiliation model now, you’re maybe already doing these things. So they could be moot. But if you’re in the W2 world, some of these will be new to you.
A big part of that is the additional responsibilities that come with managing your so-called “local expenses.” This is running your local P&L.
There are several reasons it is to your benefit to manage your own local P&L, and it goes beyond this episode of diving into why that’s so advantageous, but there are a lot of advantages with that. However, it comes with additional responsibilities.
For example, if you are at a W2 wirehouse firm now, for better or worse, they are providing you an office. You don’t have any say necessarily where that office is located. You might not necessarily even have any say of which physical office space within that office complex you get. But at the same time, out of fairness, you don’t have to figure out the lease, or pay the lease, or figure out the utilities, or anything like that.
As an independent RIA, or any independent model for that matter, you will now be responsible for your local office. There are however a lot of reasons that’s to your benefit. I’ve done an episode on how you can use real estate to your advantage in the RIA space. Check that out. But it is generally much more advantageous for you to control.
However, that does come with more responsibility. You’re the one that now must procure office space. You’re the one that must sign a lease, or buy a building – if that’s what you’re going to do. So to be fair, there are more responsibilities with that, but a lot of benefits that come with it as well.
Another example of additional responsibility is building a tech stack. I’ve done an episode on… What is a tech stack?
For better or worse, if you’re at a firm now, they’re liking providing you with some sort of plug-and-play option. Again, we’re picking on the wirehouse model…. but for better or worse, they provide technology for you that is generally plug-and-play.
However, there are disadvantages to that.
Plug-in-play is generally take-it-or-leave-it. Here’s what we have for you. There’s no going out into the marketplace and choosing the best of this solution, the best of this solution, and on and on.
Not to mention, when you choose tech for yourself, you only pay for what you use. Whereas at the wirehouse, you’re paying – it’s in the inverse of your payout – for all their technology, even if you’re only using 40% of it.
So, there are all kinds of advantages to managing the technology yourself. But that is, again, as the theme of this episode, an additional responsibility you must undertake to put all that in place.
That’s a typical thing I help advisors and teams with. Identifying all these pieces, all these variables that you must to solve for. And then how to solve for each of them.
The final example, and this is not by any means an exhaustive list, is managing your local team.
You must hire and fire. Figure out benefits. There are responsibilities that come with that.
An example, one of those pieces is making sure your folks are paid. You must establish payroll. If you’ve never owned a business or had to manage a business, you’ve never had to figure out how to do payroll. Like, “How do I pay these people on payday twice a month (or whatever the cadence is)? How do I pay the payroll taxes that have to come out? How do I debit from their pay, perhaps the 401k contributions we’re going to set up?”
That’s a perfect example where that’s an additional responsibility of having an independent firm that can seem daunting if you’ve never done it. But again, provided you take the time to learn how to do it, rely on the right kind of vendors to help you with it, realize there’s a learning curve, but once you establish it, once it’s in place, you’ll quickly move on and payroll will not be something you’ll have any anxiety about.
Yes, there was a learning curve. Yes, you had to get over the hump. But now it’s in place and off you go.
Same kind of thing with compliance. Compliance can seem daunting. There’s a lot to learn. I’ve got to put a lot in place. How is this all going to work? But once you get that process going, once you have procedures, once you have your team members trained as need be, it’s just part of running the business at that point.
So yes, payroll is an additional responsibility. Yes, compliance is. You just put them in place. Get it all figured out. Yes, that will take work. But once you’re on the other side, you’re generally in good shape and you go forward from there.
The final thing I will leave you with on this front is – and again, this was not an exhaustive list of all the additional responsibilities – while it doesn’t necessarily solve for all these things I’ve mentioned, to the degree you say… “I do want the better economics, I do want the better flexibility and freedom of the RIA model, but I just as well not do some of that myself, even if there’s a lot of advantages to doing so.”
That’s where it comes back to, which I talk about in a lot of episodes, how you might consider joining an RIA.
There are many flavors of RIAs (to join.) You must be careful with which ones you choose. Some will not be appealing at all based on where you are in your career. But there are some wonderful solutions that, among others things, allow you to retain 100% ownership of your practice, you get to use your own brand, you’re 1099 and control your local expenses and all the advantages that come with that.
These firms will do some of the behind the scenes things that perhaps you would rather not do yourself. They manage the compliance, tech stack pieces, do your fee billing for you, etc.
They’ll take a lot of that off your plate, essentially as your infrastructure partner. But still allow you to have a lot of the advantages of the model in general. So something to think about if you’re listening to this and you say, “There’s all kinds of new responsibilities, some of that doesn’t sound appealing to me, is there a go-between where I can still have a lot of those advantages but still rely on someone else to do a lot of those things?”
The answer is, yes. There are some wonderful solutions, but they come in many different flavors. You must understand how they compare. That’s a big part of what I help advisors with. What’s your practice look like now? What’s this RIA model all about? Should you start your own RIA, or join an RIA? There’s a flavor in the middle as well. Helping you understand how all the pieces come together. I’m happy to have that conversation with you as well.
First things first though, as I said at the top, my name is Brad Wales with Transition To RIA.
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 things to help you better understand the model.
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 on today’s episode, and I’ll see you on the next one.
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