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Also available as podcast (Episode #147)
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Can I service high net worth and ultra high net worth clients as an RIA?
TL;DR – 10+ years ago, the answer to this question was generally “no.” However, with the significant expansion of the ecosystem supporting RIAs over the past decade, not only can HNW and UHNW clients be serviced in the RIA model, they generally can be serviced better than is possible in the traditional captive affiliation models.
Host:
Brad Wales founded Transition To RIA in 2020 after nearly 20 years of prior industry experience, including direct RIA related roles in Compliance, Finance and Business Development. He has an MBA and has held the 4, 7, 24, 63 & 65 licenses. He has been quoted or featured in 100+ industry articles including in the Wall Street Journal, Barron’s, and most every other major industry publication. He is well known for his RIA video explanatory series, and Kitces named his podcast as a “Top Podcast for Financial Advisors.”
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Full Transcription Of Video:
Can I service high net worth and ultra high net worth clients as an RIA? That is today’s question on the Transition To RIA question and answer series. It is episode #147.
Hi, I’m Brad Wales with Transition To RIA where we 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 this entire series in video format, podcast format. There are articles, there are whitepapers. There is a Vendor Profile Series. All kinds of things to help you better understand the RIA model.
Again, TransitionToRIA.com.
On today’s episode, we’re talking about if you were to go into the RIA model, either starting your own RIA, or joining an RIA, does the RIA model have the capabilities for you to service high net worth and ultra high net worth clients?
Now, I’ll start by saying there’s a lot of voices in the industry that are trying to tell you… “no, you won’t be able to service those ultra higher net worth clients.”
The reality is that is dead wrong.
There was a time that might have been correct, or that was accurate. But you have to go back now 10, 15, 20 years ago for that to have been accurate. The RIA ecosystem has evolved tremendously since then, particularly the last five, 10 years, to where that is no longer the case at all.
However, there is a misconception out there that you cannot service these types of clients. And often you have to look at who is essentially doing that chirping, trying to convince you that you shouldn’t go to the RIA model.
Typically, for instance, if you’re at a wirehouse, that is someone from your firm that is saying that. It could be the branch manager, it could be the firm itself that’s saying… “if you leave our big, powerful, storied firm, you’re not going to be able to service high net worth clients, not going to be able to attract high net worth clients, or your clients won’t follow you.”
But again, you have to keep in mind, they have an incentive to be saying that to you because they don’t want you to leave their current firm and take your clients and your revenue out the door. So of course they’re going to be saying that.
Now that’s further complicated as a lot of the times the people that are saying that, whether that’s your branch manager or even up the ranks of the executives at the corporate level, a lot of those folks have spent their entire career in that channel, perhaps even that firm.
That might be the same with you as well as a financial advisor that maybe you’ve only ever been in that W2 model. You’ve only ever been at a single firm. And so it’s not your fault as a financial advisor to not be an expert on how other affiliation options work, or how other pathways work. Why would you necessarily know, at least firsthand, you wouldn’t know, because you’ve only been in one particular channel. And hence why you’re maybe watching videos like this or listening to me on podcasts is to learn more about an RIA path.
But just keep in mind some of the folks that are telling you these thing, the feedback from your firm perhaps, those individuals themselves, not only are they incentivized to try to keep you at the firm, but they themselves possibly don’t even know how it works in the RIA space.
I know that as a fact many of them don’t because I’ll end up talking to folks that are maybe not even directly financial advisors that are thinking about starting an RIA to try to attract advisors to or whatever. Again, it’s not their fault, but sometimes they’re asking me what ultimately is very basic questions as far as the RIA world goes. And again, that’s fine until you’ve dipped a toe, until you’ve been in the model, why would you know the answers?
But the point is, those same folks that are at times asking me very basic questions are confidently declaring to you that this thing (RIA model) over there clearly won’t work.
Well, they can’t have it both ways. They can’t be unaware of how it works and yet confidently tell you that you’ll never be able to service these high net worth or ultra high net worth clients in a model they don’t even know about themselves. So just keep that in mind.
I would also point out if you look at over the last five-ish, maybe five to seven years and even some more recent, there have been some very high-level, high-powered executives from these large wirehouse type firms, that even headed some of those firms, that for years if not decades were espousing how that is the superior model, certainly over something like the RIA model.
And then it’s interesting because a number of those folks have essentially retired, at least from that firm, usually they then kind of hang low for a while, and now they’re back. But guess what channel they’re back in? They’re starting RIAs. They’re not starting a wirehouse.
You got to wonder why? Is that that because that’s where the pucks going? By the way, the pucks already there.
Perhaps you could say it was fair for them to have made that strong (pro wirehouse) statement 10, 15 years ago. That their then model was best.
But now, perhaps after just taking the time to learn about it, this RIA thing over here is actually superior and that is the path that they are now reinventing themselves at and attracting advisors to. They’re not trying to recreate the thing that they said forever was the superior path. That’s pretty telling. You got to keep that in mind.
Now, let’s get into can you service high net worth and ultra high net worth clients?
It’s easy for me to say yes, but let me give you some specific examples of why that is the case.
The short answer, with one exception I’ll come back to, I’m always a big believer you gotta tell all sides of the coin, so there’s one exception to this. Except for that exception, generally speaking, anything you have available to you now, if you’re at one these large broker-dealer firms, from investment opportunities to use with clients, or services you can use with clients, SMA managers, all the different things, anything you have available to you now, you will be hard pressed, if not impossible, to conclude that you can’t replicate that on the RIA side. And generally you have significantly more options to do so on the RIA side.
So, I want to go through some of those examples.
Let me start with a precursor before we get into some of the specific variables. One example that sometimes I hear advisors say, or again this is chirping from above at the execs, they say… “high net worth or ultra high net worth clients want a big brand name. That’s important to them that there’s this big brand. Look at our big storied brand on the side of the skyscraper here.”
There are some advisors that say… “that’s very important to my clients.” And there’s others that say… “I’m important to my clients. They’re not as worried about the big brand name.”
But the reality is if you do have clients, whether they’re high net worth, ultra high net worth, or whatever size, that do feel that’s important, that there’s a big brand name involved, keep in mind, as an RIA, you are not holding your client’s assets.
By design, the typical arrangement with an RIA is that you use a third-party custodian that actually holds the client assets. The RIA is providing the advisory services for the client, and the clients pay the RIA for those services, but you’re saying to the client… Here’s everything I’m going to do for you. Here’s how we’re going to invest your assets. But your assets are going to be held at this third party, highly regulated, highly capitalized custodian.”
And by the way, there’s about a dozen custodians you can choose from in the RIA space. I’ve done episodes on how to select a custodian. They’re not necessarily all available to you, or they’re not necessarily all going to be a fit for you. But to the degree that big name is important to you, there are several very big name custodians out there that your clients will absolutely recognize.
These are firms that have trillions, trillions with a “T”, in client assets held on their platform. So to the degree a big name must be involved to give your clients comfort of where their assets are being held, that bucket is solved. There are custodians that absolutely fit that bill. Your clients will instantly know who they are. So don’t think that the big name firm essentially can’t be replicated.
Next example of could what you have available to you now, be replicated – and this is not in any particular order – is oftentimes you hear that high net worth or ultra high net worth clients need or want alternative investments to use, or private investments, whatever the case may be. There this thought that only at my big broker-dealer firm will I have access to those.
There was a time that was correct. But that’s absolutely not the case any longer. In the RIA space, not only do you have access to generally the same – unless they’re proprietary to your particular firm – but if they’re not proprietary, generally you have access to the same investment opportunities, and significantly more of them.
Keep in mind, at your broker-dealer, whatever alternative investments that you have to use with your clients, that’s not the entire universe of alternative investments that are available out there in the marketplace. That is the subset of what is available in the marketplace that your firm has decided to allow you to use with your clients.
Now to a degree, you hope they’re doing good due diligence and they’re helping you weed out some bad options. But make no mistake, they are narrowing that significantly more than the entire landscape available to you.
In the RIA space, and there’s some logistics involved, but there are firms and platforms you lean on to access alternative investments for your clients. And typically you have hundreds, if not thousands of options to choose from. Whereas at your captive firm, that might be measured in dozens of options to choose from.
So not only do you have access to alternative investments that your high net worth clients might need or want or demand, you generally have a lot more to choose from and to be able to offer them.
Another example, sometimes you hear you won’t have the same lending solutions to use with your clients in the RIA space.
Maybe they need margin, or they need non-purpose lending, also sometimes referred to as securities based lending. Or maybe they need aircraft loans, or loans against fine artwork, or whatever. Well, you absolutely can do that in the RIA space. There’s several different ways to access similar types of lending.
And not only do you have access to similar types of lending, you have more options to offer to your client for those needs.
As a simple example, image your client needs a margin loan. Well, guess what? You go to your (current) firm and you say, my client would like a margin loan. And they look at the client, they look at the portfolio, they look at how much the loan is going to be, and they say… “Here’s what the rate is going to be well.”
Perhaps you don’t like that rate. Or your client doesn’t like that rate. Or you’re aware, or your clients aware, that there’s better rates elsewhere.
Well, guess what, if you’re in that W2 captive environment, you don’t have a choice. That is the only thing you can offer your client, is that solution and that rate.
In the RIA space you can go out in the marketplace and there are multiple different ways to get lending.
For our margin example, that’s traditionally done through custodians. If you’re either your own firm, or you’re with a firm that is, as they say, multi-custodial, you can shop that loan out to multiple custodians and say… “What rate could you get for my client for this size loan and this size collateral?”
And then there are even third-party lenders that you can go to that will use the assets that are in the account for the collateral
That becomes part of your value add. You get to tell your clients in the RIA space… “client, you have this lending need, I’m going to go out to all these different options in the marketplace and fight for you and try to get you the best rate we can out there.”
That is adding a lot of value. In some circumstances that can be tremendous cost savings for the client. So to think that you wouldn’t have access to lending in the RIA space not only is incorrect, it’s far superior typically in the RIA space of what you can provide for these clients.
The next example, this is kind of similar to alts, is how you invest assets perhaps using SMA managers or money managers or whatever you want to call them.
Similar in the wirehouse world with alts, if you’re at a large broker-dealer firm now, they have gone out in the marketplace of all the, in this case, let’s say you want to use SMA managers, and they have narrowed that pool of SMA managers down to only a fraction of what is available out there in the marketplace.
Presumably they’ve hopefully narrowed it down to at least some good options for you to choose from. But that doesn’t mean that’s all the options that are in theory available for you to choose from.
In the RIA space, you have access generally to significantly more money managers if that’s how you want to invest your client’s assets.
So not only would be factually incorrect to say… “I won’t have access to money managers”, not only will you have access, you’ll have a lot more access to money managers.
The only kind of exception to that is if you’re using a proprietary manager to your current firm. That’s a whole different topic. I always suggest you don’t use proprietary anything because there’s all kinds of conflicts with that and they’re obviously doing that just to kind of keep you there at the firm. If those proprietary managers are not available anywhere else, which is sometimes why they try to encourage you to use them, that’s the only kind of exception to it.
But otherwise, not only can you typically replicate what you have now, you’ll have significantly more options typically in the RIA space than you do just choosing from your firm narrowed down subset that you have to offer to your high net worth and ultra high net worth clients.
And then the last variable, this is not an exhaustive list, you generally have much more flexibility with the services you can perhaps offer your clients.
It depends on what kind of firm you’re at now or what your arrangement is, you possibly can’t do tax planning or tax services or have in-house estate planning.
In the RIA space, and there’s different disclosures you’ve got to put in place, and there’s some logistics involved, but you generally can provide a wider array of services to your clients, and specifically if we’re talking high net worth and ultra high net worth clients.
Depending on the type of firm you’re with now, you either might not be allowed to provide certain services, or you must disclaim it away or disavow that you’re providing the service, as otherwise that might be considered selling away or whatever the circumstances are.
You generally have much more flexibility with the services you can provide high net worth and ultra high net worth clients in the RIA space.
An example, and I don’t typically suggest this because there’s extra complications to this that’s beyond the scope of this episode, but for instance doing bill pay for your ultra high net worth clients. Where you’re paying some of their bills for them.
A quick sidebar on paying bills for clients….that triggers a thing called “custody.” There’s all kinds of additional compliance ramifications for that. So again, I’m not typically suggesting you necessarily incorporate that, but just to give you an example, that’s the kind of service that typically there’s no way in the world you can ever offer your clients in that captive W2 environment.
But over here in the RIA space, provided you have the right disclosures, you have the right logistics, you have the right processes and procedures in place, you could potentially do something like that.
So just think about all the services that you would maybe want to offer these folks, either your existing high net worth, ultra high net worth clients, or you feel that will help you attract more of those folks that perhaps your current firm simply won’t allow you to do.
Ask yourself and take the time to learn… if I were to go to the RIA model, would I be able to do that? I’m certainly happy to have that conversation with you to understand what your vision is and what you have in mind and let’s make sure that can indeed be done and here’s what that would look like.
So, those are just some examples of where it’s not only possible to do what you’re already doing with these types of clients, but it’s generally far superior as well.
I noted earlier there’s one exception to this. There’s only one exception that I’ve traditionally come across, and that is access to IPO allocation.
Getting an IPO allocation is usually very firm specific, where your firm is involved in the underwriting of the IPO.
However, I would just challenge you and say… “how often are you, one, desiring to do that, and then how often are you actually even able to get an allocation from that?”
Oftentimes, those shares are already assigned to institutional buyers and the opportunity to use them more at the retail level, even if we’re talking high net worth, ultra high net worth clients, is generally limited.
But I do want to acknowledge that is an example that that generally cannot be replicated as such in the RIA space. But at the same time, realistically, how much are you ever even able to do that now as it stands currently? But out of fairness, again, I want to give both sides of the coin.
The final takeaway I would just instill on you is even if you don’t want to take my word for it, even if everything I’m saying for some reason is not resonating, or you don’t believe it, or whatever the case is, look at what’s happening in the marketplace.
Particularly over the last five years, massive teams are leaving these large W2 wirehouse firms. And those teams service very large high net worth and ultra high net worth clients.
You did not see that 15, 20 years ago. That was fair critique 15, 20 years ago to say… not only can you not service those clients (in the RIA model), that’s why 15, 20 years ago, no advisors, no large teams were transitioning to the RIA model.
There might’ve been some exceptions, but for the most part, it wasn’t a thing.
However, if you look at particularly the last five years, and maybe you start going all the way back 10 years, but here more recently, there are massive teams doing this with very large clients.
If those folks clearly did their homework ahead of time, went through this whole process, understood the RIA model, understood what their pathway that they’ve chosen is, they concluded that this was good for them. This was good for their teammates on their team. This was good for their clients and they moved forward. And we continue to see more and more of that.
So again, even if you don’t want to take my word for it, just look at what’s happening in the marketplace. It speaks for itself that these very large teams, the same size teams that these firms preached forever, that this would never happen, that these large so-called corner office teams would never embark for the RIA model, it’s absolutely happening. And we’re seeing that pick up the pace with more and more teams and larger and larger teams as part of that as well.
Like I said at the top, my name is Brad Wales with Transition To RIA. This is the type of thing I help advisors with all day long is to say, what does your practice look like now? And in this case, what type of clients do you serve? What kind of services do you provide for them? What kind of services would you like to provide for them? How do you manage your assets? How would you like to manage your assets going forward? We put all those pieces in place and say… what would that look like if you were to embark on an RIA path? And then I help you think through all the different pathways and all the different options?
That’s a very common conversation I have all day long. I’m happy to have that conversation with you as well.
First things first, head to TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. There is a Vendor Profile Series.
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 in today’s episode and I’ll see you on the next one.
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