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Also available as podcast (Episode #120)
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Are There Platform Fees In The RIA Model?
So-called “platform fees” are often found in the independent broker/dealer model. It is important to be aware of when they exist, and how they impact your economics as the advisor, when considered alongside your firm’s stated payout level. If considering the RIA model for your practice, it is equally important to understand when such fees may be present with an RIA path. Which is complicated by the alternative names platform fees can sometimes be referred to as.
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Full Transcript:
Are there “platform fees” in the RIA model? That is today’s question on the Transition To RIA question and answer series. It is episode #120.
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 today’s episode, we’re going to talk about platform fees and do they exist in the RIA model.
Some of you might not be paying platform fees currently where you’re at. Others of you are perhaps such fees. Either way, it helps to understand what exists in the RIA model.
An example of where a so-called platform fee comes up is, for example, in the independent broker-dealer model and they give you a payout. The payouts oftentimes can be this seemingly high percentage, perhaps 90%. And you think…. “wow, I got a 90% payout.”
But then it turns out, well, there’s also a platform fee. You might have a 90% payout, but there’s also a platform fee of 10 basis points, or I’ve seen 25 basis points.
I often hear advisors say… “but the client pays that.”
I’ve talked about this in other episodes, you must run the math and say, what are the economics? What’s the true payout to you?
Let’s take a simple example where a platform fee could come in and how the math works. Let’s say you as the advisor charge the typical 1% fee and you get 90% payout on that.
You think, well, that’s a good payout! But then it turns out there’s also a 25 basis point platform fee that the client pays in addition. So the reality is the client, in this example, is paying 125 basis points total for the value and services you are providing them. But you are only compensated on the 100 basis points that then goes through your 90% grid. You’re not compensated on the platform fee.
If you were to take your 90 cents, in this example, and divide it into the full 125 basis points, that is arguably your true payout. And it is not 90%. It’s meaningfully less than that.
You need to run the math and say, what are the economics truly for the client and then truly for me as the advisor? How much of the total fee the client pays, for all the value and services I as the advisor provided them, how much of that flows to me?
You need to mentally reset and don’t trap yourself into thinking…well, the client pays that. The client doesn’t care who gets what behind the scenes. The client only knows how much they are paying, and then you can determine how much of that flows to you.
With that background, I want to talk about what sort of, if any, so-called platform fees exist in the RIA space. Because then you want to make a true apples-to-apples comparison to what you have now. Whatever type of firm you’re at now, what would my practice look like in the RIA model? You want to make sure you are levelizing those economics and adding up all the associated fees, no matter what they want to call them…. platform fees, advisory fees, I’ve heard different names for them.
In the RIA space, in some instances there are no platform fees. Now that’s not to say that there are not costs associated with you running a practice in the RIA space. But there are scenarios where there’s no so-called platform fee.
But I want to share three examples of fees that could occur that some people might refer to them as platform fees. I want to explain when they become applicable.
First, and this applies to whether you were to start your own RIA or potentially join an RIA – I’ve done multiple episodes on why you might choose one or the other, I help advisors down both paths – but let’s start with the first one.
If you were to start an RIA, 100% of the revenue flows to you. You then have certain costs of running the RIA. One of the solutions you need to rely on, in addition to variables like technology and compliance, is a custodian.
Some custodians charge a basis point fee for that service, some don’t charge it at all, and others only in certain scenarios.
This fee is often referred to as a “custody fee” or a “custodian fee.” It’s usually expressed in basis points, usually a single digit number of basis points. As such, some people might think of that as some sort of platform fee, so I wanted to acknowledge that.
Where might that impact you, if you were to start your own RIA – again, some custodians traditionally do not charge it, other do – is it depends on the economics of your practice.
I’ve done separate episodes on how custodians generate revenue. A custodian is providing a service, they are holding the assets in custody and clearing trades for your clients. They need to be compensated for that, they need to generate revenue.
Depending on the profile of your practice – and there are a lot of variables that go into that – the size, the amount of assets involved, the investment products you use, how much cash you typically hold in accounts. A custodian will typically profile you to determine if you’ll be a good relationship for them.
In some instances, they might say… “we would love to earn your business, we would love to work with you, but there will be a custody fee (or a platform fee, or whatever they want to call it) of X basis points.”
Now, there are reasons they might still be the best solution for you, versus a different custodial offering that doesn’t have basis points, because you need to evaluate more than just price.
That would be like a perspective client coming to you and merely asking what your fee is, and then going to another advisor and asking them their fee, without asking what value and services will be provided in return for those fee.
Point being, don’t discard a custodial choice solely on what their fee is. They might provide you with certain services (for the fee), that you would otherwise need to pay for separately if you were to go with some other custodian.
Helping you understand when that comes into play, which custodians handle it which way, etc. is all something I help advisors with. I’m happy to chat with you as well regarding how it applies to your specific situation.
The next example of a potential “platform fee” applies to if you were to join an RIA.
I’ve done an episode on how the payouts of joining an RIA typically work. As I point out in that episode, there is not a lot of uniformity with how it is done from one RIA to the next.
Whereas with the four major wirehouse firms, for example, while they have a couple different levers that they put in their comp plans, it generally is the same rough setup that you generate production and it goes through a grid and there’s a couple variables that might move that number up or down. But it’s going through a grid on a payout percent to you.
In the RIA space, there are several different flavors of RIAs you could join, and several different ways that they have priced it.
Some do it solely on a percentage payout basis. Others do it the inverse of that, whether on a percentage basis, or basis points. While others do almost kind of a hybrid, and this is where that platform fee could come into place.
Some “hybrid” pricing approaches basically say… “If you use our solution, here’s all the wonderful things we provide for you. In return, there are two components to our pricing. First is a payout percent, and there’s also a flat amount of, for example, five basis points.
Now, do they call that a custody fee? Do they call that a platform fee? Do they call it back-office services fee? They can call it whatever they want, but that sometimes exists where there’ll be some sort of fee separate from the payout amount.
Now, sometimes that can be to your advantage, particularly if it’s done in basis points because for some of you that maybe have some large clients and so your ROA on your assets is lower than other practices (because you have larger clients and maybe charge lower fees) and as a result, the benefits having the bulk of the economics on a payout percent versus solely a basis points – some platforms are solely on a basis points amount – can be to your benefit.
Main takeaway is to be aware that some firms use this hybrid type approach combing two types of pricing fees. Whether you want to call that a custody fee, a platform fee, whatever, that can exist.
If joining an RIA, you would want to understand what those economics are.
The third example of where some sort of platform fee could come into place relates to – whether you start your own RIA, or join an RIA – how you manage client assets.
There are essentially two ways to approach managing client assets. A lot of RIA’s do it one way, and a lot of RIA’s do it the other way.
The first approach is where you manage the assets yourself. That’s part of your value proposition.
Other advisors and teams say… “that’s not a primary part of my value prop. I (for example) focus on financial planning more, so I outsource the asset management to a third-party solution.” That could be models via a model marketplace, SMA managers, etc.
There are several ways to outsource the management of. It is typically accessed through some sort of TAMP solution – I’ve done an episode on, what is a tamp?
Quick note on that, be very careful as the term TAMP is used in several different ways. So don’t assume when a firm says… “we are a TAMP”, that you automatically know exactly what they are offering. Different “TAMPs” provide very different service offerings.
To the degree you want to dive into that more, I did do that separate episode on, what is a TAMP?
But if you are accessing a TAMP, what I often refer to as a TAMP platform, a solution that gives you access to perhaps multiple models to choose from, or multiple SMA managers to choose from, there are typically two pricing components to that.
First, whoever has created a particular model is typically being paid an ongoing fee, usually in basis points. Or if an SMA manager, same type thing.
Separate from that fee, is typically a fee being paid to the TAMP “platform” itself. This is fair because – whether using an in-house platform, or a third party tamp type solution that gives you access to multiple models or managers – there is a cost associated with building that platform, maintaining that platform, handling the trades, there are logistics involved in that. And so you could argue that’s a platform fee.
Again, that only applies if you are outsourcing the management of the assets to some sort of third party. There typically is some sort of platform fee associated with that.
I’ll leave you with two tips on this all.
First, reminder that there are different ways these fees can be referred to. There are different circumstances where they are applicable or not applicable. It doesn’t matter what any of these are called. Whether a platform fee, custody fee, TAMP fee, etc.
What matters is to ask yourself… “What is the total cost of doing business? I’m going to provide my clients with certain value and services. I need certain vendors, certain solution providers to provide that. What are the various fees associated with that? And how much is ultimately coming out of my pocket? How much is coming out of the client’s pocket?” And then let’s look at it and decide what (approaches) we like or don’t like.
But don’t get caught up on what it’s called because again – I hate to use the term “hide” it – but you’ll see perhaps some large independent broker dealer and they throw out this large payout number. The only number they want to talk about is… “look how high our payout is.” Well, it turns out they also have a platform fee, which they didn’t mention in the big headline advertisement.
The main question is, how much is the client paying, and how much of that flows to you the advisor?
It’s important to understand where these levers come into play, where this might be applicable, what the options are.
Maybe you can avoid a fee by using one solution over another, but you must be aware of what the different solutions are to do that.
The second tip, is make sure you’re doing a true apples-to-apples comparison.
I said this at the top. If you are trying to compare what you have now, to the RIA model, but all you do is ask for one number regarding one path, and compare it to one number with your current path, have you fully built the pie? Have you added in all the fees, whatever they’re called?
Come up with a grand total of how much the client pays, and how much flows to you. Then do the same exercise looking at a new proposed path. Add up all the pieces, call them whatever you want. I don’t care. Add them all up and do a true apples-to-apples comparison.
As a takeaway, just be aware that so-called platform fees can exist in the RIA model. In some instances, they don’t. In some instances, they do.
But if value is being provided for the fee, you might need that value or that service regardless. It just so happens to be built into some fee. But the key is understand how does all this work? How much should you realistically pay for it? Who are the solution providers out there? Why is one better than the other? How do each of them charge? Where’s the best value prop?
That’s the sort of thing I help advisors with all the time to say, what do you have in your current arrangement? What do you have from your current firm? What does the RIA space look like – which as I talk about often in these episodes, there are several ways to potentially transition into the model.
You need to understand the pros and cons of all the options, and then who are the various solution providers and why you might choose one over the other and how they are different. How do they structure their pricing, and how does that impact the decision you might ultimately make on whether to go down that path or not?
Again, I’m happy to help you think that through for your practice as well.
First things first though, as I said at the top, 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.
And with that, I hope you found value on today’s episode and I’ll see you on the next one.
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