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Also available as podcast (Episode #128)
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Can I Keep Using The Same Investment Models Or SMAs That I’m Using Now If I Transition To The RIA Model?
TL;DR – If you create your own models, there is generally nothing that prevents you from continuing to use them in the RIA space. You just need to solve for the logistical/tech steps needed to do so. If you rely on third party models or SMA managers, there are more considerations involved such as how to logistically access them, costs involved, challenges with proprietary solutions, etc. In most scenarios, these variables are solvable.
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Full Transcript:
Can I keep using the same investment models or SMAs that I’m using now if I transition to the RIA model? That is today’s question on the Transition To RIA question & answer series. It is episode #128.
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.
Today’s episode has a bit of a lengthy title. I tried to slim it down, but just to repeat it again….if you’re an advisor at some sort of firm now, a broker/dealer, a wirehouse, a regional firm, etc, and you are using either investment models or SMA managers – which I’m going to define all this for those of you not familiar with it – if you were to transition your practice to the RIA model, could you keep using those same models or managers?
Depending on what type of affiliation model you are with now, there are essentially two approaches to how to manage your client’s assets.
First, managing the assets yourself could be part of your value proposition. You might also do financial planning, goal setting, etc, but a main part of your value-add is the asset management. That is something some advisors are very passionate about.
Maybe they have a very specific investment style or investment approach where they feel they add a lot of value. Part of what they’re telling prospective clients is… “Here’s everything we can do for you. We’d love to have you as a client. Here’s the financial planning. And for your investment management, here’s how we’re going to do that for you.”
There are many RIAs that use this approach.
Other advisors say… “That’s not a passion of mine, that’s not something I’m necessarily even good at or that I necessarily want to spend my time doing. But providing asset management is part of the value add for the client relationship. I need the assets managed, but as opposed to doing it myself, I’m going to rely on essentially third party solutions.”
Typically that’s investment models created by a third party or SMA managers – which again, I’ll define in just a second.
“In my job as the financial advisor, I do the due diligence on these investment models or these managers and make sure that they are going to provide the value I expect to be able to deliver to my clients. But ultimately, they are the one doing the underlying investment analysis, making changes to the portfolio, etc.”
If you currently create your own models, or perhaps every client account has a bespoke portfolio, you can continue with that same approach if you transition your practice to the RIA model.
Maybe you’ve created five models that you manage yourself. You have a conservative model, an aggressive model, and a couple in between. If they’re your models, there is no reason you can’t continue to use them going forward after moving to the RIA model. Provided there are some logistics involved with how to implement your models, facilitate the trades, costs involved, etc.
But this episode is focused on if you currently outsource your asset management, and would prefer to continue doing so, how do you do so?
As I mentioned prior, when you outsource asset management it is typically via either using 3rd party models or 3rd party SMA managers.
When using models, that is often accessed via so-called model marketplaces. That could be models your current firm has procured from available providers like Blackrock, American Funds, etc. Or perhaps models they’ve created in-house themselves for you to use.
Then there are advisors that choose to use SMA managers, separately managed account managers. That is a more direct one-on-one type relationship where there’s a third-party manager. You in turn, as the advisor, do your due diligence on the SMA manager and monitor them going forward to make sure they’re still best for your client.
You might also have heard of a UMA, Unified Managed Account. That is essentially a collection of SMA managers all within one account.
I should probably do an episode on SMA versus UMA, but at a high level, it used to be that if you were going to use four different SMA managers – and the reason you might have four different is because maybe there’s a portion of your client’s assets that should be in fixed income, so you have a SMA manager for the fixed income slice. Then you have maybe an equity manager for domestic activities. Maybe another manager for international equities.
It used to be, in most instances, you had to open a separate account for each one of those managers. A UMA account, which is relatively new – it’s been around a decade or so – but with a UMA you have one account (for simplicity for the client) that have individual “sleeves” for each of the different SMA manager.
It’s all one account, but you can extract out, for instance, performance data based on each of the sleeves to help with however you want to present that to the client.
But again, the idea being if that (UMA) is what you’re using currently, can you replicate that if you move to the RIA model?
The short answer, with some caveats, is generally “yes.” But there’s due diligence required to make it possible.
The primary hurdle, whether you’re using models, SMAs, UMAs, etc. is how to logistically access the similar solution. There are several ways to potentially do that.
The first option is dependent on what custodian you choose.
A big part of my value is helping you understand the different custodians in the marketplace and why you might choose one over the other, what might be a better fit for your practice.
One of those deciding variables is you might look towards your custodian to say…. “Have you built a model marketplace that has a lot of the models available in the industry?”
Or custodian… “Have you built a platform that procures dozens, if not hundreds, of SMA managers? If I’m using this SMA manager over here at my current firm, can I just move the account and continue to use them at your custodian?”
Such a platform is often referred to as a TAMP platform.
So the first place you might look to access such solutions is your chosen custodian, perhaps via some sort of model marketplace or a platform of SMA managers.
Now, depending on your custodian, they might not have that at all, or you simply don’t like the platform they’ve put together. In that case, you’re then typically looking towards 3rd party platforms for access.
So in that case, you’re still choosing a custodian (as that is needed regardless), but you’re going to use a third party “TAMP” instead.
As a reminder, be careful with the word TAMP. I did an episode on what is a TAMP. That term is often used in several different ways.
What I’m referring to here is essentially a platform that procures, whether it’s models, or managers, all in one place. So you then say… “I have my custodian over here, they’re going to hold the assets. But I’m going to use this third party TAMP over here, and they’re going to send the trade instructions to the custodian.”
Accordingly, you need to make sure your chosen third party TAMP is integrated to work with the custodian like this.
Again, don’t let this intimidate you. I’ll help you figure all this out. But the idea being, you don’t have to access such solutions directly from your custodian if you don’t desire to do so.
If you go the third party TAMP route, your due diligence at that point is to say… “What models, SMAs, etc. am I using now? Does a particular third party TAMP platform have those same models/managers available for me to use? And to the degree they don’t, might they be able to add those models/managers to their platform?”
So two things to think about… If you were to start your own RIA – and as a reminder, I help advisors down multiple different pathways. For some of you, you might conclude you should start your own RIA. For others, you conclude joining an RIA is the better path. And then there’s a flavor in the middle as well.
It’s not to say one of those three paths is better than the other. There are different reasons, different motivations why advisors go down a particular path. Again, I help you figure all that out.
But if you were to start your own RIA, there are several different things you need to solve for as part of that. One of those, to the degree you do need or want access to third party models or SMA managers, is for you to determine how to procure them.
Whether via your research on a custodian you conclude their platform is the best way to do it, or perhaps you conclude using a third party solution is better. So you need to know who the solution providers are to choose from, and how to do due diligence on them.
That is if you are starting your own RIA, which there are pros and cons to doing so.
If you were to choose to join an RIA – which also has pros/cons – the RIA, as part of their value proposition, has typically gone to the marketplace and procured various solutions to support their offering. One of those solutions is usually a way to access third party models or SMA managers. So part of your due diligence on an RIA is to determine what they have procured.
No matter whether you’re starting your own RIA, or joining one, if you can’t replicate your exact models/managers you’re using now, you’ll want to understand what the next closest options are, and whether those options will work for you or not.
That’s part of your due diligence. What do you use now? What’s available via your new potential path?
If you start your own RIA, you’re putting those pieces together. If you join an RIA, part of their value is they’ve built something out already. The question is….does what they’ve built accommodate what you need? If they can’t accommodate it, then the fact they’ve built it doesn’t help you. That might be why you choose one RIA over another, or perhaps the pendulum swings back and you consider starting your own RIA instead.
It’s lots of variables, but it’s part of the normal due diligence process of considering these future pathways.
I’ll wrap up with a few additional items to think about.
First, it’s almost assured that if you are using some sort of proprietary models or a proprietary in-house investment guru currently (at your current firm), that you likely won’t be able to find those same models or that manager on a new path.
While the large firms have generally whittled proprietary solutions down over the years – there’s not as much of this anymore as there once was – but one of the reasons they try to talk you into using their in-house proprietary solutions is because if you ever want to leave, you’re going to be forced to change from those solutions as part of your transition. That makes you more sticky to them.
There are some economic and compliance reasons firms create such proprietary solutions as well, so it’s not entirely some malicious thing. But they are fully aware – they’d never admit it – that it will create an additional hurdle for you to overcome if you were to ever leave them.
So, if you’re not currently using proprietary models or managers, I would suggest not starting to do so. And if you are, but you’re on a longer term roadmap to making a transition – provided it’s in the best interest of the client to do so – consider trying to allocate out of using proprietary solutions.
Next, you’ll need to compare costs.
Even if you find a way to access the same model/manager on your new path, you’ll need to understand what the costs involved are.
This can be tricky because what you’re paying to access that model or manager now can sometimes be blurred because of how the fee is presented.
For starters, you might simply be able to access the same model/manager on a new path at a lower cost. This could be in part because your current firm is treating their TAMP platform as a profit center, and adding (typically basis point) fees to the overall cost.
Or alternatively, your firm might be artificially providing a model/manager for a lower fee because they’re giving you a lower payout (than you could get on an RIA path). So they’re making up for that lower model/manager fee, via their retention on your payout.
So you can’t just say… “I’m using this particular manager now and I’m paying 30 basis points for it. And over here on the RIA side, it might cost (for example) 35 basis points. Well, I don’t want something that’s going to cost me more.”
But you must consider the whole pie. If your economics will go up significantly from a payout perspective, you can consider potentially lowering your client fee to offset the difference in fees, and both you and your client will potentially still be better off. You must consider the total economics.
I’m not sharing all these details to confuse you, this is just part of the due diligence process of exploring the RIA model.
As I say frequently, first you must understand the model. Does it make sense for your practice? Is it even something worth you potentially exploring?
If you get past that, then there are multiple different ways you could go into the model. You could start your own RIA, you could join an RIA, there’s a flavor in the middle.
And then once you get past that, you determine how to solve for the needed pieces. Today’s topic is one of those pieces. It’s just a matter of working through the due diligence. Having someone like me guide you through it. Making sure you are aware what steps are needed, how to perform them.
With that, like I said at the top, my name is Brad Wales with Transition to RIA. This is the sort of thing I help advisors with all day long is understanding these variables and helping advisors like you explore what an RIA path would mean for your practice.
How do the pieces come together? What’s the due diligence required? I’m happy to have that conversation with you as well.
First things first though, 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.
And 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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