Q78 – Can I Manage Client Assets Myself As An RIA?

Also available as podcast (Episode #78)

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Can I Manage Client Assets Myself As An RIA?

Yes.  Unlike in the traditional broker/dealer firm model, you do not have to ask anyone’s permission (except the client) to manage portfolios on a discretionary basis.  Nor does anyone monitor (“supervise”) the investment products you use, and how you build portfolios comprised of them.  What is telling, though, is why advisors (not yet in the RIA model) are asking if this is possible.  They are in part concerned that their ability to manage portfolios at their current broker/dealer arrangement will be taken away from them (of no fault of their own, but due to firm wide policy changes.)

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Full Transcript:

Can I manage client assets myself as an RIA? That is today’s question on the Transition To RIA Question and Answer series. It is episode #78.

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 to the RIA model.

If you’re not already there, head to TransitionToRIA.com, you’ll find all the resources I make available. This entire series is available in video format, podcast format, I have articles, I’ve whitepapers. All kinds of resources to help you better understand the RIA model. Again, TransitionToRIA.com.

On today’s episode, we’re talking about what would seem to be a simple question with a simple answer. “If I transition my practice to the RIA model, can I manage client assets myself?”

The short answer is, yes. But there is some background to it that prompted me to make an episode on it.

First, why am I hearing advisors ask this question? What are the circumstances that have prompted them to ask?

And second, there are some nuances to managing assets yourself that I want to briefly touch on as well.

For some quick background on what prompts this question to be asked, I’ll give you two (real) examples. These are not every potential example that this question might be relevant for, but they’ll help for the purposes of this episode.

The first example, I most recently heard with an advisor I spoke to recently. I won’t name the firm he is with, but it’s a very large traditional W2 firm, a well-known firm.

Part of his value proposition to his clients is the investment management he does for them, the managing of the assets. He feels a big part of the value he provides his clients with is how he manages their assets.

He doesn’t use (as some advisors do) third-party solutions like maybe an SMA manager or various pre-built models. For advisors that do that, they typically access those via some sort of TAMP solution. I’ve done an episode on TAMPs and how that works. So, if you’re interested in that, take a look at it.

There are many advisors that have no interest in a TAMP solution, because a big part of their value proposition is to manage the assets myself. That was the case with this advisor.

His concern is, while he is allowed to do discretionary asset management currently, he feels that his firm will eventually require all advisors use the firm’s pre-built investment models.

The motivation for a firm to do that is in large part from a supervisory standpoint. It is easier for the firm if all their advisors simply use the half dozen or the dozen models that the firm themselves makes because then the firm doesn’t need to worry about how any particular advisor is investing their client’s assets. They’d all be using the same models.

Now, we’re not there yet. I don’t know if we will reach this point. But you can see the motivation for firms to continue in that direction. And for this advisor, that is a concern of his. Taking away his ability to manage assets would be a fundamental risk to the value proposition he provides for his clients, and a risk to his practice. Hence why he’s exploring the RIA model.

This is why some advisors ask me, “If I transition my practice to the RIA model, will I be able to manage the assets myself?”

The second example I want to give is of an advisor, again at a traditional W2 broker/dealer model, but in this case a more mid-size type firm, one that is arguably even more restrictive.

This advisor has been working at the firm for over 10 years, but they still will not approve him for discretion. He cannot manage assets on a discretionary basis for his clients because his firm won’t approve it. It sounds like they don’t approve most people. Instead, and no surprise, they encourage him to use firm-built models instead.

As an aside, it will be interesting to see if this scenario is a backdoor way that the fear of the first advisor I spoke about comes to fruition.

As opposed to forcing advisors into models, do firms just slowly start dialing back who is approved for discretion? Do they make it prohibitive to the point where the default easier path is to simply use the models that they’re trying to get you to use anyways? That will be interesting to follow over the coming years.

Back to our example of the advisor that hasn’t been approved for discretion

This advisor believes in using some third-party approaches, whether it’s models or SMA managers, but he wants the flexibility to where appropriate/needed, manage the assets himself. It’s more efficient and easier for him and the client if he can do that on discretionary basis. Hence him asking, “If I were to move into the RIA model, could I manage assets myself?”

Those are a few examples of what prompts advisors to ask me this question. I encourage you to reflect on whether you could potentially find yourself in these scenarios.  Large traditional broker/dealer firms typically will put up guardrails that can constrain you like this.

So, the short answer is in the RIA model, yes, you can manage your client assets, for the most part, however you want. You don’t have to worry about being forced to use a TAMP or anything like that. You have much more flexibility.

And even if you join an existing RIA, they are generally far more flexible than any of the large W2 traditional firms with how they try to manage how their advisors are investing their clients’ funds.

Now, there are several variables I want to go through regarding managing assets yourself.

First, discretion. I did a separate episode on this if you want to dig deeper into the topic. But in short, as an RIA, yes, you can have discretion. Which you might ponder, “Isn’t it always discretionary in the RIA model?”

Most RIAs manage 100% of their assets on a discretionary basis. That is by far the standard practice in the marketplace. However, if you’re not aware, it is possible in the RIA space to also have non-discretionary assets. There are scenarios when that might be appropriate for a particular client. Again, I did a separate episode on that if you want to dive deeper into the topic.

If you choose to work with your client on a discretionary basis and/or non-discretionary basis, is up to you. If you have your own RIA, you don’t have to get anyone’s permission to act on a discretionary basis.

If you’re at one of the large traditional broker/dealer firms, you likely must go through some sort of process to be anointed, approved to act with discretion. In the RIA space, that’s up to you to decide.

The next variable I want to mention, you also get to decide how those assets are invested, whether mutual funds, ETFs, individual equities, etc.

With your own RIA, you are responsible for making sure you are making prudent investments for your clients.  But you don’t have to get anyone’s permission (beyond the client) with how to do it.

As an example, your custodian has no responsibility or liability as to how you as the RIA manage the assets in the client’s account. So, your custodian will never come to you, like your current firm might, and say, “We think you are a little too overweighted in technology stocks,” or, “We think because of the age of the client, you should move more into fixed income,” or, “You’ve profiled the client as semi-conservative in our system, and your investments have maybe moved out of that a little.”

You might have your firm telling you that you must make a change either to the profile, or you must make a change to the investments, or you have to make notes, or whatever the case is.

In the RIA model, your custodian is never going to say any of that. They will never contact you about that. It is not their responsibility. It is not their liability as to how you invest the assets. You will not have Big Brother looking over your shoulder telling you how you can or can’t invest and what kind of solutions, whether it’s mutual funds, or ETFs, or equities, or fixed income, whatever it is you want to use. You are unshackled from that kind of Big Brother.

Now, make no mistake, as the RIA, you still have responsibility to your client to provide prudent investments, and they will ultimately judge you on whether they think you’re a good solution provider for them.

And, of course, you always have the regulators that can come in and make sure that how you’re running your practice is appropriate, but they won’t get involved in whether a 78-year-old widow client of yours should be invested in Facebook stock or not. They stay out of that. That is the responsibility of your RIA to decide.

All that said, this doesn’t necessarily mean that a custodian will make every investment product type available for use. For the most part, custodians make available thousands of mutual funds. They make available ETFs. You can generally trade any individual equity that’s available on a stock exchange.

Now you might think, “If it’s publicly traded, I can trade it. I can do whatever I want. No one’s looking over my shoulder telling me how to do things or not.” That doesn’t necessarily mean the custodian has to make it available, though.

As an extreme example, if there’s a triple inverted natural gas ETF that was just started three months ago, there’s a decent chance that your custodian has not made that available on their platform yet, and might never make it available.

So, even though they don’t have a responsibility to supervise how you invest the assets, there could still be a line drawn where they don’t want certain products on their platform.  They don’t decide what any individual RIA or financial advisor might use, but they can decide what’s available on their platform in general.

That availability, though, whether it’s mutual funds, ETFs, whatever the case is, is generally always better than what you have available to you now if you’re a large traditional broker-dealer firm. Availability will generally always be broader, you’ll have access to more solutions, but it doesn’t mean everything is necessarily available. Though, any excluded products are generally a very small minority of what is available in the marketplace. Nonetheless, it’s worth mentioning.

The final variable I wanted to mention is, there are disclosures that must be made if you’re going to invest assets yourself.

In the RIA space, it’s all about disclosures. For example, in your ADV, if you have your own RIA, there’s a section that talks about your investment approach. How investments are selected, how the portfolios are traded, etc. What your investment thesis is, how you choose to manage assets.

So, yes, you can manage the assets yourself, but you must detail your approach in the ADV, in addition to how you’re likely verbally communicating it to the client.

Further disclosure is made in your advisory agreement that you have with your client. Quick reminder, as an RIA, whether your own or you join an existing RIA, there’s an agreement between the RIA and the client that says, “Here’s the services I’m going to provide, here’s the value, here’s what I’m going to charge for those services, etc.”

Part of the advisory agreement would also disclosure whether you’ll be acting with discretion or not.  Which is also noted in the ADV as well.

The final point I’ll make on this episode relates back to the example I talked about at the top, with the advisor whose asset management is a big part of his value proposition.

Besides his concern over his ongoing ability to continue managing assets as such, he is also severely limited in how he can market and articulate that value proposition to begin with.

It’s an interesting catch-22.  Is how he manages assets going to be slowly curtailed, dialed back? A death by 1,000 cuts. And on top of that, he can’t even fully or easily communicate his investment approach to prospective clients (because of the firm’s compliance restrictions.)

Whereas in the RIA model, there’s significantly more flexibility in how you can market your services, how you approach business development for your practice. The types of ways you can reach out to prospective clients and articulate your value proposition.

As we were talking, you could tell he was already considering ways he could better put his message out into the marketplace, if he wasn’t so restricted as he is now.

That was refreshing to see a live example of someone where the wheels start spinning, and they start realizing, “Wow, if I had that flexibility, this would be exciting, because this is how I would put my message out there.”

He gave an example of a customized website, but there’s all kinds of ways you could communicate your message with the additional flexibility in the RIA space.

With that, like I said, my name is Brad Wales with Transition To RIA. This is the type of conversation I have with advisors all day long. Talking to advisors about where they’re at now, what are the pros and cons of it, and how does it compare to the RIA model?

Will the flexibility be better? Will the economics be better? And out of fairness, we also talk about the additional responsibilities you might have in the RIA model that you might not have now.

I have this conversation all the time, and would be happy to have it with you as well.

The first thing to do, head to TransitionToRIA.com. You’ll find all the resources I make available. The video series, podcast series, articles, whitepapers.

At the top of every page is a contact link. Click on that, you can instantly and easily schedule 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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