Q32 – How can I create my own upfront transition check?

How can I create my own upfront transition check?

A common misconception amongst advisors considering moving to another affiliation option is the belief that if a large upfront check is involved (commonly applicable with moves to a captive employee type model), that the sheer size of the check guarantees a better overall economic outcome for the advisor. That belief is generally entirely incorrect.  In fact, you can transition to the Registered Investment Advisor (“RIA”) model, synthetically create your own “upfront check” and still generally be meaningfully better off economically than the alternatives.

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Full Transcript:

(Editorial note: This video involves a screen share, which starts at approximately the 7:40 minute mark of the video. As the visuals shown on the screen share are critical to what is being communicated, the below transcript – based on the audio alone – is omitted during the screen share portion, and picks back up once it is done.)

How can I create my own upfront transition check? That is today’s question on the Transition To RIA video series. This is question #32.

Hi, I’m Brad Wales with Transition To RIA where I help advisors like you understand everything there is to know about why and how to transition to the RIA model.

Today’s question, a little different setup than my normal videos. You can tell the background here is a little different. I’m sitting at my desk at my home office as I’m going to bring up a screen share here to go over some math today, a little math lesson if you will. This question dovetails off of one of the whitepapers I wrote. If you haven’t seen my whitepapers, and if you’re not on the website currently, if you head on over to TransitionToRIA.com, there’s a link right there at the top, whitepapers. I encourage you to take a look at that.

One of those whitepapers is the “11 ways the economics of the RIA model are superior to other advisor affiliation options.” So obviously, it goes over 11 different ways the economics of the RIA model are superior to those other options.

One of those specifically talks about this concept of an upfront check that you would receive if you went from, maybe if you’re currently at a traditional wirehouse type firm, if you were to go to another wirehouse firm, you would generally receive an upfront check. Or even if you go to an independent broker-dealer, you generally receive some sort of upfront check, albeit usually smaller than what that wirehouse might provide. Regardless, it’s this idea that you get these upfront checks, and the thought is….“If I go to the RIA world, I don’t get any upfront check.” Generally speaking, that is correct.

There is some potential opportunity for assistance to help with some startup costs of your RIA. But there’s certainly no upfront liquidity event paid for by the custodian (that you choose to utilize with your RIA.) So some advisors, they shy away and think….”I can get this giant check if I go over to this firm,” or whatever the case may be.

I think that’s very, for lack of a better word, short-sighted because you’re only looking at that first year when you have that mindset. You have to think….“if I take that check” – in the case of a wirehouse firm, you’re locking yourself into probably 10 years, maybe even 11, or 12 is what the commitment is with receiving that check.

You need to look at the economics, not just in that first year that that check goes into your pocket, but how the aggregate compensation you will receive over those 12 years, what does that look like? How does that compare to these alternatives? I get into that in the whitepaper, but part of that dovetails into what I’m going to be showing you here today. That’s why the whitepaper, in that specific section, refers you to this video.

Part of what got my original thinking on this concept of upfront checks is something I heard in a podcast I was listening to of an advisor. It was fantastic how he framed it. I certainly won’t give it justice. He was much more eloquent in how he explained it. But he was basically telling the story about how he was talking to a fellow advisor. (BTW, the podcast advisor speaking had his own RIA.) He was talking to one of his fellow advisors that he knows that’s at a wirehouse and was considering moving to another wirehouse and was talking about this big upfront check he’d be able to receive.

The RIA advisor pointed out to him and said….”You do realize, that’s your own money they’re paying you. It’s just they’re paying it to you upfront. This is not magical money that a wirehouse is creating out of thin air and giving it to you. Make no mistake, they are giving you your own money in year one and extracting it from your future earnings over the balance of that commitment period, maybe that 10 year period. Don’t think they’re, out of the kindness of their heart, giving you money. It’s your own money. You’re getting it upfront. And for that luxury of getting it upfront, you’re taking a meaningful haircut over your potential that you could earn, in this case, in the RIA model instead, to get that upfront.”

Today’s video is going to show exactly what this means, but I thought that was a really good way that advisor put it. Don’t think that an upfront check is some sort of gift. It is your own money. It’s simply being paid to you, sooner than later. But you’re paying a significant price for that luxury.

Part of what we’re going to talk about, and I’m going to show you the examples, a baseline, I’m going to show you what that math looks like if you go from wirehouse to wirehouse, a wirehouse to an RIA with no upfront, and then I am going to show you how you essentially can synthetically make your own upfront transition check in the RIA world and what that math looks like. We’re going to go through that as well.

I will caution you ahead of time, there’s some math involved. That’s why I’m bringing it up on the screen. If you’re watching this on a phone, it’s probably going to be better on a tablet or a traditional computer screen so you can see the numbers a little better. There’ll be some numbers I share, and also some graphs. The graphs really do a good job showing the main theme that we’re going to be going through here.

The last piece before we jump into that is this is going to look at a 10-year snapshot of these various scenarios. You can see how they’re different. Keep in mind what I’m going to show you here does not even go into the liquidity event you could have at the end of your career with the value of your practice and how that’s dramatically different as your own RIA versus if you were to stay at a wirehouse. That’s one of the big topics I touch on in that whitepaper. So again, if you haven’t read the whitepaper, take a look at that. That is a meaningful variable here that you want to factor as well.

But for today’s example, we’re saying if you were to take the upfront check, or if you got one or didn’t get one, and then what’s the next 10 years in aggregate look like? Because that’s generally the commitment period you have in the wirehouse world.

I could have baked it in and said….“Let’s hypothetically say you make this move, and at the end of 10 years you retire, and what does that liquidity event look like under those different scenarios?” That would only further amplify the point I’m making here about the differences in the economics of that traditional wirehouse world, or even independent broker-dealer world, and then having your own RIA.

So just know everything we’re going to show here doesn’t even factor in that additional benefit of the higher value your practice would have as your own RIA. Again, take a look at the whitepaper. I go into a lot of details on exactly how that is and whatnot.

With that, I did want to jump on the screen share now. This is what we’re going to look through the math on….”How do I create my own upfront transition check?” And then I’ve noted here….”But should you?” I’m actually going to show you how arguably you’re generally better off not taking an upfront check.

I know that sounds crazy, but bear with me. I’m going to walk you through that. However, to the degree, there is some need you have to have that – that year one extra cash flow in the form of an upfront check – I’m going to show you how you basically can make your own and what those economics look like as well.

Standard disclaimer, this is a hypothetical example. I give some general numbers of how payouts work and how the growth might work, and what the upfront check might be. Obviously, every advisor situation is unique and different. I don’t want to imply, I want to make clear that this is not to say that every situation is going to match this specifically.

The main key is you’re going to see that these different scenarios, they vary by such a large margin that even if you tweak some of these variables a little bit on….”well, if I was a higher producer than that example you gave, Brad, then my payout would be a little bit higher.” All that’s true. But again, I think you can see the gaps in the total outcomes drive home the message. Even if you tweak it a little, it’s not changing the theme here that we’re going to be going over.

So with that… Let me jump in.

(Editorial note: At this point the screen share begins and as noted prior halts the transcription. The below picks the transcription back up at approximately the 38:55 minute mark of the video.)

I hope this was helpful. I know there’s a lot of math and there’s a lot of information up on the screen. But I do want you to think this through and don’t think that….“In the RIA world, I don’t get an upfront check and I could get this giant check over here.” That’s all…it’s a mental exercise. You need to consider the math for the entire 10-year period. That’s absolutely something I help advisors think through all the time. Jump on that whitepaper and get a read on it. All the information on this topic and then again, there’s 11 different ways I outline of how the economics are better in that whitepaper.

So like I said, my name is Brad Wales, I’m with Transition To RIA where I help advisors like you understand everything there is to know about why and how to transition to the RIA model.

Today’s video, a perfect example of that, going over the economics, in detail. If you want to get really granular, I’m more than happy to do that and say….”How would that work if I were to make a move from where I’m at now to maybe a different affiliation model?” And by the way, same thing here applies if you were to go to independent broker-dealer….you would get an upfront check and, yeah, you have a little higher payout (than wirehouse) but again, the math would eventually catch up under the RIA model as well.

That’s what I help advisors with is think through all of these different scenarios. I’m more than happy to have that conversation with you as well to really dive into the economics because that is a really important part about the RIA model and how it can be of benefit to you.

I hope you found value in today’s video, and I’ll see you on the next one.

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