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Also available as podcast (Episode #142)
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How Do I Evaluate An RIA To Join?
TL;DR – Many advisors conclude that joining an existing RIA offering is a better path for their practice, versus starting and running their own RIA. The RIA ecosystem has evolved to where there are many such offerings for advisors to choose from. Those offerings come in many different “flavors.” Based on an advisor/team’s unique circumstances, some offerings will not be appealing, whereas other offerings are a very good fit. It’s important to understand the many variables that go into how such offerings differ, as well as to not make the mistake of assuming they are all alike.
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:
How do I evaluate an RIA to join? That is today’s question on the Transition To RIA question & answer series. It is episode #142.
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’s a Vendor Profile Series. All kinds of things to help you better understand the model.
Again, TransitionToRIA.com.
On today’s episode we’re going to talk about how to evaluate an RIA to potentially join.
Now, the reason I want to make this episode is because it’s perhaps easier said than done on how to actually evaluate an RIA.
That’s in part because of the proliferation of so many different RIAs out there that you could potentially join. And so many different, as I often say, “flavors” of RIAs that have different value propositions, different service offerings, different economics, different reasons some advisors are attracted to them, whereas others won’t be.
And so I wanted to make this episode to go over what many of those variables are that you’d want to be aware of. And obviously that’s a big part of what I help advisors with is knowing who the players are in the space and how they differ, and I help you narrow that field down so you’re not exploring some array of options that are not going to be of any interest to you.
I’m happy to have that conversation with you as well.
But I wanted to do this episode to at least give you a primer on what some of the variables are that go into that evaluation.
To start with, as a quick reminder, which I talk about often on these episodes, there are three main ways you can transition your practice into the RIA model. They all have pros and cons. They all have reasons some advisors go in one direction, other advisors go in different directions.
There’s no rule book on this that I can simply ask…. “What size is your practice? Where firm are you at now?”…let me look at the little matrix here and it tells us which pathway you should go on.
Every advisor and team situation is different and so it’s important you understand how these variables help determine which path might be best for you.
But again, just as a reminder, on one end of the spectrum is you could start your own RIA. That’s where you’re starting your own RIA and you’re building out the necessary solution providers around it.
On the other end of the spectrum is where you join an RIA. That’s what we’re going to be talking about in today’s episode.
And in the middle is a go-between of those two, which is where you have your own RIA, but you lean on a single vendor for about 80% of the different needs that you would otherwise have to package together yourself with the fully start your own RIA approach.
Again, pros and cons to all three approaches. Breaking that down is beyond the scope of this episode, but I have done other episodes on it.
But helping you understand how the options would apply to your specific situation is a big part of what I help advisors and teams with. Should you even be considering the RIA model? Does the RIA model, and all its flavors and all its pros and cons, does it even make sense for you?
You first must get past that. And then if you do, you want to understand those three options, which I just laid out.
As you do that process, and understand the three pathways, you’ll generally find yourself leaning towards a particular path.
Let’s say through that process, we’ve worked through that, we’ve looked at your practice, we’ve looked at what you want to do with it going forward, and we’ve considered which of the three options is best for you.
And perhaps, at least initially, you’re leaning in the direction of joining an RIA.
So now you’re going to be looking at potential RIAs to join, and as the title of this episode states, how do you evaluate them?
I want to give you some of the variables that go into the evaluation process. This is not an exhaustive list, but the conversation will give you an impression of how much needs to be considered.
I have about 10 of them to discuss.
Minimums
First, you need to be aware that RIAs you can join typically have some minimum requirements.
That minimum is sometimes expressed in assets that you currently have with clients. Other firms express it in production or revenue that you’re generating.
Some have relatively modest minimums, perhaps $50M. Others require potentially hundreds of millions if not larger for them to consider you as a possible fit for their firm.
So just know, right out of the gate, some RIAs, depending on the size of your current practice, may or may not even be available to you.
So, minimums, again, expressed as assets or revenue/production, goes into it.
W2 or 1099
Next, and this is a big one, some RIA models are set up where you would be a W2 employee advisor of the firm. Where as other models are set up where you would be 1099 independent contractor.
Those are wildly different approaches. It’s not to say that one is necessarily better than the other, but they are very different approaches with different reasons you might choose one over the other.
Most of my audience is typically leaning more towards a 1099 approach. I’ve done an episode on some of the advantages of a 1099 approach.
But you would want to know if the RIA is a W2 model or is it a 1099 model.
I can help you understand why a 1099 model is perhaps advantageous in some circumstances versus W2. You first want to understand W2 vs 1099 at a generic level, and you want to determine which would be best for you.
Selling your practice?
Next, you would need to understand, is the model of the firm you’re considering where they would be acquiring your practice? As opposed to you joining and retaining ownership of your practice and they’re essentially an infrastructure partner.
When I walk advisors through the three pathways I noted prior, and I mention the “join an RIA” route, advisors will sometimes quickly rebut that saying “I am not ready to sell my practice.”
Well, the reality is that (the acquisition model) does exist.
If you are at a point in your career where you are looking to take some, or all, chips off the table, there are RIAs where their business model is to acquire your practice. You would be selling to them.
In almost every such instance, you in turn become a W2 advisor for the duration of your career and the time you’re still practicing with them.
There are other firms you could join though where that’s not at all their value prop.
Their value prop is to say… “We realize you want a lot of the benefits of starting your own RIA. You’re not ready to sell, but perhaps you don’t want to put all those pieces together yourself. We’ve done that for you. We’d love to tell you about our value prop and our story, but you would not be selling your practice to us. We are essentially an infrastructure partner, if you will.”
So again, it’s important to know if an RIA you’re considering is an acquisition model, or if you’d retain ownership of your practice.
100% fee-only
Next, is the RIA you’re considering 100% fee-only?
I’ve talked about this in episodes prior. You do not have to be 100% fee-only to go into the RIA model.
Many advisors are 100% fee-only, but many advisors aren’t. The latter are essentially in a hybrid type arrangement.
There are solutions for if you have remaining commission assets. Perhaps there is a need or requirement to be able to maintain some amount of a commission part of your practice. There are solutions for that going forward. I’ve done episodes on that. There are several different ways that can essentially be solved for.
So, at a high level, just know you do not have to be 100% fee-only to in theory go down the RIA path.
However, if you’re evaluating RIAs to join, some RIAs have chosen to be 100% fee-only.
Those RIAs would tell you, for those remaining commission assets you have… “Here’s how we typically work with our joining advisors to solve for that.”
It’s beyond the scope of this episode, but there are different ways you could potentially “solve” for those assets that could be palatable to you.
But for some of you, depending on your situation, that is a bridge too far. That simply won’t work. And so there are RIAs you could join which have implemented solutions to accommodate it. Perhaps with a so-called RIA-friendly broker-dealer.
I did an episode of what an RIA-friendly broker-dealer is if you want to learn more about that.
But again, that is something you’d want to be aware of. If going 100% fee-only is a bridge too far for you, at least near term, well, looking at an RIA that is 100% fee-only is not going to work for you.
So, you want to be aware of if an RIA is 100% fee-only or do they have some sort of hybrid arrangement option as well?
Service level
Next, there are some providers that essentially provide what I refer to as a “core” offering. This is where they focus on bundling up just the core infrastructure pieces behind the scenes. Compliance, client fee billing, technology stack, etc.
They provide the core infrastructure and try to keep their cost (to you) as low as possible. And to the degree you want other auxiliary services beyond the core, that’s fine. You source those on your own and you pay for them separately.
Where as other service offerings are for if you desire a more full service type support where they have in-house estate planning expertise, tax planning, marketing resources, etc. It’s all part of what they’ve bundled up as their value prop.
Those are two very different approaches though. And clearly, there’s going to be a cost difference between those two approaches.
You would want to understand what you need or want from a support level, and which of those two approaches best align. And do the economics work for you as well.
Client level support
Next, somewhat related, are you going to need certain types of support resources because of the demographics of your clients?
For example, do you have higher net worth clients? Do you need resources like lending solutions, alternative investment options, a deeper array of SMA managers, etc.?
A particular RIA you might be considering perhaps hasn’t built their platform to support that.
Whereas if you service mostly near retirees with between $500,000 and $1million in assets, maybe you don’t need some of those resources. And so that’s fine if an RIA you’re looking at is geared more towards your type of clientele.
But to the degree you do have higher net-worth, or ultra high net worth clients, well, clearly you’re going to want to make sure that the RIAs you might be evaluating to join has built out the resources and infrastructure to support you with the types of clients you have.
So again, beyond the value prop of what a firm provides for you as the advisor, you also want to consider if they have the resources necessary for you to support your types of clients.
Brand
Next, you would also want to understand how the RIA you might be joining approaches the brand you would be using.
There are some RIAs in which you would be using their brand. They’re the name you hold out. And they might argue that they have built brand equity in the space. That they’ve put a lot of resources into building that brand. That you’ll be able to benefit from using their brand.
Whereas other advisors and teams want to use their own brand. Yes, you might want to join an RIA, so you don’t have to build it all yourself, but you still want to use your own brand. Build your own brand equity.
If that’s you, there are RIAs that accommodate that. They’ll help you build your brand, build the marketing collateral, build the website.
So just know there are different approaches to how the brand that you are going to hold out to your clients and to the marketplace differs from firm to firm as well.
Asset management
Next, another variable, is how your client assets will be managed.
There are some RIAs where if you join them, part of their model is they will manage your client assets. They have in-house expertise, models, or a CIO that helps with all that.
But part of their value prop is they feel it is more efficient for you as the advisor and team to offload that to them. And a requirement of joining them is that you turn over that asset management to them.
Now for some of you that might be wonderful and you’re like… “I’m already using SMA managers and I’m already having to figure out and keep my eye on models and managers and all that. And to the degree I can just outsource that to them because I’m outsourcing the asset management anyways, that’s better for me, and so let me hear out their pitch and how they put the economics together for that.”
So that can be attractive for some advisors and teams.
Other advisors and say… “no, I want to control that. Whether that’s going to be because I want to manage the assets directly myself, or maybe I want to continue picking SMA managers, or I want to pick the models, and I want to be able to make changes over time, and I want to retain 100% control over how my client’s assets are managed.”
Again, two different approaches. It’s not to say one’s better than the other. But you would clearly want to make sure whatever your desire, your vision for your practice going forward, aligns with the RIA that you might be evaluating.
So just know there are different approaches, again, to how the client assets will be managed if you were to join the RIA.
Geography
Next, some RIAs that you can potentially join are open to essentially advisors all over the country joining them. Others are more regional specific where they say… “we think we can provide the most value and resources to our advisors that use our platform if we’re all clumped around these five states.”
There are some that narrow that down and then others that open it up. But there’s no reason to waste your time talking to an RIA that does narrow it down to five states and you’re not one of those five states. It’s not going to be a fit.
So, keep in mind geography at times can come up.
Technology
Next, from a technology standpoint, you would want to evaluate what is the technology that the RIA would provide for you.
In episodes I’ve done, I’ve talked about what is a tech stack, and what are some of the pieces of a tech stack like a portfolio management tool.
Part of a typical value prop of an RIA you could join is they have built out a tech stack for you to utilize. That’s often part of the appeal of joining an RIA versus starting your own is that you don’t have to build it yourself. They’ve built it out.
However, there might be things you want in a particular tech stack. Maybe you are using a certain piece of technology now that’s a core piece of the tech stack that you want to be able to continue to use. Well, you’d want to make sure that that RIA you’re evaluating has that tool as part of your tech stack.
Or if you want to bolt on other pieces that aren’t part of their core tech stack, how would that look? How would they help you with that or not?
So just know technology is a consideration as well.
Custodians
Then the final variable I’ll note related to custodians.
A part of the value prop of an RIA you could join is they generally have already procured multiple custodial relationships to choose from. They’d in turn argue they have more scale then you do, and hence can get better pricing and service support from the custodians than you could on your own.
Typically these types of RIAs have two, three, four custodians to choose from. So part of your evaluation would be to understand which ones they use. They don’t all have the same custodians – there’s certainly some overlap with a lot of them – but there are differences there as well.
I’ll wrap up with two final thoughts.
The intent of this episode was not to make any of this sound intimidating, even though I realize I just rattled off all these variables. But instead, it was to bring to your attention that there are a lot of variables that need to go into this.
As I said at the top, there are three ways into the model. The majority of advisors and teams when they reach out to me, their first inclination is thinking they want to start their own RIA. And for many, that is ultimately the path they go down. I educate them on how all these things work, and we conclude that is the best path. And I help them navigate all the steps to do so.
But I always say… “At least let me explain how some of these infrastructure platform solutions work that you can join. And again, don’t come in with misconceptions. I’m not referring to some RIA down the street that has an empty desk in the corner that would love to have you come sit in it. That inevitably exists out there. There are 30,000 RIAs in the country. So there’s inevitably some of those folks that would love to have a conversation with you. But just know that there are, and this is mostly just in the last 10 years, platform providers that recognized advisors want a lot of the benefits, the flexibility, the economics and whatnot of the RIA model, but maybe don’t desire to have to build and manage all of that themselves. So they’ve been purpose built to support advisors with a turnkey type approach.”
These are not simply offerings where an advisor built their own practice and then one day decided to try and add other advisors to it. These were built from the beginning with the mindset to build something that will be attractive to advisors.
So, I always suggest, don’t come into this process with preconceptions about what joining an RIA looks like. I can tell you from hundreds of conversations about this, there are all kinds of misconceptions and there are very likely at least some flavors of the approach that you might find of interest.
You may or may not ultimately go down that path. But you owe it to yourself to understand it and understand how it works.
You may conclude to start your own RIA. And again, I help advisors down both paths. My comments are not meant to suggest one path is better than the other. It’s just to help make sure you are familiar with the options and are making a fully informed decision on which path to go down.
And then finally, related to this last thought, this is a big part of what I do is help you understand how all these options work. And then once we start leaning in a certain direction, what are the different flavors that are available to choose from.
It’s not that I’m the smartest guy in the room. But the reality is this is all I do is help advisors understand what a transition to the RIA model will look like. I’m not a practice management guru, I’m not a marketing guru. This is my sole focus.
So I have the luxury, which to be blunt, you do not as an advisor because you are still needing to perform your full-time job of running your practice, I have the luxury to do nothing else except pay attention to all of this and understand all these options and all these different flavors and all the different ways you could do this.
I get hit up by RIAs practically weekly that learn what I do and want to be on my radar hoping maybe I’ll introduce advisors to them.
I’m essentially your screening mechanism with that. I hear a lot of pitches and quite frankly, some are better than others. I sometimes must have good bedside manner and say… “Thank you for sharing, but there are other solutions that are going to be better.” Maybe they need more scale or more resources or whatnot.
I have the luxury of time to do this. It’s not that I’m not busy, but this is the only thing I need to focus on. Whereas you have your proverbial day job and you’re trying to essentially moonlight by figuring all this out.
I help you narrow that process down both through education and through helping you to screen your options to be considered. I’m happy to have that conversation with you as well.
First things first though, head on over 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.
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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