Q79 – How Do I Explain The RIA Model To Clients?

Also available as podcast (Episode #79)

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How Do I Explain The RIA Model To Clients?

There are many advantages for why financial advisors transition their practices to the Registered Investment Advisor (“RIA”) model.  Equally compelling are the advantages for their clients. It is important to be able to articulate to your clients what the RIA model is, why you are transitioning your practice to it, and how it benefits them.  I frequently ask advisors that have already made the transition, how they explained it.  There are several talking points worth considering. One of the better answers I’ve heard is “To provide truly unconflicted advice required separating the function of custody from who is giving the advice.”

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Full Transcript:

How do I explain the RIA model to clients? That is today’s question on the Transition To RIA question and answer series. It is episode #79.

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 in video format, podcast format. I have articles, I have whitepapers. All kinds of things to help you better understand the RIA model, and what it would mean for your practice. Again, TransitionToRIA.com.

On today’s episode, we’re going to talk about how to explain the RIA model to clients.

I get asked this a lot when advisors are considering transitioning their practice to the RIA model.  Making a transition needs to be good for the advisor, and the client.  That’s what we’re going to talk about on this episode.

Equally important is how you articulate the benefits to the client. Why you’re making the move from where you are now, to this RIA model. Knowing the client probably doesn’t even know what an RIA is, to begin with.

This also applies if you’re already an RIA and are explaining your arrangement to a prospective client. It’s works with both cases.

The key here is you can’t use jargon that your client isn’t going to understand. You’re probably careful to not use too much investment jargon when you’re explaining your investment suggestions to the client. As an industry, we have all kinds of jargon to describe the structure of an advisor’s practice as well.

We have broker/dealers, registered investment advisors, registered representatives, investment advisor representatives. All kinds of mumbo jumbo that while we understand, because we’re in the industry, clients typically will not know what most, if not all, of it is. The key is explaining it using the least amount of jargon possible.

When I’m talking to advisors that have already transitioned into the RIA model, I like to ask, “How did you explain the transition to your clients?” Because then I can share that knowledge with the advisors I’m talking to, and hence the episode here.

I was recently talking to an advisor who made the transition about two years ago. He gave one of the better answers I’ve heard, the most articulate way of saying it. So, I want to share that specific verbiage, and then also note some additional examples you can use with clients.

This advisor, and I have it (the quote) in my notes here because I want to make sure I say it verbatim, because I thought it was so good. I wrote it down immediately when he said it.

His answer was,

“To provide truly unconflicted advice required separating the function of custody from who is giving the advice.”

With his prior affiliation model, the challenge was as he was giving advice, his firm was making revenue from the payout, and because they’re self-clearing, they make revenue as the custodian on the assets as well.

As an aside, if you haven’t seen it, I’ve done an entire episode on how a custodian generates revenue if you want to dive deeper into that topic.

At a wirehouse or traditional broker-dealer model, where it’s a self-clearing firm, are you giving advice that is completely separate from the investment solutions that are being implemented? Or is there potentially pressure, whether direct or implicit from the firm of what advice you should give, and what investment solutions you should give?

If an advisor at a large self-clearing firm charges 1% to the client, the advisor is going to make their portion of the payout, but so is the firm. Because the firm is self-clearing, they will also generate revenue based on the investment solutions used. It might be the type of third-party money management, or how cash is invested, mutual funds used, etc.

Even if an advisor wants to be as ethical as possible in that situation, there’s still this direct or implicit pressure from the firm, whether by excluding certain investment solutions or direct pressure to use certain products.

So, this advisor was essentially saying, “Mr or Mrs Client, to make sure there’s none of that, no direct, no implicit, no pressure at all, I needed to completely extract myself from that. I have my own RIA, I give you advice, I charge the same fee (as before.) Yes, we are using a custodian, but I do not have any affiliation at all with that custodian.”

Now yes, a custodian will still generate revenue. But the custodian has no control over that advisor and the advice they give. It would be inappropriate for a custodian to try to suggest what investment solution should be used. By separating these two, an advisor can give truly unconflicted advice. I thought how this advisor described it was a very articulate way to explain it to clients.

I’ll repeat it again because I think it’s so helpful. He said:

“To provide truly unconflicted advice required separating the function of custody from who is giving the advice.”

This verbiage still requires that you explain what an RIA and custodian are, but you’d have to be doing that regardless.

I want to share a few additional examples of how the client benefits when you transition your practice to the RIA model.  These talking points aren’t packed in as nice of a sound bite as the one I just described. Perhaps you can massage them and come up with a good way to express them.

Now, for starters, don’t over think this. If you are going to make a move into the RIA model, it’s natural to ponder if your clients will follow you to your new practice. That’s a conversation unto itself.  In short, if you have good relationships, they will follow you.

What you don’t need to do is give them a sales pitch. Most clients don’t really care too much about some of these details. They want to work with you. They’ve built a trusted relationship with you. They’ll often just say, “Sure, send me the paperwork, and we’ll take care of whatever you need.”

Some clients may ask a few more questions, to understand it better, but you don’t have to overdo it. You don’t have to give an eight-point bulleted explanation of why you’re doing it. One, because it could confuse clients. Two, oftentimes they don’t care. They just want to continue to work with you. And three, there’s no need to give them an impression that they should be thinking twice about it.

So, use what I’m about to explain for good, but don’t overdo it. Don’t oversell something that generally doesn’t need any selling at all. It’s just you explaining your next path, and if you have good relationships with your clients, they’re going to want to follow you regardless.

With that disclaimer out of the way, here are a few additional talking points to consider using.

In the RIA model, you typically have access to a much broader set of investment solutions and services you can offer your clients than if you’re at a more traditional wirehouse type firm.

The first example of this is additional mutual fund or ETF availability.

(Note:  When I refer to wirehouses, the same generally applies to all traditional broker/dealer type platforms.)

A wirehouse can limit what mutual funds or ETFs are available on their platform, sometimes blatantly without much of a legitimate explanation.

I know of one large firm that won’t allow Vanguard mutual funds. Whether you’re a Vanguard fan or not, I think we can all agree Vanguard is a mainstream investment product, yet this firm won’t let their advisors use their mutual funds.

The firm has some word salad explanation for why they don’t allow it. But the reality is, it’s because they’re not getting revenue share back from Vanguard. So, they don’t let their advisors use it. Which goes right back to the original explanation of needing to avoid the conflicts of a self-clearing firm.

In the RIA space, the custodian has no incentive to limit what’s available. They need to provide the widest range of solutions because their custodian competitors are doing so.

Now, that’s not to say every mutual fund, and every ETF is available on a custodian’s platform, because there’s some logistics involved with it. But availability is generally always broader in the RIA custodian relationship than there is in the typical wirehouse arrangement.

The next example is access to alternative investments.

The large wirehouse firms have built pretty robust alternative investment offerings. They declare, “Here’s all the alternative products we make available to advisors, and we think these are great.”

The reality is they limit that down from the broad universe of what’s actually available. This could be due to conflicts relating to revenue, supervisory reasons, etc.  As a result, as opposed to potentially offering hundreds of options, they narrow the scope down to 60, 70, 80 options, whatever the case is.

If you’re in the RIA space, there are robust third-party alternatives platforms you can access solutions from. They generally have a much broader selection and availability of alternative investments.

Next, availability and access to lending solutions.

If you are at a wirehouse firm, and your client wants to do a non-purpose loan or a margin loan, you typically only have one choice. You go to the firm and say, I need a margin loan or non-purpose loan, what interest rate can we get for the client?

Whether you like the rate or not, you only have one option available. If you’re in the RIA model, particularly if you’re multi-custodial – sidebar, I did an episode on why you might want to be multi-custodial at some point – you could go to more than one custodian to see what interest rate you can get. There are also third-party lending solutions to possibly use.

Another advantage of the RIA model, you can access more managed investment solutions.

Like alternative products, most wirehouse firms limit the money managers you can access and use. They’ve curated a list of perhaps a few dozen managers, which naturally they tout as the best available.

These wirehouse offerings usually include good money managers, but the total number of managers available in the industry is much larger than the list they’ve curated.

The narrower approach of a wirehouse is often due to supervisory reasons. It’s much easier for them to supervise their 10,000+ advisors if they only let their advisors choose from a smaller subset of money managers. If they made hundreds of options available, it’s harder for them to do their job.

Instead of just admitting this, the firms again give some word salad explanation about how they’ve carefully curated a wonderful list on behalf of the advisor. No, it’s primarily for supervisory reasons as to why they’ve narrowed it down.

In the RIA space, through different mechanisms, you can generally access the full spectrum of solutions available. Hundreds of solutions if you wanted. I’m not suggesting you necessarily need hundreds of solutions to choose from, but the availability is generally always broader in the RIA model than elsewhere.

This same breadth of solutions also applies to things like trust providers or insurance solutions.

If you’re at a wirehouse firm, you generally must use their captive solution, maybe a corporate trustee. In the RIA model, there are several ways to access trust providers, as well as insurance solutions. You can go into the marketplace, and work with whichever providers you want that you’ve done your due diligence on and that you want to use.

When you’re in a captive environment, you are required to use only what they make available to you. So again, a much bigger difference. The more availability of solutions you have to provide the client, the better it is for the client.

The next macro benefit to the client is your ability in the RIA model to adapt new technology.

Not only adapt it, but adapt it at a faster pace. This enables you to provide your clients with possibly more services, and in a more efficient manner.  Perhaps enabling you to be more responsive to them, provide better reporting tools, etc.

In the RIA space, you have the entire universe of solutions available to you. You don’t have to ask anyone’s permission to use whatever you want.

Now, there are some logistical considerations such as whether a particular tech tool will integrate with the rest of your technology, and/or custodian. But to the degree the logistics work, you don’t have to ask anyone’s permission. You can just use that tool.

There are dozens of fintech solutions that are not available for use at the wirehouses. Either the wirehouse hasn’t got around to doing their due diligence on it – which by the way, is a very long process at the enterprise level – or they just don’t want to, perhaps again for supervisory reasons.

The technology you have available to you in the wirehouse model is significantly less than what is available in the fintech universe. It’s a huge benefit to clients when more technology can be used.

An example of this is a scheduling application like Calendly. Such tools make it super easy to schedule time to talk to someone. If you go to my website, TransitionToRIA.com, you will see that’s how I enable people to schedule time to talk with me. It is very efficient for both parties.

Yet, a lot of wirehouse firms still don’t make very basic technology like Calendly available for their advisors to use.  Instead, you or your assistant must go back and forth with a client or prospective client trying to arrange calendars.

When we live in a world where someone can just click on a link, instantly see available times at their own leisure, at whatever time of the day they wish to be looking. It’s super simple. And yet, that’s not available to most advisors at the large firms.

Another tech example is related to something I saw earlier this week. I won’t name the firm to try to protect the guilty, but I thought it was a wonderful example to share.

One of the wirehouse firms just rolled out with some self-promoting fanfare a tool they’ve made available so their advisors can make videos to use with clients and prospective clients.

Obviously, I’m a big believer in videos. I’ve been making videos for years now. I have them on YouTube. I have them on the website. By the way, YouTube’s been around, I looked it up, something like 17 years now. So, online video has been around a long time.

And yet, this wirehouse firm is excited to be announcing that they have just now made it possible for their advisors to make videos. 17 years after YouTube came along, they’ve finally got onboard.

Here’s the even crazier part, it is very limited how the videos can be made.  Each video can be no longer than 60 seconds long. The advisor must choose from a list of pre-made, canned scripts that they must read verbatim.  To record the video, the advisor must use some sort of application they’ve built which involves the advisor reading the script from a teleprompter!

They are promoting this with fanfare, as if it’s some great new tool! Whereas in the RIA space, forget the 60 seconds, forget the teleprompter, forget the script. You can do whatever you want. You can make videos, you can make them as long as you want, as short as you want. You don’t have to read from an approved script.

I know I’m ranting about this, but I think it’s crazy that a wirehouse advisor that potentially has decades of experience, has worked with clients for decades, they know what they’re talking about, is told if you want to make a video, it must be no more than 60 seconds, and you must read a canned script from a teleprompter. I think that’s crazy! And then to attempt to announce it as if this is some wonderful new thing!

Now in their defense, as crazy as it is, their solution is probably a step ahead of their wirehouse competitors allow. But it is light years away from the RIA model.

So again, big difference in technology between what you can offer your clients now (if at a wirehouse type firm), and what you can offer in the RIA space. It’s worth pointing out to clients.

I have a few final items to wrap up with.

There can be lesser expensive mutual fund share classes in the RIA space, versus the traditional wirehouse broker-dealer model.

There are different reasons a wirehouse might limit availability of certain share classes. Sometimes they have conflicts, as some share classes might generate more revenue than others.

Where in the RIA space, you typically have availability to more share classes than you do in the broker-dealer space. So again, a talking point to share with clients.

Next, as I’ve talked about before on a different episode, you have more flexibility with the fees you can charge your clients.

Typically in the large wirehouse setting, you might only be able to do an AUM fee, maybe some sort of flat planning fee.

In the RIA space, you have tremendous flexibility. You can do an AUM fee, you can do an hourly fee, you can do a flat fee, retainer, subscription, whatever you want to do.

There are some disclosures involved, but if it’s available, and it’s a good fit for you and the client and the service offering you’re going to provide, you absolutely can do it. Whereas at a typical wirehouse-type firm, you’re generally much more limited. So again, a talking point with clients.

The last item I’ll mention – and this has not been an exhaustive list – is you can expand your service offering.

Not all advisors might have the desire to do this, but the availability is there to now offer insurance services, tax planning services (which is a big one for CPAs), mortgage services, etc. It’s all possible to do within the confines of an RIA setting. Where typically in the broker-dealer world, you’re much more limited in what you can do in that regard.

I hope this has been helpful. These are just some examples of talking points you can explain to your clients as to why you have made the move to the RIA model. It’s important to be able to articulate the benefits to the client.

Think through the various items I’ve noted. Maybe you want to use the original sound bite I shared, or you want to wordsmith some of these other items into a sound bite.

Again, don’t overthink it. Don’t think you have to give a bulleted list like I’ve now given on this episode. The reason I’ve done all this is to help you pick and choose the topics you think are most important. There is value in the client working with you as an RIA. It’s your job to articulate it to them, so they understand why you’re doing this, and how it benefits them.

With that, like I said, my name is Brad Wales with Transition To RIA. This is the kind of conversation I have with advisors all day long. I love asking advisors how they explained the RIA model to their clients. I wanted to make this episode to pass some of that along.

Most of the episodes I’ve made talk about how moving to the RIA model benefits you as the advisor. It’s equally important to talk about how it benefits the client as well, and how to articulate those benefits to the client.

If you want to learn more, head to TransitionToRIA.com. You can find this entire series in video format, podcast format. I also have articles, whitepapers.

The easiest thing to do is 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 to talk about today’s episode, or anything else RIA-related you would like to discuss. 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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