Also available as podcast (Episode #40)
How does a broker-dealer grid payout compare to an RIA?
Economics and flexibility are two of the main drivers of why advisors transition their practices to the RIA model. With respect to economics, of particular note is the ability to increase your bottom-line take home compensation, as compared to what you might be receiving in a broker-dealer model currently. The initial step is to first make sure you are calculating your actual “grid” payout correctly. This is often a much more nuanced exercise then simply looking at a payout grid table in a broker-dealer compensation plan. Once a true, bottom line payout calculation is determined, you can then compare it to what you could reasonably expect to net in the RIA model.
👉 See also episode #91 where I explain what payouts are when joining an existing RIA platform.
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How does a broker-dealer grid payout compare to an RIA? That is today’s question on the Transition To RIA question and answer series. It is question #40.
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.
In today’s question, for those of you that are currently at a broker-dealer, whether you’re in an employee model, perhaps at a wirehouse, maybe a regional firm, or even an independent broker-dealer firm, how does that broker-dealer grid payout compare to the RIA model?
I did do a previous question and answer – I’ll link to it in the show notes – on what kind of bottom line take-home can you expect to receive as your own RIA. I’ll circle back and briefly touch on that at the end of this question because it will correspond with talking about that grid payout and how it compares.
It is important to first make sure you’re even looking at your grid payout currently correctly, to know how to compare it to what that RIA model is.
So, a couple of things on today’s video here I wanted to do is go through that and then talk about again, how it compares to what you might be able to receive in the RIA model.
First things first, a big topic of conversation when I’m talking to advisors about the RIA model is naturally, they want to understand the economics of the model. The two biggest drivers, I talk about this all the time, of why advisors transition their practices into the RIA model is the economics and the flexibility, and a lot of the questions and answers that I’ve done this series here for address both of those topics in one form or another, but certainly economics is a big part of that.
That question comes up, how much more could I make? I’ve been told I can make more as my own RIA, more bottom-line compensation. So how much more could I make?
The first part of how I answer that, and that’s where it comes back to this broker-dealer grid payout conversation is I first say, well, what are you making now? And invariably the advisor I’m talking to ponders, okay, well this year because of my production, the little grid table and the comp plan, says at my production level, I’m getting 45% or whatever the case may be. That’s oftentimes all that’s looked at, so it’s like, okay, I’m making 45% now, tell me how much I could make…what kind of bottom-line take home could I make in that RIA model?
We’ll get to that, but first let’s consider that 45%, and that would be perhaps in an employee model, or if I’m talking to someone in a independent broker-dealer model, they might say, oh, I’m making a 90% payout or an 88% payout or something along those lines.
Again, it’s because they’re looking at what that grid rate apparently tells them they’re making. And I always then ask, I say, “Okay, so you looked in the comp plan for the grid, right?” “Yes, that’s where the numbers are.” And I say, “Well, so was the comp plan only a one-page comp plan? Because if all you had to do was just look at one table and that told you everything, then clearly it’s a one-page comp plan.”
And of course, that’s not the case. Comp plans are 15, sometimes 20-plus pages. The reason is because while that grid rate of your broker-dealer might be fairly simple to put in a table, the next 15-plus pages of a comp plan are usually ways they then take money back away from you. I’ll give you a couple of examples of what that is, but the underlying point is, just because you think it’s 45%, what really matters is solely what goes in your pocket at the end of the day. Not what this stated, published grid rate is because again, 15-plus pages to follow and deduct from.
Here are some examples of things I’ve seen, and different firms do different things, and you can maybe unfortunately relate to some of these. As an example, some firms pay 0% payout on small accounts. You might think, well, I don’t really have that many small accounts, or I’m not trying to get small accounts. That’s certainly fine, but I would tell you, I’ve seen that kind of hurdle to not receive, 0%, seems to increase at some of these firms over time.
At one point it was generally if you had an account under $100,000, you got 0%. You might think, I don’t have too many of those. But now I’ve heard that figure as high as $250,000. If the account’s not at least $250,000, or the relationship’s not at least $250,000, you get paid 0%. You might not have many of those, but by the way, some of those might one day be very good large clients for you. They’re just, at the moment, perhaps early in their career, or at a younger age, to have a smaller net worth at the moment, and here you are penalized for working with those people that one day they’re going to be hopefully much bigger clients.
But the key is, let’s say you do have a number of those that are now paid out at 0%. You have to run that math and if this slice of my client base, I’m getting paid 0% on, well, after I extrapolate that out…and maybe again, assuming there’s no other variables, I’m getting 45% on the rest, but when you run that math, maybe I’m only making 43% because of that goose egg on a part of it. You have to run that math to calculate in aggregate, what is my actual take home grid amount, not just what the stated broker-dealer grid payout amount is.
Another example, I’ve seen some comp plans that pay 0%, for example, on the first 3% of production every month. Not necessarily for any good reason, the first 3% that you’ve done at the end of the month, whatever that number is, you get 0% on. So again, take the steps – get out a spreadsheet or calculator or whatever – but you have to factor in that 0%, extrapolate it out to the rest of the assets and say, what effectively is my actual payout grid at that rate?
There are also comp plans that unless you refer over a certain number of clients per year to perhaps the bank channel for banking products, or maybe you don’t do a financial plan for X number of clients per year, if you don’t reach any of those hurdles, you get penalized. Now, I’m not suggesting that a financial plan for a client is not a good idea. And sometimes even banking products are good ideas for clients. I’m just of the belief that it should be the advisor-client relationship that drives whether any of those tools or services are a good fit for the client. Not because the advisor is going to get penalized for not implementing something that arguably maybe the client doesn’t even realize.
The firms that do this generally put a spin on this. They won’t say, you get penalized. They won’t say, your grid rate is 45% and you’re going to go down to 43%. What they do when they implement those sorts of things, they usually say, oh, congratulations, we have raised your payout from 45% up to 47% or whatever the number is. And now you think, oh, wow, okay, I have a higher payout. But unless you do these banking products or services or whatever, then we’re going to bring you back down to this 45% level. And so they kind of put some spin on it as if they’re doing you some favor, oh, we’re giving you a higher amount and now you just have to do this to maintain it.
Again, it’s all spin. It should be based on what you feel is best for the client, not some arbitrary X number of plans a year, X number of referrals to the banking team to be able to not be penalized or rewarded, however they want to position it as going up or down on the grid amount.
Then a last example, and I’ve seen this in the independent channel quite frequently, where I’ll talk to someone in the independent broker-dealer channel, and I say, okay, what payout are you making? And they state a very high number, maybe 90%. And they say, oh, there’s no reason for me to look at RIA. There is not a big enough gap there and I know that I’ll have to pay for things like compliance, which by the way, I did a whole video on that as well.
And the route is, again, you gotta start digging into it. A perfect example is an independent broker-dealer team I was talking to not too long ago. They said they were receiving a 92% payout.
Well, turns out, two major factors. There were transaction charges in the client’s accounts every time they did a trade. That was being assessed to the advisors, not the clients. When you ran that math, that was coming up to about 4% to 5% of what their total production was, so essentially a haircut down because they were having to pay that themselves. And then it turns out, oh, on the advisory part of their assets at their independent broker-dealer, not the commission part, but their advisory, they were also charged a basis point platform fee, or whatever you want call it. And that was another couple basis points.
Basically, when you stopped and ran the aggregate math, their 92% payout was all of a sudden down in the mid to low 80% payout. The idea is you can’t just look at that stated grid payout rate of a broker-dealer. These advisors defaulted to saying they were getting a 92% payout. Well, no, it turns out you’re getting low to mid 80%. That’s a big difference with a larger practice.
The last variable – this doesn’t cover all of them – to the degree your firm requires part of your payout go into deferred comp, and of course they spin that with some, oh, we do this for the future partnership of our relationship and blah, blah, blah. No, that’s just golden handcuffs. That is to keep you in your seat. The reality is that is your income they are withholding from you in the year you are earning it, and pushing it to some far off date for no other reason than to make it harder for you to ever want to leave their firm. How advisor-friendly is that?
Again, you have to factor that into what actually goes into your pocket at the end of the year, not just what the stated grid rate is. Because if some of that’s deferred, you’re not receiving it now and you might very well have to walk away from it at some point because you’ve changed firms. Don’t mentally even think of it as income at this point, because you haven’t received it at that point in the year.
The next thing I point out after I walk someone through that kind of painful exercise, is I also challenge them. We’ll use the employee model, so that example of an advisor with a 45% payout. If you’re receiving 45%, you are paying 55% to the broker-dealer. And I say, hey, do you get an itemized bill for that 55% to show you what you’re paying for?
The reality is, no, you don’t. It’s a bundled bill and they don’t even present it to you. It just naturally comes out of your fees and commissions as they come in. It goes through the grid. And then what is leftover nets, as we just talked about, into your account and you get no accounting of what all exactly you’re paying for, for that 55%.
I always say to advisors, when you go to a restaurant and the bill comes at the end of the meal, is it just a bundled bill, just a flat dollar amount? Or do they itemize it for you so you can make sure exactly what you’re paying for, what the dollar amount of each item is? That helps you decide, maybe I want to come back to this place in the future, maybe I don’t? Oh, I didn’t realize these things were going to be so expensive.
Or another example, you go to a hotel, when you go to check out, do you just get a bundled bill with one dollar amount at the bottom and that’s it and you don’t ask any questions? Or do you like to see an itemized bill and to say, okay, I have to pay a room rate, I have to pay some taxes, here’s some auxiliary spending I did while I was here. Yeah, you insist on an itemized bill.
But yet, when it comes to your broker-dealer grid payout, you just accept this bundled bill of 55%, or whatever the math comes to, with no questions asked. How can you tell if you’re getting good value for that if you’re not even getting that itemized bill? And of course, it’s not that they’re withholding it from you. They can’t easily tabulate that at all, because of the nature of how they are set up, to be able to show you exactly what you’re paying for.
Along with that, I challenge you to consider – and we’re going to use this example of this advisor with a 45% payout. Which for all the reasons I said previously, arguably that’s probably like a 40% payout, not a 45% payout when you run all that math. But for simplicity, I’ll play nice, I’ll even assume somehow you’re actually getting that 45% that the grid rate says.
If you are, as an example, a $1 million-producing advisor, so in the year, you’ve produced $1 million. We’re going to use real simple numbers here, and you’re getting that 45%. That of course means you’re paying 55% to your broker-dealer. Or put differently, that’s $550,000 you are paying to your broker-dealer.
I challenge you to consider, how you would feel if instead of how it works now, where your fees and commissions just go behind the scenes through a payout grid, and then everything gets deducted and then what’s left over goes into your pocket, imagine if instead, 100% of your fees and commissions went into your pocket throughout the year. 100% into your pocket. $1 million into your pocket.
Then, once a year at the end of the year, your firm presents you a bundled bill, again, not itemized – in this case, our example of the million-dollar advisor, 45% payout, so the broker-dealer is retaining 55%. They give you a bill for $550,000. You have to take out your checkbook. You have to write a check for $550,000 and give it to your firm.
If you like getting an itemized bill on a $100 restaurant tab, imagine a $550,000 bill that you’re not getting an itemized bill for. So that’s number one. Number two, ask yourself, am I getting $550,000 worth of value and services from the broker-dealer in return for me having to write that check every year?
Now make no mistake, absolutely you’re getting value, particularly if you are given an office, if you are given perhaps a sales assistant, if you are given health benefits, there’s absolutely value in there. The question is, when you add up what you feel you are receiving to help you as an advisor, to help you grow your practice, is it – in this example – worth $550,000? Or could you perhaps go out and build the same set of value and services on your own? So go out and get your own office, pay for your own sales assistant, pay for your own health insurance, could you build that out for less than $550,000?
If you can, for instance, under the RIA model, the difference between what you’re currently paying in your bundled bill now, versus what you build out on your own, with your own itemized bill, the delta between those two amounts, in the RIA model, it goes straight to your bottom line. That’s why the economics generally are so much better in the RIA model because you control those expenses. You control how much, or what you want to spend money on. You can decide whether you want to go extravagant or more modest in certain expense items.
I challenge you, figure out what the inverse of your payout is, what’s not going in your pocket because your firm is retaining it. Mentally think how you would feel if instead of it just magically coming out behind the scenes, if you instead had to write a check once a year for that dollar amount, would you be satisfied that you are getting good value and services for your money?
If you do feel you are, by all means, you might be in a great situation and perhaps you can’t do better elsewhere, or you wouldn’t want to try to do better elsewhere. You can say, wow, this is an incredible deal and the value they are providing me is incredible and is worth every penny of the $550,000.
If you don’t feel that’s the case, that’s what leads a lot of advisors to explore the economics of the RIA model, where you do get to control those expense items, and where you can build out your own value proposition. And again, to the degree you can do it for less, those savings go right into your pocket at the end of the day.
With that background, with that exercise, again, figure out what your actual payout is, not just what the grid rate says. That’s number one. Then the next thing, ask yourself, am I getting enough value for what I am paying for? Because again, you are paying for it. And again, it’s a bundled bill. You don’t even know what all is going into that. They’re just presenting you one bill, are you comfortable writing that check for a bundled bill every year for what you get in return? Then compare it in the RIA world of how the economics work.
In the RIA world, oftentimes you hear it talked about, a 100% payout, and it’s not technically correct. Yes, you do retain 100% of the fees that you generate under your RIA. 100% goes to you. Technically it is not a “payout” though. When those fees come out of your client’s account, they are sent directly to you. Those fees do not go to the custodian first. Those fees do not go to the custodian’s P&L. They’re not considered revenue for the custodian.
So, it’s not really payout because it’s not like the money goes to the custodian and they have some payout amount, which in this case happens to be a 100% they remit onto you. It’s simply 100% goes straight to you.
From that 100%, you of course then need to build out your own set of value and services like we talked about. To be fair, your current firm, if you’re at a broker-dealer, it’s hopefully absolutely providing you some value and services. You will need to replicate that in whatever fashion you want in the RIA world. But again, you get to decide how extravagant the office is, how many members of your team you want. All those sorts of things, you get to decide that. So, from that 100%, you do need to cover all of your expenses.
And then the question is, at the end of the day, generally, what can I expect to take home? I did a whole separate video on that, but in a nutshell, a reasonably run, reasonably sized RIA can generally expect to net – before owner’s compensation, so before you pay yourself – about 60% to 70% of that top line number.
There are all kinds of variables that determine if you’re on the lower end of that, higher end of that, perhaps even outside of that range. Every situation is unique and different. But generally speaking, a reasonably run, reasonably sized RIA can expect to receive 60% to 70% net before owner’s compensation.
Compare that to what you are truly making now. Not just what the broker-dealer payout grid says, but what actually goes in your pocket. What is that difference, and is that difference enough to say, maybe I should explore this RIA model a little more, understand it more, understand the economics, maybe it is something for me, maybe it’s not? Usually that variance is so big that it absolutely makes sense to at least explore it further and say, hey, let me learn more about this. This might be for me.
Like I said, my name is Brad Wales with Transition To RIA. This is the sort of thing I help advisors with all day long. Helping talk through how the model works, how the economics work. We talked earlier about flexibility, it comes up big in the conversation. If this is the sort of thing you’d like me to help you think through of, what’s your current situation and what might I be able to do under my own RIA, I’m happy to connect with you on that.
If you’re not already there, if you head on over to TransitionToRIA.com, you can find all kinds of free information. I have videos, podcasts, whitepapers, all kinds of things to help you learn more about the model. The easiest way, on every page, is a contact link. Click on that and you can quickly and easily schedule a specific time for us to connect and have that one-on-one conversation to talk about topics just like this and how it would look for your specific practice.
With that, I hope you found value on today’s video and I’ll see you on the next one.
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