Also available as podcast (Episode #60)
How Does A Wirehouse Compare To An RIA?
There are many differences between wirehouse firms and the RIA model. While traditionally defined as Morgan Stanley, UBS, Merrill Lynch and Wells Fargo, the “wirehouse” model is indicative of many of the W2 broker/dealer firms of today. There are fundamental differences in how these two models approach variables such as compensation, real estate, technology, compliance, to name a few. It behooves all wirehouse financial advisors to understand these differences, as doing so is the only way to make a fully informed decision as to whether staying at such a firm is in your (and your client’s) best interest, or if the RIA model provides for a better path.
👉 See also episode #67: How Would I Improve The Wirehouse Brokerage Model?
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How does a wirehouse compare to an RIA? That is today’s question on the Transition To RIA question and answer series, and it’s question #60.
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 over to TransitionToRIA.com, you can find all of the resources I’ve made….the video series, podcast series, whitepapers, all available for free, all designed to help you better understand the RIA model. Again, TransitionToRIA.com.
On today’s episode, we’re going to be comparing the wirehouse model against the RIA model. This won’t be an exhaustive list. I might eventually have to do a second episode because I won’t be able to get through everything. But these are some of the main highlights and I want to help people understand the differences.
For those of you that are at a wirehouse now, you understand how your model works. This is meant to help you understand how some of these variables differ and how they work in the RIA model.
As I go through this, I don’t want it to come across as me being biased towards the RIA model, or that I believe everyone should go into the RIA model because that’s simply not the case.
The RIA model has significant benefits to it. Significant advantages from an economic standpoint, and flexibility standpoint. It’s not for everyone though, and I’ve said that in a number of these episodes. You have to look at each advisor’s situation on a one-by-one basis because each advisor is unique.
For many advisors, it does make sense, and there is a reason they should transition into the RIA model, and they do make the transition. In other instances, it might make sense for a wirehouse advisor to stay at a wirehouse. So, I don’t want this to come across as implying that everyone should go RIA.
But you’ll see some of the differences of why you should at least, if you’re at a wirehouse now, fully understand what the RIA model looks like to know whether it is better for you or not.
I’ll give a quick example. Earlier this week I was talking to a two-person advisor team in the W-2 model. They realize the value, the economics, the flexibility would be better for their practice in the RIA model. But in their particular case, both of them had young families at home, and for them, at a personal level, it is too much of a mountain to climb right now, to tackle raising young families, and be making a change to their business.
I respect that. That’s a perfect example of why someone might want to stay put, even if the economics are better, even if the flexibility is better. So again, advisor by advisor, you have to look at what their specific circumstances are.
So again, we’re going to go through a couple of items here one by one that will be beneficial for you to understand.
In the wirehouse world, there is a grid payout system. Every dollar in fees and commissions that you, the advisor, generate, goes through a payout grid. I’m going to get to comp plans a little later, but comp plans have made the grid payout process significantly more difficult to calculate what flows to you at the end of the day.
The idea being though that every dollar that you bring in – and make no mistake, it is you, the advisor, that is generating that dollar for the firm – you retain only a portion of that per the payout. If $1 comes in, you might retain 40% of that, as an example, or 45%. That’s your payout, that’s what’s retained by you.
In the RIA model, whether you have your own RIA and you’re building out everything around it, or you may be joining an existing RIA – I’ve done a whole episode on why you might want to consider that and what that looks like – the payout process is typically the exact opposite of a wirehouse.
In the RIA model, think of it as for every $1 generated, that full dollar flows to you. While you don’t have a “payout”, you do have a P&L (Profit & Loss statement) of your local expenses that you need to be responsible for.
One dollar comes in and you get to retain that full dollar. You then get to determine what your expense level is going to be, and that is what ultimately determines the bottom line that flows to you.
I’ve written several articles on this topic. I always suggest wirehouse advisors think of the inverse in your situation as well.
To use very simple numbers, let’s say a wirehouse advisor generates $1 million a year in production revenue, and maybe that’s a 40% payout. It’s not this simple because there’s deferred comp and all kinds of extra things in the comp plan that make it more complicated, but let’s say you’re $1 million, you’re at 40% payout, in theory, $400,000 should go into your pocket.
Don’t think about, “Oh, I made $400,000 last year,” think of it as, “I generated a million dollars in fees and commission revenue, and my firm provided me with certain value and services to be able to generate that million dollars. In return, I paid them $600,000 for the value that they provided for me.”
When you start thinking about it that way, the question is, are you getting enough value for what you are paying them? Again, the inverse of the payout grid because, again, that’s typically how it’s done in the RIA model.
You bring in 100%. You have certain costs, which you can very easily determine if you’re getting the value for it because you’re paying for it.
So again, fundamentally different ways as to how payouts work in the wirehouse model versus the RIA model.
I recently did an episode discussing what a tech stack is. If you want to dive more into that topic, you can check out that full episode. But worth noting here, technology is fundamentally different between the wirehouse model and the RIA model.
In the wirehouse model, for those of you that are at a wirehouse, you know it’s an integrated proprietary technology solution that’s provided for you. Your firm over the years and decades has built their technology, and hopefully continues to reinvest in the technology, to provide you that full desktop system.
In the RIA model, while there are some integrated solutions that a custodian might provide, the typical approach is that you build what’s called a tech stack. Again, I did a full episode on this, so I’m not going to dive into it too far here.
But in short, you source the best-in-breed from the different technology vendors, whether that’s rebalancers or CRMs, or financial planning. And some of those solutions are bundled up to make it easier for you. But you get to pick and choose from what’s best for your practice.
So, which approach is better?
There’s a misconception, which is, thankfully, subsiding. The wirehouses of the world would say, “The technology in the RIA space is inferior to what we have available.” There was a time, and you must go back a long time ago, that was accurate.
The reason was because a wirehouse that had 10,000+, 15,000+ advisors had the scale to amortize the cost of the tech investment needed across their 10,000 advisors, 15,000 advisors.
At the time, the RIA world was not nearly what it is today. It was more fragmented. Any one technology solution did not have that many users to be able to spread that cost against, and so arguably they couldn’t invest or reinvest into their solution enough to compete with the wirehouse tech.
That has completely changed now. There are more advisors in the RIA space by headcount than there are in the wirehouse space. Many of the third-party tech providers now have more scale themselves than the wirehouses do.
So, to the degree you ever hear that argument being made, that is a misconception. While the wirehouses have built some good technology and hopefully it continues to be improving, by no means should the default be to assume what they provide is superior to what is available in the RIA space. Not to mention, the flexibility in the RIA model to source and perhaps change over time which technology solutions you use.
In the wirehouse model, the benefit is it’s all packaged up, it’s all integrated, it’s all plug-and-play. However, to the degree you want to step outside of that sandbox, you don’t have the ability to do so. Or if their technology does not keep up with the innovation in the industry, you’re stuck solely using the wirehouse technology.
Related, the next topic is TAMPs (Turnkey Asset Management Programs). I did an episode on this as well, what is a TAMP?
A TAMP is a platform to give you access to managed money solutions. That could be separately managed account managers, it could be portfolio models that you implement, etc. A TAMP provides a way to access those solutions.
At a wirehouse, your firm has essentially made an in-house TAMP, which they might have branded internally. They’re basically saying, “If you need or want to use managed money solutions, we, the wirehouse, have gone out into the universe of options and we’ve curated this list, and here is what you have available to you.”
What you have available to you as a wirehouse advisor is a small fraction of what is available in the marketplace. The reason your firm has narrowed that list is primarily for two reasons.
One, they have an obligation from a regulatory perspective to “supervise” you because you’re a registered rep of their broker-dealer. They’ve decided, “We don’t want to offer the 500+ solutions to our advisors to choose from. We’re going to get comfortable with this small subset of them, and that’s the only ones our advisors are allowed to use. From a supervisory standpoint, we’re more comfortable with that.”
Now, there are good managers that didn’t make the cut, you don’t have access to them. You are constrained by what your firm has put on their TAMP platform.
The other reason they narrow it down is sometimes the economics of how it’s priced out. It can perhaps be more advantageous for them to incorporate certain managers onto the platform than other managers.
Whereas in the RIA space, while some custodians have TAMP solutions you can lean on if you want, the typical approach is to use a third-party TAMP solution.
Those providers say, “We’re going to create a platform,” and there’s a number of varieties of this, “and we’re separate from the custodian, we’re separate from the RIA, and we try to bring as much of the universe of solutions as possible for you to choose from.”
The TAMP provider has no regulatory responsibility to supervise you or purposely narrow it down in a particular fashion. To the degree one TAMP solution does not satisfy your needs, you could use a different TAMP solution. You have that flexibility to do that.
So, fundamental differences on TAMPs as well. If you want to dive more into how TAMPs work, all the different varieties of them, again, refer to my other episode on TAMPs. It is what it is, it’s a much more constrained TAMP solution in the wirehouse model than is available to you in the RIA model.
Next is real estate, or we could call it office space. Part of the value proposition of a wirehouse, and we must give them credit for the value and services they provide, part of that value is they provide you with office space. That can be a great thing, or maybe not a great thing.
The last two years with COVID has fundamentally changed the perception of how valuable office space is to advisors and their clients. The wirehouses nonetheless provide it for you as part of what you’re giving up in your payout.
In the RIA space, there are some RIAs you could potentially join that their value proposition supplies you with office space. But typically, if you start your own RIA, or if you join an existing RIA, the value proposition has you choosing your own office space. That’s to your benefit because that gives you the flexibility to decide how fancy of a space you want, how economical of a space you want, and where you want the location of that space to be. You get to control that variable.
For those at wirehouses, you might effectively be overpaying for office space. Maybe you don’t need something as fancy as they’re providing, but you don’t have a choice because it’s provided for you and you have a payout that everything goes through that pays for it.
In the RIA space, you have the flexibility to decide yourself how much you are willing to commit of your revenue to cover office space.
There’s an interesting quagmire I sometimes point out. In the wirehouse space, everything goes through the payout grid, but there’s not different payout grids based on which part of the country you’re in.
An advisor in downtown Manhattan, that arguably is provided with expensive real estate, has the same payout as the advisor in Idaho, that presumably has far less expensive real estate being provided to them.
It’s nice for the Manhattan advisor because they’re, in some ways, being subsidized by that Idaho advisor. They’re both getting the same payout even though one of them is arguably getting a much more expensive office space than the other advisor.
And even for the Manhattan advisor, it’s not always a good deal. That assumes they’re getting enough value from what’s being provided and their clients care enough about that value.
In the RIA space, even in a big city like New York City where things are more expensive, you can decide what kind of location you want to have, and how extravagant or not it is. You control the P&L and how it impacts your office expense.
Next, is compliance. This is a big one.
Most of you at a wirehouse are wearing two hats. You are a registered representative of the wirehouse’s broker-dealer, and you are an investment advisor representative of the wirehouse’s RIA. You are under both SEC and FINRA regulations. That can be a challenge because they do not line up in every capacity.
In the RIA space, to the degree you decide to go 100% fee-only (which you don’t have to), you would only be under SEC regulations (or state, depending on your size.) You would no longer be under FINRA if you no longer have any commission business.
For those of you that have commission business that you want to continue, or it’s legacy business, there are several solutions worth considering. For some, that is working with, as they say, an RIA-friendly broker-dealer where you would still retain that FINRA oversight.
But there’s also solutions now – which go beyond the scope of this episode – where there is a way to protect those client relationships, but not have FINRA oversight. To the degree you want to dive further into that, feel free to reach out and I can explain it further. I’m sure I’ll do a future episode on some of those additional solutions as well.
Lastly on compliance, is more at the firm level. Right now, you must adhere to what the wirehouse’s compliance team decides of how to implement rules and regulations.
From a regulatory standpoint, there are some things that are black and white. You can do it, you can’t do it. Other areas require interpretation of how a firm will manage their risk.
Take for example what I said about TAMPs. There’s no rule that says a broker-dealer, or in this case it would be the RIA part of it, can’t make more money managers available for their advisors to utilize. But, because you’re a registered rep of theirs, and they have a responsibility to supervise you, they narrow the options down.
And so, compliance is dictating what you can and can’t do beyond just what is black and white in the regulations. If you’ve ever been told you can’t do something, ask yourself is that because the rule says I can’t do it, or is it because of how my firm wants to interpret and implement the rule? You’re in a very captive compliance situation.
In the RIA space, you still must follow regulations. However, especially if you have your own RIA, you’re going to have significant more flexibility to decide how to implement rules. “How can we interpret and implement this particular rule that we can satisfy our obligations and still run the kind of advisory practice we want to?”
Maybe you are comfortable having a much larger universe of managed money solutions available to you than the wirehouses allow. There’s a fundamental difference from a flexibility standpoint.
In the RIA world – I’ve done a lot of episodes on this – you work with external third-party compliance consulting firms that help you manage your compliance responsibilities. There’s no regulation that says you must, but it’s best practice and it makes sense to do it.
It is their job to help you stay within the rules and make sure you’re not running afoul of the SEC or your state. They are doing their job by sometimes telling you no, you can’t do something. However, they do have a responsibility to try and be flexible with how you can implement things.
But more importantly, if you think that a compliance firm is not being responsive to your needs, they’re not willing to consider different solutions, those sorts of things, well, guess what, possibly for the first time in your career, you can fire that compliance team.
You can find someone else that is more responsive to your needs, that is more willing to think through solutions. Again, you need to take the advice of these folks, that’s why you’re hiring them. But you have control over these teams. If you don’t like their service, if you don’t like how they’re approaching things, you can change them. They are a vendor of yours, a solution provider of yours.
In the wirehouse model, you are captive to the compliance team. You have no say over what they do or don’t do.
I was trying to think of what other industries this may occur in, where except for the brief pause because of COVID, that pretty much every single year, wirehouses change their compensation plans.
What other industry every year resets how you’re paid? Maybe the screws get tightened a little more, and often you must jump through more hurdles to make the same amount of income that you would have made the prior year.
In the wirehouse world, you have no control over that. You have control in the sense that you can walk out the door and go in a different direction. But if you’re staying there, you effectively have little to no control over the constantly changing compensation plan. Which make no mistake, is meant to squeeze out more profits for the firm.
In the RIA space, there is no such thing as a compensation plan. If you have your own RIA, you’re running your own P&L. What are your local expenses going to be? Again, back to office space, how extravagant is your office? What technology solutions do you want to use and that you have to pay for? What kind of compliance solution are you going to use that you must pay for?
Effectively, the “compensation plan” says, “100 cents on the dollar comes in the door. I, the RIA, get to decide what my cost structure is going to be and how much I’m going to spend on all these different required parts of running an RIA, and what’s leftover comes directly to me.”
There is no one else monkeying around with it. Your custodian doesn’t have any say in it. Your compliance firm doesn’t have any say. It is for you to decide on your own, “Here’s my advisory practice. There are certain solutions I need to run the practice. I either individually source them or I lean on a bundled solution provider that packages them up for me. I pay them. What’s left over goes into my pocket.”
That is your comp plan. That doesn’t change every year. That’s not out of your control. You control every part of it.
The last item, and sorry to pour a little salt in the wound here, in the wirehouse world, there’s an increasing push of forcing advisors to introduce perhaps banking products from the affiliated or parent company of the wirehouse firm to your clients.
And by the way, if you don’t make X referrals per year or your clients don’t sign up for X new loans or credit cards, whatever, you get docked on your pay. I’ve never come across any advisor that says they like that. They like that being forced on them, they like every year that changing on them.
In the RIA world, that doesn’t exist at all. No one is going to tell you, “You have to introduce certain products or services to your clients,” or anything like that. That does not exist.
If you have your own RIA, it is your decision what you do or don’t do to generate revenue. And even if you join another RIA, that is not something that happens in the RIA space. You are not forced to be a banking sales rep.
That is a fundamental difference between the wirehouse model and the RIA model.
There are plenty more items I could go into. I don’t want to make this episode too long. I’ll likely end up doing a second episode on this topic as well. But it is important to be aware of what these differences are.
Again, not every advisor is a fit for the RIA model, even with all these differences and the advantages of the RIA model that I’ve talked about. It’s a case by case basis of, does it make sense for you, or not?
I would challenge you though, if you are in the wirehouse world, do you fully understand how your practice would look, how it would work, what the economics would be, what the flexibility would be, in the RIA model?
If you’ve fully vetted that out – and that’s something I routinely help advisors with – then and only then can you make an informed decision on whether the RIA model is the better path for you or not.
Like I said at the top of the episode, there are scenarios where it may be a fit, or it may not be a fit. How can you know if staying put is best for you unless you understand what the options look like? That’s what I help advisors with all day long, is understanding everything there is to know about the RIA model, and what it would look like for your specific practice.
Like I said, my name is Brad Wales with Transition To RIA. Again, I have this sort of conversation all the time with advisors. I’m happy to have the conversation with you as well.
I’ve made a lot of episodes, but there are a lot of questions that come out of those episodes and are specific to your unique practice. I have those conversations, which are often very educational initially. Then we start diving into your individual practice, and how it would look in the RIA space. And if it makes sense for you, how would you go about transitioning into it? Again, I’m happy to help you with that.
If you’re not already there, head over to TransitionToRIA.com. You can find my entire series in video format, podcast format. I have whitepapers as well. And then at the top of every page of the website is a contact link. Click on that, and you can instantly and easily schedule time to have a conversation with me about today’s topic or anything else RIA related. I’m happy to have that conversation with you.
With that, I hope you found value in today’s episode, and I’ll see you on the next one.
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