Q140 – How Does Transitioning To Another Wirehouse Compare To Transitioning To The RIA Model?

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Also available as podcast (Episode #140)

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How Does Transitioning To Another Wirehouse Compare To Transitioning To The RIA Model?

TL;DR – Every year many financial advisors transition from one wirehouse firm to another wirehouse. Making such a move often results in a degree of continuity (similar economics, similar approach to compliance, similar level of responsibility, etc.) Such moves often come with the much discussed “upfront checks” as well. However, before concluding that a wirehouse-to-wirehouse move might be best for your practice as well, it’s important to educate yourself on how a move to the RIA model would compare. Only then can you make a fully informed decision regarding what is best for you, your practice, and your clients.

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 does transitioning to another wirehouse compare to transitioning to the RIA model? That is today’s question on the Transition To RIA question & answer series. It is episode number #140.

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 all the resources we make available from this entire series in video format, podcast format. There are articles, whitepapers, a vendor profile series. All kinds of things to help you understand the model.

Again, TransitionToRIA.com.

On today’s episode we’re going to talk about if you’re at a wirehouse now and you’re pondering perhaps moving to a different wirehouse… for whatever your motivations are, you’re not satisfied at your current firm or you believe the grass might be greener elsewhere,  and you’re trying to decide whether to move to another wirehouse or perhaps the RIA model is the better path for you.

I want to give you some breakdowns of some of the variables to consider if you’re perhaps leaning towards a wirehouse-to-wirehouse move, so you understand the things you will essentially be given up by not going to the RIA model.

Now, I will start by saying, as I often do on these episodes, the RIA model is not for everyone. I don’t get on here and say every advisor and every team and every practice is a fit for the RIA model, or is where an advisor or team is going to be most satisfied.

In most cases, the RIA model is the better fit. But there is, and I respect this, a subset of advisors who at the end of the day just want to be a financial advisor. A practitioner of the craft. They don’t also want to be a business owner. I get it.

Now, the wirehouses sometimes say… “you’re running your own business.”

No, you’re not. You’re W2 for a company. You must play by their rules.

Yes, you’re running your own practice. But that’s an entirely different arrangement than being a true business owner and all the benefits that come with it.

Now that said, again, there’s a subset of advisors, and I respect this that say… “Ok,  I get it, Brad. You can talk about the better economics and the better flexibility and all the things I’m going to talk about on this episode. I get it. I’m willing to leave all that on the table because that also comes with additional responsibilities and I’d rather just be an advisor, a practitioner. I make a very nice income. I like my clients and I’m content.”

I will always respect that and I think that will always exist out there in the marketplace. So while the wirehouses will continue to bleed advisors to the RIA channel, the wirehouses will always exist as there are folks that that is just going to be a better fit for them based on what that advisor or team desires.

But if you are that advisor that’s considering if maybe a different path is better, if the RIA model is better, that’s what we’re going to dive into here.

With respect to wirehouses, we can also throw in the W2 models of the so-called regional firms, which some of those themselves are growing quite large. We’ll just kind of encapsulate that W2 broker-dealer model by calling it the wirehouse model.

These firms are not massively different from one another. Arguably of the four so-called wirehouses, they are not massively different from another one. Yes, over time, there’s certainly been some reputational damage of some. And there are reasons advisors might lean more towards one than another. But the technology of one is not massively different than another. The available investment solutions are not massively different than another. The comp plan, which I’ll rant about here in a moment, is not massively different. They’re all trying to be competitive with each other.

So oftentimes, and I’m not saying this is the sole reason advisors go from one wirehouse to another, is for the proverbial upfront check. A lot of people talk about the “deals” being offered. “What kind of deal can I get if I leave my wirehouse and go to another. What’s that big upfront check look like?”

And obviously I’m oversimplifying it because there’s generally, yes, a big chunk of money upfront, but then you must hit hurdles in the backend and all that sort of thing. But that is well beyond the scope of this episode.

The point being is that’s often one of the enticing things is… “wow, if I make that move, I can get this big giant upfront check, which by the way, if you go to the RIA model, you’re not going to get that big upfront check.”

Now, that’s assuming you’re not selling your practice to an RIA roll-up or aggregator type firm. If you’re selling your practice, that’s a whole different conversation.

But if you’re moving, for instance, to your own RIA or you’re joining an RIA platform as a 1099 advisor, there typically could be some money involved to help with the transition, but it’s not that big upfront check.

And so that’s oftentimes why you see one of the motivators of advisors or teams going from one wirehouse to another. They’ll of course never say that. It’s always… “The technology is better over here,” or something like that. But again, it’s arguably not meaningfully different so that check does come into play.

But the challenge with the check is, that feels good to get that check. And for some of you, that could be a very large check that goes in your pocket. But you must consider all the strings that come with that. That’s a lot of what we’re going to cover here is what are those variables that you’re now having to deal with, that you’re giving up by not going on an RIA path.

When you get that big upfront check, again, there’s usually hurdles and it’s back-end loaded, but for easy conversation, we’ll say it’s upfront.

Some people like getting that upfront check. An upfront bonus, whatever we want to call it.

But that firm is not gifting you money. That’s not a gift. That’s not them being generous.

That basically is just them enabling you to pull forward your future income and get paid out now, and as a result get paid out less over the years to come, than if you were to go on a different path where you could get higher amounts of income as you went.

Now for some folks that can be enticing. Whatever their personal economic circumstances, they maybe need some sort of immediate big chunk of money. But make no mistake, that is not a gift, that is not generosity, they are simply pulling your future income forward and at the same time adding significant handcuffs to your ability to run your practice, for perhaps over the balance of your career.

With that context I want to go over some of the things that for those of you that are considering going wirehouse-to-wirehouse, even with that check you’ll receive, some of the things you will be given up as opposed to going on an independent RIA path.

First, and this is seemingly always overlooked, is when you get that check there is a commitment of time you must stay there.

That upfront bonus is technically a loan to you. The firm is then bonusing you over time, paying down the loan with those bonuses. This also creates the additional headache of phantom income that you must pay taxes on over time.

But basically they are giving you that money upfront and in many instances nowadays, that’s a give or take 10 year commitment for you staying there.

Now yes, if you ever wanted to leave, you could do so, but you would owe the remaining balance on the loan. You can pay that back and still leave, but from a psychological standpoint, that can be difficult. From a cashflow standpoint, that can be difficult if you have not set that money aside.

So mentally, you need to prepare yourself to essentially locking yourself in for call it 10 years.

What I think is often overlooked, and I think it’s crazy, is by taking that check, you are committing to 10 years of uncertainty of what that firm is going to provide for you going forward.

As I’m recording this, it’s the season of the annual comp plan changes. That’s a whole rant I could do on an entire other episode how if you’re at a wirehouse, you work for a firm that generally changes your composition every year!  That is absurd!

By taking that check and committing to 10 years, you’re committing to likely 10 years of future changes about how you are going to be compensated. You have no idea what those changes are going to be when you’re signing on to this upfront. All you know is that there will be changes, and yet you’re just accepting their word for it that hopefully that works out in your favor.

I don’t want to spoil anything, but when wirehouses make comp plan changes, they’re not doing it for the advisor’s benefit. They’re doing it for the bottom line of the firm, and hopefully to retain advisors. But don’t think the lens they look through with comp changes are how to pay their advisors better. It’s for the bottom lines, for the shareholders. It’s to try to grow revenue and income.

By taking that upfront check, you’ve now committed to perhaps 10 years of these changes, which you have no idea what that’s going to be.

Another example, perhaps you really like the branch manager at the branch you’re going to be joining and that’s perhaps part of what has attracted you to make this change.

Well, who’s to say that branch manager is going to be there for the balance of the 10 years that you’ve now effectively locked yourself in? That branch manager could leave 18 months later. They then bring in some other branch manager, and you have no idea what you are getting with that new branch manager. Are they going to be an ally of yours, an advocate of yours? Are they going to make business more difficult for you? You don’t know!

I could go on and on about this, but the idea being do not overlook how taking a check locks you into 10 years of uncertainty that you have little to no control over.

Next, taking an upfront check puts money in your pocket now, but in return for that, you’re now going to be making less income going forward than you could in most scenarios if you went to the RIA model.

What you need to consider from an economics standpoint, is not just looking at how much money goes in your pocket on year one after you’ve made the move. Because unless you plan on retiring after year one (which if you did, changes everything about the economics as well), you need to consider your economics over the balance of your career.

For argument sake let’s say your timeline to retirement is the same 10 years mentioned prior. You need to factor in, a large upfront check, with whatever the stated payout is going forward (which as noted is likely to change; likely not to your benefit.)

Or should you take less money upfront, but have the potential to make oftentimes meaningfully higher income over the balance of those years?

You must run that math in aggregate.

Yes, in year one, the wirehouse move works out better because you got a big upfront check. And for the first few years, even with a lower income now, the aggregate math is still better because of the year one bonus.

But when you compare it to an RIA path where you get less upfront but a higher income going forward, it typically takes a few years, but the aggregate math on the RIA path typically crosses over well before you get to the 10 year point.

So you need to factor in the total aggregate economics of the 10 years you’re now about to commit to, versus what you could potentially achieve economically over the comparable 10 years on an RIA path and without all the handcuffs I’ve been alluding to. You need to understand how those economics work.

That’s a big part of what I do. I’m happy to have that conversation with you.

Next, another variable you are accepting if you sign on for a 10-year wirehouse move is you are accepting that deferred comp is part of how you are being paid.

Now granted, that’s probably what you’ve already been stuck dealing with at your current wirehouse. All the wirehouses do deferred comp. Unless one wants to raise the flag and do away with it and the others maybe must follow, but I don’t see that happening. They’ve all ingrained it into their culture that they’re going to do this.

You must appreciate what deferred comp is. Wirehouses will go and spin this as if it’s some sort of reward to their advisors for their longevity and their loyalty and how they’re investing in you the advisor.

No, that’s not at all what’s going on.

You, as the advisor, are earning revenue by providing services for your clients. You’re earning fees and/or commissions for the services you are providing them. Your firm then gives you a payout, a payout on the money you have earned. But from that payout, then they say… “we’re going to arbitrarily take some of that, which you’ve already earned, which you deserve to be paid, and we are going to arbitrarily defer it years into the future and not pay it to you for years from now.”

And the only reason they are doing that is to handcuff you to the firm because they know that the more they can build up in this deferred comp pool, the harder it is for you to ever leave because you must walk away from that.

The only way you can generally get all of your deferred comp, and they know this, the firms know this, is to ride out the balance of your career and eventually retire through their often referred to as sunset plan. I’ll allude to it in a moment, but these plans generally come with much lower valuations than you could get in the RIA model, and with worse taxation of the proceeds.

But to keep all your deferred comp, you must ride out the balance of your career with all these handcuffs, inferior economics, and then go through this inferior succession arrangement, and if and only if you do that, then they make good and pay you out all the deferred comp.

Because otherwise, by design, they purposely have made these deferred comp arrangements that you can never get off the treadmill if you don’t do what I just described.

A deferred comp allocation typically has about a five year cliff vest. In five years, yes, it does come free to you and you get it, it’s essentially vested. But just as you’re vesting on one tranche, the latest new allocation is just starting a new five year vest.

You can never get off this ongoing treadmill without losing money. They absolutely know what they’re doing. Don’t let anyone convince you that deferred comp is somehow to your benefit. It is to arbitrarily keep you at the firm.

They’re not saying… “let’s keep you at the firm by providing you such good value and service that you wouldn’t want to leave.” They’re saying… “we’re going to economically hurt you by taking the income you’ve earned now and deferring it into the future so that you will lose it if you ever want to leave us.”

Imagine if that was how you treated your clients. They paid a fee to you now, but you in turn don’t provide them a service until years in the future?! All because they supposedly need to be loyal to you?! And if they don’t stick around the five years, they simply never get the service from you.

That’s absurd. You would never attempt to do something like that with your clients. Yet that’s what wirehouses do.

If you sign on for a wirehouse-to-wirehouse transition, you’re signing on for another give or take 10 years minimum of that deferred comp treadmill that you can’t get off of without essentially losing income you’ve already earned.

I’ll leave my rant on that. You can tell I’m passionate about that.

The next example of something you give up by going wirehouse-to-wirehouse is the operating leverage inherent in having your own RIA or joining an RIA on a 1099 basis.

As your own RIA or 1099, you are responsible for your so-called local expenses. I did an episode on that so you can check that out. One of those variables you’re responsible for is your office. Now, and I’ll allude to some of the advantages of real estate here in a second, but from an office perspective, let’s say you will be leasing an office.

As you grow your practice, every time you add one incremental client, the cost of your office lease does not go up. You have operating leverage.

A lease is a relatively fixed cost. Now, there are likely small annual increases in the rent, property taxes can go up, etc. But for the most part, it’s fixed. So you can grow your practice 10%, 20%, 30% and this big piece of your expense pie is not going up in lockstep with it. That is operating leverage.

When you’re in a wirehouse world, part of what they are providing for you, and to their credit they do provide you with things, in the inverse of your payout, one of those is they are providing you an office.

Well, guess what? They are getting the operating leverage of that because as you incrementally bring on new clients and increase your revenue, they continue to take more from your payout on a dollar basis.

Now some argue that as you grow your revenue (at a wirehouse) you move into a higher payout bucket. But that tops out.

For simplicity, let’s say you grow your practice to the highest payout range. Every time you add a new client and grow revenue, you’re maxed out. You’re not going higher than whatever that percentage is. But every incremental new dollar in revenue you bring in, you’re still paying more and more in dollar terms to the wirehouse.

And at the same time, the office they’re providing for you, it’s not like, every time you grow 10%, they give you a 10% bigger office. Or if you double your practice, you get double the office size.

No, they have that operating leverage.

When you’re in the RIA space, you get to take advantage of it. Definitely something to think about. The office is just one example of that.

Related, and I’ve done an episode on the real estate advantage of an RIA path, you also have the extraordinary potential opportunity with your own RIA or on a 1099 basis to, it depends on your where you live and if this is feasible, to own the building you use for your practice going forward.

If you are going to be in the game for another say 10, 15, 20 years, you are already going to pay in one fashion or another for office space. Whether it’s embedded in a wirehouse payout, or you’re paying a lease or the opportunity to buy something. You’ll be paying for it one way or another.

Imagine over the 10, 15, 20 year balance of your career, you instead buy an asset. You must pay for an office anyway, you might as well be accumulating an asset alongside it.

For some of you, that could be a significant additional asset that you have available to you at the end of your career. Not only are you selling your practice, you’re also now selling this additional asset as well. It’s a huge advantage.

You do not get that if you go wirehouse-to-wire house.

Another difference on the two paths, if you look at the tax code, the tax benefits of being a business owner or a 1099, versus W2 income, is substantial.

I won’t go into all the details here, but your ability to write off expenses or depreciate an asset, perhaps if you have a building and can offset income. There are all kinds of additional benefits.

It is what it is. The difference in taxes from a true business owner versus receiving your income on a W2 basis, is substantial. I probably should do an episode on that. But it’s absolutely something to be aware of. You do not get that if you go wirehouse-to-wirehouse.

And then two last variables, and then I’ll wrap up with a few final thoughts.

First, if you go wirehouse-to-wirehouse you continue to be managed, as they say, to the lowest common denominator.

If you go from one wirehouse that has 10,000+ advisors to another wirehouse that has 10,000+ advisors, that’s not improving the situation. They must manage their compliance. There are 10,000+ advisors, and unfortunately there are inevitably a couple knuckleheads in there. They don’t know who the knuckleheads are, so they must manage their compliance to make sure the knuckleheads don’t bring down the ship.

Meanwhile, you the more experienced, more ethical, more tenured advisor get stuck in the lowest common denominator approach to compliance.

If instead, for example, you go and start your own RIA and maybe it’s you and a couple other advisors as a team, maybe there’s six of you as an example, you get to build a compliance approach that reflects six advisors, not 10,000+.

It is what it is, compliance is going to be more flexible when you build a compliance apparatus that accommodates six, just to give an example, advisors versus 10,000+.

And then the final variable here, and I alluded to this earlier, if you ride out the balance of your career at the wirehouse and go through their sunset program, in almost every instance those programs are economically inferior compared to what you could get in the RIA space. Both on the valuation of your practice, the enterprise value, and very important, a lot of people overlook this, how the income you receive from the sale can be taxed.

In most cases on the independent side, the majority can be taxed at lower capital gains rates. If you’re W2 and you’re doing the sunset program, you’re still on the W2 tax rates.

For some of you, that could be close to twice as much as current capital gains rates. You must factor that math in as well.

If you go wirehouse-to-wirehouse and you ride it out, yes, you got that big upfront check, but keep in mind, there’s going to be a big liquidity event at the end, and it could potentially be much better in the RIA space. You must consider the aggregate math of the entire remaining balance of your career.

This has not been an exhaustive list of every variable to consider, but many advisors don’t consider these variables. It’s important you do.

Again though, regardless of what I just said, I respect the fact that there are some advisors and teams that still say… “That all sounds good, Brad. But I don’t want the additional responsibilities of running my own RIA, or running my local expenses. I’ll accept the trade-offs.”

I respect that. But make sure you’re not leaning that way due to falsehoods. I’ll give you a few examples of rebuttals I typically hear which don’t hold up.

First example, this is a tired old excuse, but there are still some people that have been around a long time that are still using it, who proclaim the RIA model is only for advisors and teams that aren’t good enough to cut it at the wirehouses.

Perhaps that was true 20, 30 years ago. That has not been the case for a very long time now. There are very large teams moving into the RIA model, and have been for a very long time now. Just here recently, there was a team with $25B+ in AUM that made the transition.

So for anyone that’s still holding on to that old tired line that somehow the RIA model is only for folks that can’t cut it at the wirehouses, plenty of examples prove that wrong.

The next rebuttal you sometimes hear is that wirehouses have better resources. Better technology. Better investment solutions. Better access to investment managers or alts.

That is all false nowadays. There was a time that was accurate. There was a time that claim was fair.

However, as I’ve talked about in different episodes, the RIA ecosystem has grown to the point that not only would you be hard pressed, likely not possible at all, that you would find something that you have available to you in the wirehouse world, whether it’s investment solutions or technology or whatever, that can’t be replicated as is or replicated in a better solution in the RIA space.

That topic is beyond the scope of this episode. I could rant about that for 20 minutes alone. But don’t let anyone suggest wirehouses have better resources than the RIA model.

Take the time, talk to me and understand if supposedly that’s true what they’re saying, how would you replicate it and what would you have available in the RIA space.

If you’re not already aware of how far the RIA model has advanced, you’ll be very surprised. In many, if not most instances, not only can you replicate what you have, you can have even better solutions. Whether it’s better flexibility, better options, better pricing, better technology, all those sorts of things.

And then the final rebuttal I’ll note, and this is not an exhaustive list, is sometimes you’ll hear wirehouses say… “Clients, particularly high net worth clients, they want the big name brand that we have on the side of the building.”

There was a time that was probably accurate. That began to take a big hit though during the global financial crisis where a lot of these firms were tarnished, or had to be bailed out. That reputation is not as strong as it once was.

But regardless, if that’s still important to you, keep in mind when you go on an RIA path, whether with your own RIA or joining one, a big part of what that arrangement involves, and I talk frequently about all these variables, is you have a custodian, sometimes you eventually have more than one.

A custodian holds your client assets, and there are about a dozen custodians to choose from. To the degree you still feel your clients want some sort of big brand name behind you effectively, there are some wonderful custodians that have very respected, very well known names in the industry that will go par for par with any name that you perhaps have on the side of the building now.

So don’t be concerned about where your client assets will be held. Some of these custodians have trillions, with a T, trillions in client assets on their platform. These are huge global firms. So from a name recognition standpoint, if that’s your concern, that’s not a problem either, you can solve for that.

Then the final thing I’ll leave you with, I could keep going on and on, I’m very passionate about this topic, is regardless of your current impression of the RIA model, it behooves you to educate yourself on it, before possibly making a wirehouse-to-wirehouse move.

And when looking at a wirehouse, I’m not your guy to help you with that. I believe you can’t be everything to everyone. I’m a specialist, not a generalist in this industry.

Learn about the wirehouses if you want. But talk to me and compare how an RIA path would look. Educate yourself, inform yourself. And at the end of the day, if you decide that you still want to go the wirehouse path, that’s fine, but at least you’ll have the confidence that you made a fully informed decision before doing so.

But for many of you, if you take the time to learn about the RIA model, you will conclude it is the better path for your practice going forward.

As a final parting shot to leave you with, when you look at the industry trends, particularly over the last 10 years, the RIA model continues to be the fastest growing channel. The movement of advisors from the wirehouse model to the RIA model, that river only flows in one direction.

Have you ever heard of a RIA that has closed so the advisors could move to the wirehouse model? That is non-existent. That river only goes in one direction and you must ask yourself, why is that? If the wirehouse model is supposedly superior, why do we not see RIAs closing down and going in that direction? It doesn’t happen.

With that, like I said, my name is Brad Wales with Transition To RIA. This is the sort of thing I help advisors and teams with all day long. I’m happy to have a conversation with you as well.

First things first, head to TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, whitepapers, there’s a vendor profile series. All kinds of things to help you better understand the model.

And 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.

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

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