Q12 – How much does an RIA compliance consultant cost?

Also available as podcast (Episode #12)

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How much does an RIA compliance consultant cost?

There are two main components to what you pay a Registered Investment Advisor (“RIA”) compliance consulting firm for.  The first is for the initial startup costs associated with logistically setting up your RIA.  This generally ranges from $10-$25k.  Second is the cost for the consulting firm to provide you with compliance guidance on a going forward basis.  This generally ranges from $8-$15k per year.  There are a number of variables to consider that determine where within these ranges your particular scenario might fall.

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Full Transcript:

How much does a compliance consultant cost? That is today’s question on the Transition To RIA video series, it is question #12.

Hi, I’m Brad Wales with Transition To RIA. Today’s question is how much does a compliance consultant cost? This is question #12. I just did the prior video, question #11, to discuss…..if I transition to this RIA model, am I going to have to pay for my own compliance? Most advisors realize, yes, I’m going to have to pay for it. But that video really goes into detail of why you should not fear that and why it’s actually to your advantage. So if you’re seeing this video first, I encourage you to watch both of them. And if you did watch that one, here we are in this one and what we’re going to talk about is….okay, you understand why you need it, you understand actually why it will benefit you. But the bottom line, how much is this going to cost me? Because it is what it is, there is a cost involved. What can I expect that sort of cost to be?

There are two main costs associated with using a compliance consultant. And by the way, that’s part of what I do is help advisors think through how to engage compliance consultants. There are a lot of them out there in the universe. And so which one should you choose and why? And again, that’s what I help advisors think through as an example.

But with this, generally speaking, there is a lot of variety out there (of compliance consultants), there’s a lot of different service models, but generally speaking, what can I expect to pay?

The two main parts of what you pay compliance consultants for are number one, is that upfront cost of starting up the RIA. I did a whole video on this, on how logistically as an RIA, you technically and legally set up. How does the filing process work, the paperwork process work, the application process. That is what is step one of what you use a compliance consultant for is that kind of one time startup cost. Again, I did a whole video on…I’ve done a couple of videos on, what are the logistics of that process? How long does that process take? So you can find all of those (on the website) if you’d like to learn more about that. But that’s cost number one, and I’m going to give you some numbers on that, is that one time upfront cost. Let’s get everything up and going.

And then from there going forward is the ongoing cost of helping you maintain your compliance. And so that’s usually set up as an annual retainer fee that’s paid on an ongoing basis to help you stay on top of…..these are the rules you need to be following because the regulations say so; and then because we’ve worked with you to figure out what your policies and procedures should be specific to your RIA, let’s make sure all of that is being followed.

They also help with when a new policy or new rule comes out from the regulator. This is how it’s going to apply to you and your RIA. Let’s make sure we’re implementing that correctly in your RIA. They keep an eye on that sort of thing and bring it to your attention. And then they also do some of the administrative things like your annual license renewal fees, your annual ADV updates, those sorts of things, again, is part of the ongoing services that you pay a compliance consultant for.

And to be sure…there’s no regulatory requirement that says you have to use these folks for any of this. You in theory could do all of this, the startup and all of this ongoing on your own. I’ve never worked with an RIA that chose that path and I certainly would never recommend it. You want to have some knowledge there within your RIA on these topics and these matters, but you definitely want to work in partnership with the compliance consultants because this is what they do all day long. They help RIAs startup and they make sure they stay compliant on an ongoing basis.

When that’s their day in and day out expertise, you really want to utilize that to your advantage as well. So again, not a requirement you use them, like I said though, I’ve never come across an RIA that chose not to. And if I was working with an advisor that said that they were not willing to make that investment, then I probably would not want to help coach them because I think at that point, you’re signaling, you’re trying to cut too many corners. You’re not willing to do this correctly. It is an important expense of running an RIA.

Of those startup and ongoing, on startup, and this ranges on both of these, I’m going to kind of walk you through this, that initial startup cost. You can generally expect to be somewhere in the neighborhood of $10,000 to $25,000. Now, yes, there are circumstances where it could go less, and circumstances where it could go more, and I’ll explain that. But generally speaking, most RIAs fall within that $10,000 to $25,000.

Now, you wonder why is there a range? Why is it not (for example, a flat) $12,000? And the reality is because every RIA is different. Some RIAs have a lot more advisors. Maybe you are looking to start an RIA by yourself, or maybe you’re a part of a team. When there’s more advisors involved, there’s some more complexity involved. The size of the RIA generally dictates…the larger the RIA the more services the RIA might desire to offer, the more complexity the client base.

So there’s a number of variables there of why it could range from that $10,000 to 25,000. And then it also has to do with where you’re departing from. If you are already with an independent broker-dealer firm and it’s very clear that you own the book of clients, that’s a different conversation with the compliance consultants than if you are with a traditional kind of wirehouse type firm where there might be a disagreement on who owns the book of clients. And so part of what the consultant firms they are providing for you is the expertise needed to make sure you can manage that process.

Naturally some of these scenarios are going to be more complicated than others. And so that’s why you have a range there. And as far as what might cause it to go below or above that, truth be told you can find compliance consultant firms that will set up your RIA for less than $10,000, sometimes quite a bit less. And no disrespect to those firms, but to the degree you have any size to your practice, maybe it’s you and a couple other people, you’re going to be hard pressed to find that provider that will do it for $3,500, you really have to question, what are you getting for that money?

Now, maybe if you are an advisor, you have $20 million in assets, and it’s just you, and you’re going to be state-registered and you use one model of mutual funds for every client, and that’s all you ever do, maybe that is so simplified and so easy to get set up that you could use one of these options that charges less. But once you get into any reasonable amount of complexity, which is going to be most of you, you’re looking at that 10 to 25.

And then on the high end, I have seen them go $35,000, $50,000. Where you get up there is when you really have to bring in not only the compliance expertise, but also legal expertise. Some of these compliance consultant firms are attached or part of a law firm, and sometimes that’s not necessary. That might be overkill for your particular circumstance. And other times it is going to be very important.

Again, there’s no black and white answer on this. It’s very specific to your situation currently, what you would be moving away from and how you would be moving into the RIA model. And so sometimes depends on that complexity, you do get up into that $35,000, $50,000. That is more on the rare side though. I don’t want to give the impression that’s the normal take. Again, $10,000 to $25,000 is more the reasonable range. But just know depends on the circumstances, it could go below it and could go above it for that matter.

That’s on the startup cost and that’s essentially a onetime cost. You get up and going and they do everything you need to get the RIA up and going.

Then on an ongoing basis, you’re really looking again at a range of $8,000 to $15,000. And there is some variance in that based on, again, the complexity of your practice. So that is still at play with this $8,000 to $15-ish thousand range. But in this one, it more so comes into the level of service you need or want. A lot of consultant firms will offer multiple tiers of service. Obviously the more you pay for it the more they will do for you. Some compliance consultant firms go so far as trying to effectively do almost everything for you. Again, that’s going to cost more than a firm that’s maybe mostly just doing your ADV update and your license renewals and occasional passing along of information.

It really could range….I mentioned in a prior video….one of these ongoing services that compliance consultants do for RIAs is a mock audit to help prepare them for that day when the regulator comes in to audit the firm or examine the firm. And again, that’s going to impact what tier of service do you want. The more you’re willing to pay, you can start getting things like a full on mock audit.

I don’t want you to fear the cost of this because again go back to video #11 I did. If you haven’t watched it, it will really reset your thinking of not only why this is an important cost, but why you might find this to actually be a lot less expensive than you realize. I don’t want to repeat all that, just go back and take a look, again video 11, will walk you through that.

But again, on that ongoing basis, call it $8,000 to $15,000. And just to recap, a quick item, I did talk about in the prior video, is part of this is a mental exercise that you have to reset your thinking and think….“oh gosh, this compliance is going to cost me $8,000 to $15,000 a year”, and you think, “well, that’s a new cost.” Well, no, you are paying that cost now. It is in part of the payout you are paying to your current firm. It’s now you can actually see kind of an itemized bill in the RIA world of all the costs you have and one of those, which maybe you’ve never seen before because it was all bundled in this blurred package is this single line item that says compliance with a number next to it.

And so part of it is just a mental reset of how you kind of approach this. Don’t think of it as….“oh, that’s a new cost.” It’s a different way that cost is now going to be paid for. Again, make no mistake, you are paying for compliance now. You just don’t see it as clearly as you would in the standalone RIA model.

This is money well spent. There is no cutting corners as far as setting up the RIA correctly and maintaining it on an ongoing basis. That doesn’t mean you have to go with the most expensive compliance consultant out there that offers the most service in some gold package or something like that. But there is a middle ground there where it is going to be important that you do follow along with that, and you do invest accordingly to make sure that you’re doing it right, not only the startup, but on an ongoing basis as well.

With that, like I said, my name is Brad Wales with Transition To RIA. At my firm my goal is to help you understand everything there is to know about why and how to transition to the RIA model. This is an exact example of that “how”. If the RIA model does seem to be a right fit for me, how do I do all the steps needed? One of them is this compliance matter, what’s it going to cost me? And so hopefully you found some value in this video in helping explain part of that “how”.

If you’re not already there head on over to TransitionToRIA.com. Lots more videos, I have whitepapers. And then the most effective way to really start the learning process about the RIA model is to go ahead reach out to me. There’s a contact link right at the top. You can instantly and easily schedule an exact day and time for us to connect. To have this sort of dialogue where we can begin to go over what exactly is your current situation, your current affiliation model, and what would your practice look like in the RIA model and how does everything to do with that work. That is the kind of conversation I have with advisors all day long. I would love to begin that dialogue with you as well, and try to help you with that.

With that, I hope you found this video helpful, and I’ll see you on the next one.

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