Q84 – How Much Does It Cost To Start An RIA?

Also available as podcast (Episode #84)

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How Much Does It Cost To Start An RIA?

How much does it cost to start a Registered Investment Advisor (“RIA”) practice?  As often occurs with the advice that financial advisors give their own clients, the answer is “it depends.”  For new advisors first entering the industry who plan to run a virtual practice, the cost might be as little as a few thousand dollars.  For a large team catering to HNW clients, who plan to transition their practice from an existing broker/dealer firm, the cost could potentially be $100,000+.  There are several variables that go into the total cost equation.  Some of the variables have static prices, while others provide a wide range of options for advisors to choose from.

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Full Transcript:

How much does it cost to start an RIA? That is today’s question on the Transition To RIA question and answer series. It is episode #84.

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 go to TransitionToRIA.com, you can 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 resources to help you understand the RIA model and what it might mean for your practice.

Again, TransitionToRIA.com.

On today’s episode, we’re going to talk about a question I get asked often, “How much is it going to cost me to start an RIA and transition my practice into it?”

It’s an important question to ask, and it’s certainly part of the conversation I typically have with advisors that are exploring the model. But it’s not an easy question to answer. I certainly can’t come on an episode like this and just say, “It is exactly $11,200,” or whatever the case may be, because there’s so many different variables involved in starting an RIA.

What drives the answer is the advisor’s current practice profile, and what they hope to do with it going forward. There are significant differences from someone that’s literally not an advisor now that wants to become an advisor via the RIA model, versus a $700 million team that is desiring a large office space. That’s going to have an entirely different cost structure.

There’s not just one simple, “Here’s the number, as long as you can plan for that, then you’re good to go.” There are a lot of variables involved.

What I want to do on this episode is talk about what many of those variables are, so you can start to pencil some of these factors in. This is what I help advisors with. But we’re going to go over a number of those variables, so you can start to do that exercise yourself as well if you’d like.

This is not going to be an exhaustive list of every possible expense that could be involved in starting an RIA, but it is going to touch on some of the main key pieces.

How I often try to frame this answer is that there are two main expense buckets. The first bucket is what I refer to as “day one” expenses. Basically, what costs are there to get you to “day one” of the RIA? And then there are the “day two and beyond” expenses.

We’ll start with the day one expenses.

The first expense that typically comes to mind is the registration of the RIA itself. I’ve done several episodes on this process. How long it takes, the rough cost of it, how you hire a compliance consulting firm to help with it, etc.

Now, you’re not technically required to hire anyone for help with the registration.  In theory, you could attempt to do it yourself, but that would not be a good idea. You’re almost assuredly going to do it incorrectly because it’s a detailed process. If you’re not willing to spend money to get help with setting up the RIA from a registration standpoint, you probably shouldn’t be going down the RIA path, to begin with.

Registration of the RIA is a typical “day one” expense, because obviously, you can’t go live with your new RIA, your new firm, until it’s been registered.

The registration is typically a one-time expense. I’ve talked about this in various episodes, but as a quick reminder, there are two main things you pay a compliance consultant for.  Those expenses overlap between “day one” and “day two and beyond” expenses.

One of those things is, again, a one-time exercise, a one-time fee of registering the RIA itself. That’s creation of the ADV, policies and procedures manual, advisory agreement. It’s submitting the registration filing with the state or SEC, depending on your circumstances.

If you are a small, relatively simple advisory practice, the registration cost might be in the $4,000 to $7,000 range. If you’re a larger practice with a much more complicated situation, and maybe even need to bring in legal help with navigating away from your current firm, it could run 3, 4, 5 times or more that amount. Again, it depends on what your circumstances are.

It’s a pretty big range, but it is a cost that needs to be absorbed upfront to get the RIA registered. So, the first “day one” expense example is the RIA registration.

Next, is office build-out costs. This is another expense that can vary dramatically.

There are some RIAs that are fully remote, fully virtual, and do not have standalone office space. There are others that have very elaborate offices, in very elaborate locations. The latter is going to have a much higher cost.

If you decide to have an office, part of the cost is the build-out of what is typically an empty space. Though there are some “move-in” ready type offices that require less build out.

If you must do a build-out, oftentimes, you can work with the landlord and try to get credits from them to go towards the buildout cost. There are ways to potentially mitigate some of that cost. I did an episode on how you can try to minimize your office expense costs if you want to check it out.

Related to building-out an office is the expense of furnishing it, as well as potential IT hardware.  You’re likely going to need desks, chairs, laptops, printers, etc.  These are typically all “day one” expenses.

Another day-one expense is your errors and omissions insurance, E&O policy. I’ve done episodes on this. You can learn more about it if you want. But the short of it is that most custodians, not all, but most custodians now require that you have an E&O policy. It is a best practice to have it as well.

Regardless of why, or how you obtain it, E&O insurance is another “day one” type expense.

The last “day one” expense I’ll mention – again, this is not an exhaustive list – is your website and marketing plan.

A motivation for advisors to move into the RIA model is the increased flexibility with how they can market their services, use their own branding, etc.

Maybe they want to do webinars, or write whitepapers, or whatever the case is. The flexibility is almost assuredly greater than where you are now. Particularly if you are with one of the traditional broker-dealer type firms.

This flexibility is a wonderful thing, but depending on your proposed strategies, there will be costs involved. The good news is you don’t have to have everything implemented by day one.  You don’t have to have all the bells and whistles in place right from the launch.

What you generally do need from the jump is a website. As you launch the firm, and begin telling your clients about it, they’re going to want to see the validity of your new practice. You’ll need a professional-looking website from day one.

Maybe you plan to eventually have an extensive social media presence, or you plan to make videos, etc.  But on day one, keep it as simple as you can, but it needs to be professional-looking as well. A website is a must on day one for your clients to be able to see what you’re now doing with your new practice.

These have been examples of “day one” costs. You can understand why there’s a range of prices involved. The office situation could go from almost zero to, in theory, hundreds of thousands of dollars. The RIA registration is more static. It will depend on your circumstances though. With office furnishings, the more elaborate, the more expensive.

Point being, there’s some things you don’t have much control over….E&O policies are generally pretty static, RIA registrations, etc.  But you have control over some of the more elaborate parts of the practice. Again, all these are “day one” expenses.

Now, we’ll move on to “day two and beyond expenses,” the ongoing expenses of running an RIA

We talked about getting the RIA registered, and how that’s a one-time exercise, a one-time cost. However, if you have your own RIA, you are now responsible from a regulatory perspective, for the compliance of that RIA.  Either yourself, or someone on your team must be named the Chief Compliance Officer (CCO) for it.

Now, you are likely not a compliance professional yourself, nor do you ever care to be a full-time compliance professional. So, the question is, how is your RIA’s CCO going to manage the compliance responsibility of the RIA? How are they going to fulfill the responsibilities?

You engage the compliance consulting firm for this. Typically, the same firm you hired to register the RIA in the first place. You engage them on an ongoing basis to help you stay compliant with all the things you need to be doing throughout the year.

The cost of this ongoing guidance is typically structured as a monthly or quarterly, sometimes even yearly fee on a going-forward basis. It is one of the necessary costs of running an advisory firm. On the proverbial “day two and going forward”, you will need to be pay this cost to help you fulfill your compliance responsibilities.

There are different price points for this type of service. The more you’re willing to pay, the more the compliance consulting firms will do for you. Most of them offer tiered levels of service. The proverbial bronze, silver, gold. Your circumstances will determine what level of service you might need.

A brand-new startup advisor is going to have a totally different situation than a $700 million team. But ongoing compliance support is one of the going-forward costs of running an RIA.

Another meaningful “day 2 and forward” cost is your technology.

I’ve done a separate episode on what is a third-party technology stack. In short, it is typical in the RIA space, if you have your own RIA, that you use third-party technology. AKA, a third-party technology stack.

While your custodian might provide some degree of technology, in many cases, there’s a layer of third-party technology solutions separate from the custodian that you put together into a ‘stack’ that is part of running your practice.

Now, there’s an increasing innovation in the industry, where some custodians are supplying more and more technology as part of their offering. That is something worth considering. As always, pros/cons to everything though. It’s worth understanding what those are and how they differ.

If/when you’re using third-party technology, there’s going to be a cost for it. This is for solutions like a portfolio management tool, CRM, financial planning, etc.

The reason I didn’t mention these as “day one” costs is most are priced on a going-forward basis. Now, if you need some sort of data migration, maybe from an old CRM, there could be some upfront costs, some day-one costs, but typically, most of the cost of third-party tools is on a going-forward basis.

These tools are usually priced out monthly or quarterly. Some of the more elaborate tools like portfolio management, you can sometimes get the first couple months for free as part of signing up. But for the most part, these are ongoing costs on a going-forward basis.

The price of technology will range significantly as well. It depends on how many tech tools you want to use, and how elaborate they are.

I have two more “day 2 and beyond” costs to note.

The first is office expense. Whether you are paying rent for the office you’ve built out, or you’ve acquired a property, the related cost is a meaningful going-forward expense to consider. If you have a modest office, or if you want a very extravagant office in maybe the largest office tower in town, that’s going to have a much higher price-point.

The final price variable I want to note is the cost of your staff. If you have only one person, that’s one price-point. If you have a team of 10, that’s going to be a different price point.

Office expense and staff expense are two of the biggest expenses associated with running an independent practice.

For some of you, if you are already independent, perhaps with an independent broker-dealer, you likely already have your own office. So, that “day one” expense of buildout might not apply to you.

You almost assuredly already have your own staff, so you’re already paying those expenses.

So for some of you, depends on where you’re coming from, you’re not going to have as many of these start-up costs because they’re things that you’ve already implemented into place.

But if you are coming from a captive W2 wirehouse-type environment, most of these are going to be new expenses for you.

Now with that, that dovetails into a point I want to make. Don’t be intimidated by any of this. Don’t fear how much this all is going to cost. You are already paying for it now. If you’re at a wirehouse firm, you are paying for the office, you’re paying for technology, compliance, staff, you are already paying for that. It’s just in your payout. I talk a lot about that. You have to take the inverse of your payout, that’s what you’re effectively paying for these things.

For many of you that have large practices, that’s a very large dollar amount that your firm is retaining from you every year to provide you with those services. Part of this exercise is can you put all these things together yourself for less?

Yes, you might have to pay for compliance on your own, and office expense on your own, etc. But if you are already paying hundreds of thousands of dollars, if not millions of dollars, to your firm now (via the payout retention), that is a lot of capital to work with to cover these expenses on your own.

Generally, you can do it for a lot less money, particularly if you control your costs well. One of the economic advantages of the RIA model is your ability to control your P&L, your cost structure. Any savings you have versus what you’re effectively paying for it now via your payout flows right into your bottom line.

Don’t be intimidated by the process, don’t be intimidated by the cost. An example I give frequently – which is not as relevant with today’s interest rate environment – is the process of refinancing a mortgage to get a lower interest rate.

A refinance is not a fun process to go through.  There’s a lot of paperwork, things get lost in the process, you perhaps must shop around to figure out which lender to use. None of that is fun.

Setting up an RIA is not a lot of fun either. It’s a lot of work. But similarly, once someone has refinanced a mortgage, once they have that lower interest rate, once they’re saving money in perpetuity going forward each month on their interest payments, no one ever looks back and regrets having gone through the (hard) process.  The result made it worthwhile.

It’s the same thing with starting your own RIA.

There are costs involved, there’s a lot of work involved. I’m not going to sugarcoat that. But if it makes sense for you to transition to the RIA model – again, something I help advisors determine – once you’re over the hump, and you’re significantly better off than before, the transition process is all worthwhile. So, don’t be intimidated by the process.

Also, not to give a sales pitch, but this is what I help advisors with. You don’t have to be overwhelmed by all the variables. That’s what I help advisors with.

If we get past the first part of the conversation, which is, should you even be exploring this? Does this make sense for your practice? If it does, then we talk about the different pathways into the model. And then eventually, we talk about who the solution providers are.

It is all doable. There are 30,000+ RIAs. You need to understand the process, understand the boxes you need to check, and work through it.

Speaking of checking boxes, I have a one-page checklist that identifies the main variables you need to solve for if you were to leave your current situation and transition to the RIA model. If you want the checklist, just go to the website (TransitionToRIA.com). My email’s on there. Reach out to me, I’m happy to send it to you.

The final point I’ll make on this episode is to recognize you might still be saying to yourself, “Wow, that’s still a lot of variables, I don’t know that I want to do all that. I like being a financial advisor. I don’t necessarily want to piece together technology stacks and worry about compliance.”

There are some wonderful – what I often refer to as “bundled” – solution providers out there, all different flavors.  These are offerings that recognize many advisors wants the benefits of the RIA model, the better economics, the better flexibility, but maybe don’t want to have to manage all these day-one variables and ongoing components of running an advisory practice themselves.

These providers have bundled up ~80% of the needed solutions for you. They’ve packaged up what they feel are the best set of solutions available in the marketplace. They price it altogether and provide it all for you.

There are all sorts of flavors of this to choose from. I’ve done some episodes on supported platforms. I’m happy to discuss these options with you if you’d like.

I hope this has given you an idea of some of the start-up costs and ongoing costs of running an RIA. Now you understand why I can’t provide a simple, immediate answer to the question, “How much does it cost to start an RIA?” There are too many variables involved, and the variables can range significantly. But I hope this has given you a little idea of what’s involved.

Like I said, my name is Brad Wales with Transition To RIA. This is the sort of thing I help advisors with. What is your current situation? What would the RIA model look like? If it makes sense for you, what are the variables you need to be aware of and solve for to be able to transition your practice to it? I’m happy to have that conversation with you.

As I said at the top, if you go to TransitionToRIA.com, you’ll find all the resources I make available. This entire series in video format, podcast format, I have articles, I have whitepapers.

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 on today’s episode, and I’ll see you on the next one.

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