Q42 – How To Start An RIA?

Also available as podcast (Episode #42)

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How to start an RIA?

Starting your own Registered Investment Advisor (RIA) for your advisory practice does not have to be a daunting or complicated process.  While there are technically hundreds of different options and configurations of the model to choose from, the process can be simplified down into three specific approaches.  Each of these approaches have their own pros and cons, and each appeal to different advisors for different reasons.  If you take the time to understand these three approaches, you will not only make the process of transitioning your practice to the model a lot easier, you will also ensure you are making a fully informed decision about what is best for you, your practice, and your clients.

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Want to learn even more by better understanding what a transition to the RIA model might look like for your own practice?  I encourage you to schedule a Discovery call, and I’d be happy to begin that conversation with you.

Full Transcript:

How do I start my own RIA? That is today’s question on the Transition To RIA question and answer series. It is question #42.

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 firm to the RIA model.

In today’s question, we’re going to talk about that capstone question of how do I start my own RIA? And I’ll preface it by saying this video is not designed for a new financial advisor or someone just looking to enter the industry. Maybe that’s the path you want to enter the industry with is with your own RIA, which is certainly doable, but that is a whole different set of decisions and pathway to consider, and so that’s not what this video is addressing.

This video is addressing those advisors that already have established practices, established books of business. That’s who I help with my business is those established advisors of how to move into that RIA model with their existing practice. And so just to keep that in mind, because again, it is a different set of explanations and pathways and all those sorts of things.

Now, I would tell you the process of, how do I start my own RIA can seem rather daunting at first glance. I mean, after all, if you add up all of the various service providers you might end up selecting from or working with, from technology vendors, to compliance vendors, to custodians (just to name a few), there’s literally hundreds of options to be choosing from.

And so that process can seem very daunting. I don’t want to say overwhelming but it is a lot of decisions that might cause you to think, “Oh, wow, how am I going to piece this all together? How am I going to know which of these I would need or not need? And where do I even begin with that process?”

What I wanted to reassure you on this video is it doesn’t have to be an overwhelming process. There is an absolute way which we’re going to go through of how you can kind of work through those steps and figure out what’s best for you and your particular practice.

But I would tell you, you’re not alone if you’re saying to yourself, “Wow! How do I know what these options are?” or, “How do I know what these hundreds of different solutions are?” As the reality is, there are different approaches to the RIA model, which I’m going to go through.

It can be very confusing as to which might be not only best for you but just how do each of these different approaches work. And so a perfect example, I was talking to an advisor recently, and he named off three different firms that he was considering contacting for his particular practice because he wanted to go into the RIA model. He thought he was comparing apples to apples, like, “Okay, this is the kind of approach I want to use. And so these are three firms that seem reasonable. So let me reach out to those folks.”

But the reality is, and I had to walk him through this, each of those three firms he named had very different business models. Now, he might very well want to consider each of those different business models but how he would interact, how he would work with each of those three different providers was very different and he was not aware of that at all.

I don’t blame him for that because as I frequently say, until and if you’ve ever, looked over the fence into how a different affiliation model works, like the RIA model, and maybe you’ve been at, you know, a wirehouse firm your entire career or a particular model your entire career, how would you know how a different model works?

So there’s nothing wrong with not understanding how it works currently if you’ve never taken steps to learn. There’s nothing wrong with not realizing, “Oh, this firm has a different business model than this firm.” Because again, there’s a lot of options out there. It can be very confusing. That’s a lot of what I help advisors with in my firm is helping them understand all of that. But again, you can simplify it and that’s what we’re going to do in this video here.

An example I use – again, it doesn’t have to be a complicated process – the example I will use is you do this all the time with your investor clients. How to manage their wealth, how to solve their financial planning needs, how to put their assets to work in some sort of investments is a very complex, complicated process. For advisors that have been doing it a long time, for you, it might no longer be that complex but certainly, it is complex for the investor clients that you help. Hence why they’re coming to you and paying you for those services is to have you help them simplify the complex.

When you go to a new client, and let’s say you’re a financial advisor that uses mutual funds with clients, or at least some of your clients, wherever the case may be, well, there’s thousands of mutual funds out there when you consider all the fund families, the individual funds, the share classes within each of those funds. It’s thousands upon thousands of options, and so that can seem overwhelming for an investor client that’s not familiar with everything.

But the reality is, as you know, when you first start working with a new client, you’re not immediately trying to figure out all the nuanced details of, “What share class should I use of a particular fund, of a particular fund family?” You don’t jump right to that.

First, you have to get to know the client, get to know what their goals are, know what they’re trying to accomplish, know what their current situation is. And you start, of course, with that, and you help them solve for that and determine a pathway forward. And only then can you start filling in some of these details of all the, in this example, all the different mutual funds available, to the asset classes, all the way down to the microscopic details of share classes.

That’s the same thing with the RIA model. You can’t look and instantly say, “Oh, I have hundreds of options, how am I supposed to pick one?” Instead, let’s simplify the process just like you do with clients on that front end. Let’s get you on the right path first and then everything else starts to fall into place.

So with that, something I explain to almost every advisor I’m talking to that says, “Hey, Brad, I’m thinking about this RIA model. Tell me more about it.” And so, of course, we go over things like the economics, flexibility, all those sorts of things, dive into their practice to make sure it’s a good fit for the RIA model.

Then I explain that at its most basic level, there are three main approaches into the RIA model you can pursue with your practice. And on one of them, there’s a couple of nuances and variations to it, which I’ll touch on here in a little bit, but there’s three main models.

So again, don’t worry about hundreds of choices, just remember three models. If you can determine which of those three models is best for you and your practice, everything else then starts to more easily fall into place as what additional steps or providers you might need to work with. I’m going to go over those three on this question and answer series here today.

I call them option one, option two, option three. I probably should come up with more catchy names for them but it’s just the easiest, simplest way to describe them.

Option one is what most people always think of in the RIA model. That is you go out, start your own RIA, and there’s a process for that, but you start your own RIA, and you build out a team of service providers around your RIA. That’s everything from compliance folks, to technology solutions, to a custodian or custodians, plural.

I’ve done a question and answer on why you might have more than one custodian or not. But the idea is even a custodian is a service provider to you. They are providing custody and clearing services for your clients.

So again, option one, that traditional approach is start your own RIA, go out there and build out your network of service providers around you to provide the needed services to run an RIA.

Now, I’ll back up real quick. Each of these options – I should have said this before I even dove in – each of these options, the three options, there’s pros and cons to each of them. I’m a big believer in being a straight shooter and walking advisors through, okay, here’s the good of this model, and here’s the flip side of that coin, or here’s maybe challenges with the model.

If anyone tells you that there’s some perfect solution, that’s absolutely not the case. I always tell advisors, look, I’m not holding back on this topic. There’s no golden goose that I’m going to divulge at the end of the question and answer segment here that would tell you, “Oh, okay, forget everything I’ve said. Here’s the perfect solution.”

The reality is like anything in life there’s trade-offs. To be able to provide certain pros for a particular solution there might be some cons that go with it. And so it’s just important for you to recognize that, to know that there’s no perfect solution.

Wherever you’re at now certainly doesn’t have a perfect solution. There’s pros I hope to where you are at now, but likewise there’s cons to go with that. So each of them, pros and cons, and it’s just an idea of, hey, which is the best for you and your particular practice?

So again, option one, build out your own RIA or start your own RIA, build out your service providers around it. The pros to that option is it will result in the highest level of compensation and flexibility.

What I mean by that is from a flexibility standpoint, you literally have the hundreds of choices to choose from, to go out there in the marketplace and pick from those hundreds of choices and piece that together, that’s going to give you the most flexibility.

And likewise, because you are willing to do that yourself, and do all that selection, and maintain those relationships, and perhaps where there’s technology involved to make sure they’re integrated, because of that, you’re putting in some of that work, so you then have the highest opportunity from bottom line compensation under option one.

Again, that’s the traditional model. So that’s on one end of the spectrum. Now we’re actually going to jump to option three and you’ll see why I skipped option two. We’ll come back to that in a moment.

So option one on one side, on the other end of that spectrum is an option (three) where there are RIA platforms that you can join. Now, notice I called them platforms. I didn’t say, “Oh, it’s an RIA firm you can join.” Because I think oftentimes when someone thinks of, “Oh, I have to join an RIA, an existing RIA firm,” they think of that RIA down the street that happens to have an empty office in the corner of their complex, and they’d love to have you sit in that and then now you’ve joined an RIA.

That approach does exist. That’s an example of the variation I referenced earlier, that exists. But that’s not what I’m talking about here.

There are what I call B2B RIA platforms, which are essentially RIA firms that you would join as an investment advisor representative. So you are joining their RIA, it’s their platform, but the reason you might do that is because they’ve built that out specifically for advisors like you.

These are not RIAs that themselves go out, trying to generate individual investor clients directly themselves. These are platforms that have been built from the start for advisors to join and the advisors to then go out and have their own direct relationships with clients.

And keep in mind, under this option, you would retain 100% ownership of your book. You would still be able to brand your practice however you want from a DBA name, a doing-business-as name. So you get a lot of the upsides of having your own RIA but the reason you might consider this approach is they’ve gone out and they’ve built out that technology stack. They handle all of the compliance, all of the regulatory aspects of running the firm. They’ve gone out and pieced through those hundreds of options and maybe found a good TAMP solution provider.

They’ve packaged all this up already for you of what they believe is best in breed approaches. And they’ve also taken advantage of their scale because these are usually multi-billion dollar platforms, so they can go to technology vendors, for instance, and get better pricing than you could perhaps with $400 million in assets or something in that range. Just again, it’s a scale game.

They’ve gone out and built out this platform and their value proposition is, “Hey, come to us, essentially use our RIA chassis or our RIA platform, outsource the tech stack selection and integration, outsource all the compliance and regulatory issues to us. You just run your practice, you market your practice, all those sorts of things.”

The pro to that is it’s a lot easier to go down that path then having to start your own firm. And on an ongoing basis, you would not be responsible for managing those ongoing technology integrations. And when the occasional regulatory exam comes up, it’s not your responsibility. They handle all of that. The ADV, they handle all of that. You get to just run your practice.

Now, the cons of that are, again, you give up some flexibility. They’ve gone out and built their own tech stack, so obviously you have to like what they’ve built and that’s part of your due diligence on firms like this. And, of course, you pay them for doing all this for you.

Now, part of it is a cost that you would have had anyways. So if you look at whatever they would charge you, well, keep in mind if you did option one, you were replicating a lot of that directly on your own. So a lot of that is hard cost you were going to have no matter which option you went down.

With option three, you’re essentially outsourcing to someone else, you’re paying a premium for that, but they are also taking that off of your hands for you. So pros, a lot easier. You instantly benefit perhaps from their scale, things along those lines. The cons are again, a little less flexibility and likewise less compensation because you’re paying someone else to do it for you, as opposed to doing it all yourself.

Now, option two fits right in the middle of those two. And now you’ll understand why I jumped from one to three.

Option two is where you go out, start your own RIA. So you still have your own RIA. For some advisors, that’s very important to them for one reason or another. However, you say, “You know what? I really don’t want to have to build out all these service providers myself, and deal with those integrations, and deal with those negotiations on pricing and contracts and all those sorts of things.”

There’s no official industry-wide term for them but “middle office” provider is a term that’s often used out there. Those are firms especially built to say, “You have your own RIA but basically outsource in one swoop a lot of that operational part of running the RIA itself.”

So things like the whole technology stack and integration and ongoing maintenance. Things like the billing of your client’s accounts. Perhaps it’s marketing support to help you with your marketing. It’s all kinds of things, TAMP solutions already built out for you.

All kinds of things that you’re going to have to do as part of the RIA model, whether you’re doing it yourself, or whether, you know, option three, you’re entirely paying someone to do it.

Option two says, “hey, we will do a big chunk of that for you in one basically outsourced path. Start your own RIA and we will do a lot of the non-client facing steps of running your own RIA for you.”

That is very appealing to a number of advisors. The pro of that, for some advisors, they adamantly want to have their own RIA for one reason or another, so they maybe don’t want to consider option three.

Another pro is it’s a lot easier because you are outsourcing a lot of that integration, a lot of those choices. And again, you get to take advantage of their scale as well. They can go to the technology vendors and say, “Hey, we collectively have however many RIAs, and however many billions of assets that are using this particular tool so you have to give us good pricing.” And the idea is they pass that along to you than you arguably could get on your own.

Now, the con to it – again, pros/cons – like option three, a little less flexibility. They’ve, for better or worse, they’ve built it out for you so you have to be comfortable with what they’ve built out for you. And, of course, just like with option three, you’re going to pay them for having done all that for you as well.

Then the final thing with option two is because it is your own RIA, you still retain compliance and regulatory responsibility for your RIA because under that model, you do retain your own RIA.

This is one of the big differences between option two and option three. Option two, you’re outsourcing a lot of that non-client facing aspects to running your firm but retaining the compliance and regulatory responsibility. Option three, you’re taking that even a step further and saying, “I don’t want to do that either. I’d rather outsource that to someone else.”

Options one, two, and three, are all doable. But you might say, “Hey, which is the best one of the three? Brad, which one should I pick?”

There is no best of the three. I’ve talked to plenty of advisors, and I walked them through this, and plenty of advisors choose either one or two or three. Usually, they want to look at, say, two of the three options after they understand all this but there is no best option. It’s entirely dependent on the individual circumstances of the advisor team that’s looking to go into the RIA model and what they want to accomplish with their practice, what they want to be responsible for, and then looking at those three options.

I’ll give you an example of how it can be widely different. I’m working with one team that is absolutely passionate about building out their own technology stack. They love the idea of going out to the universe of available technology solutions, and picking, and choosing, and integrating, and building it out themselves. They love that. They’re going to want to go with option one because that is the option that enables them to do that.

Whereas there’s other advisors that say, “I don’t want anything to do with that, technology integrations and negotiations, at all.” They say, “I don’t want anything to do with that.” And for that advisor, option two and option three then become more appealing.

There is no across the board single best solution. It is based on what the individual advisor or team specifically wants to accomplish.

I did say there was a variation. So option three, which are these RIA platforms you can join, there is a variation from that. There are additional RIA options out there where you can join them but they don’t necessarily fit the exact description I gave. These are firms where maybe you become technically a W2 employee of their firm, or you are required to brand under their name and things like that.

There’s some wonderful options out there, and there’s some reasons you might want to choose one of them. However, each of those are very unique, specific offerings with a unique and different value proposition, so it doesn’t fit nicely into this three-model explanation. I always point out this variation to advisors that I’m talking to as there are reasons certain advisors might want to explore one of them.

As an example, perhaps you are later in your career and you’re in need of a longer term succession solution. One of these providers might be able to provide that perfectly for you because of their specific value proposition, their specific circumstances.

So there are other providers that don’t meet that perfect definition of option three as I described it. I do want to acknowledge they are there. I do talk to advisors about it but it doesn’t fit as easily into the three-model explanation. I guess you could argue it’s a fourth model. But again, it’s very unique, each of those variations out there. I’m happy to talk to anyone that wants to explore those because they do exist, some great solutions, but they are quite unique.

So to wrap up, you don’t have to be intimidated by the hundreds of options out there. You simply have to say, “Which of these models works best for me? Let me fully understand how they work, the pros and cons of each of them.”

You do that at a generic level. You don’t even need to worry about which specific providers necessarily offer them just yet. Because you first say, “Hey, what works best for me in my practice and what I want to accomplish going forward in the RIA model?”

Maybe you want to look at two of the three options and whatnot. Then you say, “Who are the providers out there in the space that can provide me with a solution for each of those?” And so then you start looking at those – that next level of decisions and considerations. And there’s some great firms across all of the spectrums to be looking at.

Then, once you pick that, then you start filling in the final details. And it depends on what path you go down. Again, some of it’s already done for you. So if you’re going down option two or option three, you then don’t need to necessarily go and dive too much more into the technology stack conversation because, again, most all that’s done for you now.

Now maybe there’s some specific technology tool you do want to bolt on that’s not being provided by option two or option three, that sort of thing is still possible, but the bulk of it is already done for you. So you work through these steps.

As you go through them, the decision process gets easier and easier. What started as hundreds of choices, as you can tell we’re narrowing it down and finding the solution that works best for you. It does not need to be a complicated process. You just have to start at the top and work through the steps and work through what’s specifically best for you. That’s what I do all the time with advisors is help them walk through this.

Like I said, my name is Brad Wales with Transition To RIA. This kind of conversation is what I do all day long with advisors who come to me and they say, “Hey, I want to go into this RIA model. How does it work?”

I walk them through the economics. I walk them through the flexibility. I answer countless questions they may have. And then we start talking about this exact conversation of…what do your options look like, and what might be a good fit for you?

That’s a very in-depth conversation. I’ve covered a number of the pros and cons and different nuances to these models here, but clearly, there’s a lot more to it. It’s very dependent on the specific circumstances of an advisor.

Those conversations usually do get quite detailed but at the end of the day, it’s a very simple process as long as you go through it in this particular order that I’ve talked about here.

If you’re not already there, head on over to TransitionToRIA.com. You can find all kinds of videos, podcasts, whitepapers I’ve done to better help you understand everything there is to know about the RIA model.

Then you can easily and quickly schedule a time to have a one-on-one conversation with me. I call it a Discovery Call where I will walk you through this exact thing as it relates to your specific circumstances.

Almost every page has a link, but certainly at the top of the website is a contact link. Click on that and you can instantly and easily schedule time to have that conversation. I look forward to chatting with you about it.

I hope you found value on today’s question and answer and I’ll see you on the next one.

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