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Also available as podcast (Episode #141)
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Is It Easier To Acquire An Existing RIA Or Register A New One?
TL;DR – If you’ve concluded that starting your own RIA is the best path for your practice, should you register a new RIA, or potentially look to acquire an existing RIA already registered? For a multitude of reasons including regulatory risk, reputational risk, legal risk, etc. it is generally better to register a new RIA. To be clear though, this is not suggesting that acquiring another advisory practice is a bad idea, just that acquiring another advisory practice and the structural RIA associated with it can have challenges worth understanding.
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:
Is it easier to acquire an existing RIA or register a new one? That is today’s question on the Transition To RIA question & answer series. It is episode #141.
Hi, I’m Brad Wales with Transition To RIA, where we help you understand RIA model.
If you’re not already there, head to TransitionToRIA.com where you’ll find this entire series in video format, podcast format. We have articles, whitepapers, a vendor profile series. All kinds of things to help you better understand the RIA model.
Again TransitionToRIA.com.
On today’s episode, which will probably be a relatively brief one, is something I get asked from time to time so I wanted to make this episode on it.
As I talk about often on these episodes, there are multiple steps involved with potentially exploring an RIA path for you practice, let alone actually navigating the transition to it.
One of those decision points is should you start your own RIA, other folks go down a path of joining an existing RIA, then there’s also a flavor in the middle.
If you’ve gone through that whole exercise, which of course I’m happy to help you think through, and if you’ve concluded that having your own RIA makes the most sense for your practice, that then brings us to today’s question…. should you register a new RIA, or might it be easier to try to go out in the marketplace and acquire an existing RIA and you’re up and going, in theory quicker or easier?
That’s what we’re going to talk about here.
The short answer, just to cut right to it, and I’m going to give you the reasons why, in almost every instance, it is better to register a new RIA than to acquire an existing one.
Now, to be clear, I’m not suggesting that you shouldn’t potentially acquire an advisory practice, a book of clients from another advisor. That’s perhaps something you’ll do during your career. You might do that multiple times.
But if your thought was… “I could get into the RIA model, and get into my own RIA quicker and easier by just acquiring one, and if I can pick up an additional book of clients as well, that’s even better.”
Again, as I’ll explain, that’s generally not the path you want to take. I want to go over a couple of the reasons as to why that is the case.
First, if you acquire an existing RIA, you are acquiring their past. You are acquiring whatever history they have up until that point. In some ways that could be a lot of good history or a lot of good things that have happened in the past, but you also don’t know potentially negative things that have happened in the past.
Of note, from a regulatory standpoint, if an RIA has been around any length of time, they likely have gone through one, if not multiple, regulatory exams. Which depending on the size of the RIA could be by the state or the SEC.
If you’re buying an RIA, you’re basically buying whatever that track record is. And yes, there’s a chance they’ve perhaps had wonderful exams in the past.
Which as an aside, if you’re going down the path of buying an RIA, you would want to see what their prior regulatory exams were like.
But maybe they didn’t have a good exam, or maybe no matter how much digging you do, you don’t discover all the nuances that might have come out of an exam.
It is typical that during an exam, the regulator might find deficiencies. The idea being hopefully they are simply small clerical type things that can be relatively easily fixed. But even when that is the case, rest assured the next time they come back to do the next exam, they are going to make sure all of them have been corrected.
If they haven’t been corrected, you are likely going to have significant issues.
So if something has happened in the past (with an exam), and you’re not aware of it, well, now you own the RIA, and when the SEC shows up again they’re not going to have a lot of leniency.
They’re going say… “It’s still the same RIA. These things should have already been fixed.”
Even if you weren’t there at the time, you’ve basically bought into those potential hurdles or challenges from the past.
So from a regulatory standpoint alone, not knowing what baggage there might be is a reason to register your own RIA. You’ll be from there from the start and know what has occurred or not from a regulatory perspective.
Related to that, another variable to consider is if acquiring an existing RIA, you’re also acquiring potential client complaint issues.
Some of those prior complaints might have already arose and been resolved. And hopefully the existing RIA shares that information with you and how they were resolved.
But how do you know that some of the clients don’t have grievances that are boiling up and they have not formally complained to the RIA yet and all of a sudden you acquire it and because of things that you had nothing to do with prior, now they decide to make a complaint and now it’s potentially your issue, potentially your liability.
Whereas typically if you’re just buying the client book, there’s kind of a clean slate there when you start over that that client might still have an issue with the prior RIA, but under the new RIA, which they would have had to agree to come over and join your RIA instead, you basically get a clean slate going forward.
So that’s another example, you don’t know what issues are potentially boiling up with some clients if you’re acquiring the whole RIA, acquiring the whole business.
The next variable, which could be a benefit, is if you acquire an existing RIA, you are potentially acquiring a good brand in the marketplace. It’s maybe a respected brand, a brand that has a track record. Maybe they’ve built up an online presence. Their SEO, search engine optimization, for that brand is good.
Those are things that generally can’t be achieved overnight. That takes months, if not years sometimes to build up.
And so you might think… “if I acquire this, I get all that goodwill, that good reputation.”
That might be correct. But again, going back to the unknown, how do you know that there’s not a bad reputation buried out there somewhere, potentially review sites or message boards. That people have complained and there’s negative news about this RIA that you’re not aware of.
A seller is probably not going to go out of their way to point that out to you, as it would likely deter you from buying the RIA.
So yes, there could be good from a reputation brand perspective. But with the uncertainty of the unknown, it could potentially be very damaging as well.
And then the last example I’ll give, and this is not an exhaustive list, if you acquire an RIA you generally are acquiring whatever contractual obligations they have in place at that point. That might relate to, for example, a lease on an office building or whatnot.
Or with technology vendors, there are generally contracts in place. Depending on the vendor, sometimes those contracts have multi-year contracts. If you acquire an RIA, they might have a multi-year contract with perhaps a portfolio management tool and you might get in there and not like that tool, but you still have three years left on the contract you are now essentially obligated to. Which depending on the size of the RIA could be tens of thousands of dollars per year.
Again, that is a potential challenge when acquiring an RIA. For better or worse, you’re potentially acquiring existing contractual obligations.
Whereas if you start an RIA from scratch, when it comes time (for example) for the tech stack, you can piece together whatever technology solutions you want. To be able to start from scratch and only go into contractual agreements with solution providers that you like and that you have chosen.
So those are just some variables to consider of things to be careful about with respect to buying an RIA, versus starting one from scratch.
To wrap up, I would note… a couple decades ago people would start a broker-dealer in some capacities. Nowadays it’s very rare that new broker-dealers are being started. If you look at the statistics the number of broker-dealers has been continuously shrinking over the years, as among other things RIAs continue to rise in quantity.
But there was a time, if you went back say 15 years ago that if you were trying to build some sort of firm and you thought well I need a broker-dealer solution – which I’ve made episodes on how to solve for your legacy commission assets – but there was a time you might have entertained having your own broker-dealer.
It was often easier, even with all the same baggage I described prior about acquiring an RIA, to acquire a broker-dealer, versus going through the very long, often costly, time-consuming process to register a new broker-dealer. It’s a very onerous process.
Whereas in the RIA world, not that it’s an easy process per se, but it’s significantly easier to register an RIA than it was to register a broker-dealer.
Back in the day where perhaps you would acquire a broker-dealer, that was the easier path than trying to start a new one.
It’s essentially the exact opposite in the RIA space. To register an RIA is not massively expensive. It’s not massively time-consuming.
There are lots of steps involved. That’s a big part of what I help you figure out is how does it all work? Should you even be going down this path? Should you be starting your own RIA? If it makes sense to do, what are the steps to get it registered?
But it’s not some monstrous giant process that is so difficult to overcome that it might just be easier to buy one.
As I’m explaining in this episode, I’m arguing the exact opposite. You generally should start fresh with your own RIA. It takes a couple months, takes a little money. But I’m happy to walk you through the process.
With that, like I said at the top, my name is Brad Wales with Transition To RIA. Helping advisors and teams think through variables such as this is something I do all day long. I’m happy to have that conversation with you as well.
First things first, head to the website at TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, whitepapers, a vendor profile series.
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.
And with that, I hope you found value in today’s episode and I’ll see you on the next one.
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