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Also available as podcast (Episode #118)
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Is My Practice Too Large To Join An RIA?
Advisors often ask if their practice is large enough to start their own RIA. On the other end of the spectrum, could you reach a size practice where you are too large to join an existing RIA? There was a time 10+ years ago, where existing RIA solutions arguably couldn’t provide the support and resources that very large advisors and teams needed. That is no longer the case. While not every RIA can support large teams, there are several attractive solutions available. Size of practice alone, though, is not the only variable that should be considered when deciding between starting your own RIA, or joining an existing RIA solution.
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Full Transcript:
Is my practice too large to join an RIA? That is today’s question on the Transition To RIA question & answer series. It is episode #118.
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 practice to the RIA model.
If you’re not already there, head to TransitionToRIA.com where you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of things to help you better understand the model.
Again, TransitionToRIA.com.
Today’s episode is almost the inverse of a question I often get asked, “Is my practice large enough to start my own RIA?”
I’ve done episodes on that. Today we’re going to talk about is your practice perhaps too large to join an RIA?
As background, keep in mind there are multiple ways you could transition your practice into the model. As an example, one path is perhaps you start your own RIA. There are pros and cons to that approach.
Another path is to join an existing RIA solution. There are pros and cons to that approach.
I help advisors down both paths. I talk about both paths frequently on these episodes. There are reasons one path might be better for you than the other.
But because I’m at times asked, “how big do I need to be start an RIA”, it begs the question….is there a point where you’re too big to join an RIA? And so I want to give you a couple thoughts and a couple takeaways on this episode around that topic.
I would start by pointing out, and I rant about this at times, if you ever ask this question to someone, and they give you an immediate answer that has a number in it, or before they even know how big your practice is, you should immediately discount whatever they say after that point.
You need to question what their motivations are to give you that answer. Perhaps it aligns with the solution they’re selling. Or they simply don’t know how the different options work. They only know how one option works.
They have an answer they’re going to give no matter what you say the size of your practice is. So be careful with anyone that gives an immediate answer, or who gives some line in the sand answer that, once you’re above this size, you should have your own RIA. Or if you’re not that size, you should not have your own RIA.
Anyone that gives such a black and white answer either doesn’t know what they’re talking about, or they have motivations for giving you that answer. It’s much more nuanced.
What I’m going to try to do on this episode is help you understand what some of those nuances are.
For starters, if you went back 10, 20 years ago, it’s very fair to perhaps assume or conclude that there is a size, advisor or team size, that’s just not going to be able to join an existing RIA because there were no, back then, attractive existing RIA solutions that could handle perhaps a billion dollar team joining them.
That was accurate, again 10, 20 years ago. The marketplace has evolved tremendously to the point where there are solutions now that can accommodate the so-called corner office team. Whether we want to call that a $ billion or higher. It’s just a good example that very large teams do breakaway nowadays. Some of them start their own RIA, while others conclude that joining an existing RIA platform, an existing RIA solution is the better path for them.
Now, I would preface it, every advisor, every team is unique and different. There are variables where perhaps a large team might not be able to, or want to, join an existing RIA. Perhaps you have several billion (AUM) and there are unique services that you provide for your clients and it’s just not a good fit for any of the existing RIA solutions.
Perhaps you do need to start your own RIA because of your unique service model, but in most instances that’s not the case. Most of the large advisory teams that are exploring this, are perhaps with a large wirehouse firm where the guardrails of the firm prevent them from any esoteric things anyway. So replicating that practice in the RIA model is typically not an issue.
But if you aspire to do certain things, for example, have an in-house hedge fund alongside your core offering, that’s not going to be a fit for most existing RIA platforms, even if they can handle your size.
So just know there are multiple variables that go into it. I’m not going to blindly say that joining an RIA will always be a fit. The devil’s in the details.
The next point, and this applies to whether you want to start your own RIA or join an RIA, there was a time where the RIA marketplace, the resources for the RIA ecosystem, had not evolved to be on par with the big legacy, for instance, wirehouse firms.
That was the argument for a long time, that wirehouse firms could previously say the technology in the RIA space is not as good, the access to investment solutions for your clients is not as good, the resources are not as good.
There was a time 10, 20, 30 years ago where that was accurate. That is no longer the case.
Whether you start your own or join one, the ecosystem that supports the RIA model has evolved so that I will absolutely argue that not only are the resources available on par, in most cases, those resources are better than what you have available to you currently at a large wirehouse firm.
How could that be?
Part of it is just the flexibility. Not only has the technology evolved, many advisors and teams find the technology significantly better than what their wirehouse provides for them, but you also have the flexibility of what technology you want to use. Whereas in the wirehouse world, it is a packaged solution. It’s what you get. It’s what you must use.
And in their defense, wirehouse firms spend a lot of money on technology. They’ve built some good technology. But that doesn’t mean that what’s available in the RIA space is inferior. If anything, it is superior and again, even more flexibility to go with it.
As you consider, should you even go into the RIA model, let alone should you join one, if anyone is telling you that you won’t have as good of resources, that is no longer the case.
Either the people telling you that are stuck in the past and they don’t realize how the world has evolved. Or they’re simply motivated to tell you that because they don’t want you to leave, they want you to stay at their solution.
Educate yourself if anyone tells you that or you’re under the impression things are not as good in the RIA space or if you were to join an RIA they can’t support a large team or they can’t provide me with the services and solutions that my clients are going to need. That’s not the case and if someone’s telling you that or you’re under that impression, you need to educate yourself on it.
That’s what I help advisors with. What do you have now. What is available to you over here? How does it work?
Make sure you don’t fall prey to misconceptions before you’ve even taken the time to learn how it works in the RIA space.
Next, a benefit of what I do, and by talking to a couple hundred advisors each year who reach out to me, I hear all different kinds of scenarios. Different motivations for why advisors are looking to perhaps make a change.
From experience, it would make my job easier if I could just simply point to a $500 million team and declare they are always better off starting their own RIA, or perhaps they are always better off joining an RIA. It’s not that simple. No two teams of advisors are alike.
To stay on with the $500M example, even after talking with me to learn the pros/cons of starting their own RIA, and the pros/cons of joining an RIA – again, I help advisors down both, I’m not biased towards either – one $500 million team will conclude they want their own RIA, and another will conclude they want to join one.
There are no easy rules on this that if you’re a certain size, that one path is better for you than the other.
And so likewise, there’s no size where you should initially assume you’re too big to potentially join an RIA either.
The key is to educate yourself on how both paths work, how it would look for your practice. You might conclude that even with a billion dollars or two billion dollars (in AUM), for all the reasons you’ve come to learn about, that joining an RIA is the best path for you.
No two teams are alike. If you have $500 million, and you had a colleague with $500 million that last year left and did X, whether that was started their own RIA, or joined an RIA, it’s helpful to talk to them and hear about their experience and hear why they chose the path they did. But that doesn’t necessarily mean that’s going to be the path that’s best for you as well.
The final thought before some takeaways, is to remember that economics are not everything with this decision.
As I talk a lot about on these episodes, when I ask advisors what are their motivations for considering the RIA model, it typically falls into two buckets. A desire for better economics, and/or a desire for better flexibility with their practice. Most are typically seeking both.
The point is, the decision on whether to start or join an RIA shouldn’t be based solely on economics.
If it was solely economics and all you cared about was maximizing your bottom line income, and you don’t care how much additional responsibilities you must take on to achieve that, at a certain size practice the economics are generally better with your own RIA.
But that comes with the intangible costs of the additional responsibilities you have, the additional day-to-day things you must do. That’s not as easy to pencil out on a spreadsheet.
The question is, what are you hoping to achieve with a transition?
There might be things you don’t want to be responsible for yourself and you conclude that economics aren’t everything. You want better economics than you have now, but if the max economics requires certain additional responsibilities you’re not interested in doing, there’s a way to potentially avoid that.
It is not solely a spreadsheet exercise. It is important to understand how the economics work, but if someone says… once you’re above a certain size, the economics are always better to start your own RIA, but economics aren’t everything.
Always consider the tangibles and intangibles that go into this.
That’s a few high level thoughts, but I want to leave you with some takeaways as well.
As I noted, ask yourself what are your motivations for why you’re doing this? What are you trying to solve for? If you want better economics, great, let’s understand how the economics work in both paths.
If you want more flexibility with your practice, great, let’s understand how that works with both paths.
If you want both, but you don’t necessarily want a lot more responsibilities than you currently have, great, factor that into the decision.
What are your motivations, and then let’s solve for that.
You need to come into the conversation with a blank slate. I talk to advisors all the time that, from the first time they reach out to me, they’re leaning in one direction. And I say, great, let’s fully understand that one direction, but let’s also understand how the other direction works as well.
Only once you’re fully informed, can you then decide which path is best for you.
The next takeaway… while I’ve talked about there being two paths, starting your own RIA or joining an RIA, keep in mind there are three paths total.
I’m not going to go fully into it on this episode due to time, but there is also a middle path, which I’ve talked about on other episodes.
There are not as many providers in this middle path, but it is where you have your own RIA, yet still outsource a lot of the needed resources you need to a single solution provider.
Point is, be aware there are multiple ways into the model. You need to understand how each of the three work. They all have pros and cons. You need to understand how each of them would look for your practice before you can decide which of the three is best for you.
And you need to understand them at a generic level, before you can start worrying about who are the solution providers for those pathways.
Not to give a sales pitch, but that is what I help advisors with. Understand what are the three models, how they work, what the pros and cons are with each, what your practice would look like with each, etc.
Only then can you determine which path is best for your practice, and then who are the solution providers you’ll need to make that path work.
And then the final item I want to mention, and I referred to this briefly at the top, be careful who you take advice from on this topic.
I don’t want to dunk on anyone. I certainly won’t name names. But you need to be careful about what the motivations are of whoever is explaining this topic to you.
There are a lot of headhunting firms, recruiting firms, that will cold call you up and they might be pitching you perhaps only the idea of joining an RIA. And again, that’s a great solution for many advisors, many teams.
But oftentimes the only reason they’re pitching that, or they’re trying to hard sell you on that, is because they don’t know how the other two options work. They don’t have the experience to help you understand them, or the relationships to help you explore them.
You should always ponder… why is someone so adamant that I should go down the route they’re pitching?
Now maybe, ultimately, that might be the best route for you.
But is the person that’s cold called you out of the blue, capable of walking you through all the options?
It’s always easier for a recruiter to just hand you off to some RIA firm and let them take it from there. As opposed to helping you understand everything involved in starting your own RIA instead, to compare it to.
What the easiest path for the recruiter is, should not dictate what paths you end up exploring.
I see and hear it, I won’t say where, but in industry resources or podcasts or whatever, and I know the people touting a particular path are doing so because it’s perhaps all they know. They don’t have the experience to help you down another path. That’s the easier solution for them to be suggesting. The extent of the relationships they have is for a particular path.
So careful with who you are getting advice from regarding this. If someone comes along and immediately tells you that above/below a certain size AUM you should do one path, or another path, immediately question if there is an incentive for them to be suggesting that.
There are some great resources out there. I’m certainly not wanting to paint a broad brush. But I do see it. It makes me cringe at times how certain things are being answered or addressed. There are at times ulterior motives you need to be conscientious of.
With that, as I said at the top, my name is Brad Wales with Transition To RIA.
This is what I help advisors with. Helping you understand what these options look like, what your practice looks like, how might the options align. Does joining an RIA make the most sense? Will they be able to accommodate your practice?
There are solutions that can accommodate very large advisors and teams. But not all of them can. Some do not have the scale, the capacity to do so.
You need to understand how it all works, who are the providers that can deliver the support and services that you need to run a successful practice. That’s what I do with advisors all day long. I’m happy to have that conversation with you as well.
First things first, head to TransitionToRIA.com where you’ll find all the resources I make available to help you better understand the model. This entire series is available in video format, podcast format. I have articles, I have whitepapers.
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 on today’s episode, and I’ll see you on the next one.
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