Q98 – Is The RIA Model Right For Your Practice?

Also available as podcast (Episode #98)

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Is The RIA Model Right For Your Practice?

Most financial advisors will benefit from transitioning their practice to the RIA model.  Better economics and more flexibility are the driving motivations for why the RIA model continues to be the fastest growing channel in the industry.  While advantageous for most, it is not for everyone.  Whether because the profile of your practice is simply not a good it, or due to external variables which would prevent you from making a transition even if inclined to do so.  It’s important to understand where the RIA model is a fit, and where it is not.

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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:

Is the RIA model right for your practice? That is today’s question on the Transition To RIA question and answer series, it is episode #98.

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’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 resources to help you better understand the RIA model. Again, TransitionToRIA.com.

On today’s episode, we’re going to talk about is the RIA model right for your practice.

Now, you might think, “Brad, you are the Transition To RIA guy, you talk to folks all day long about the RIA model, you must think it’s for everyone, and that must be what you’re communicating in the marketplace.”

That’s not the case. If you have spoken to me before, or you have followed along on these episodes, you will know that I point out that the RIA model is not a fit for all advisors.

It generally is a fit for most advisors, but there are scenarios where it’s not a fit. Part of my job is to tell you as an advisor if it’s not going to be a fit and not worth exploring further.

You’ll see how this relates to today’s topic, but what I help advisors with, in the most basic explanation, is that there are three main steps of potentially transitioning into the RIA model. And they’re in this order by design.

First, which is today’s topic, does the RIA model even make sense for you? Is this even something you should be exploring further based on your practice and what you’re trying to accomplish?

Second, if you get past that, there are different ways into the model. You could start your own RIA, you could join an RIA, there are some flavors in-between to potentially consider.

Finally, depending on which pathway you choose, who are the solution providers? Who are the firms in the marketplace that can support you with that sort of approach?

I help advisors through all three steps. But the reason they’re in that order is if you can’t get past step one, you don’t need to worry about what the different pathways are, or who the solution providers are.

Maybe you have former colleagues that have gone into the RIA space, or you’ve heard about the trends for years now, how increasingly more advisors move into the RIA space. And so, you say, “Is that a fit for my practice as well?” On this episode, I’m going to give examples of where it’s not a fit for an advisor’s practice and the things you need to be asking yourself to try to conclude where you stand with that first step.

The first example, and this comes up early in one-on-one conversations I have with advisors or teams is I ask, “What are your motivations for even having this conversation?”

Or put differently, if you were to go down this RIA path, what are you hoping to gain? What are you hoping to accomplish? Let’s make sure that your future vision is feasible.

I usually start by asking what your motivations are. No matter how it’s articulated – I’ve heard all different kinds of answers to that question – it typically falls into one of two buckets. It’s either desiring the better economics of the RIA model, or the increased flexibility that comes with it. And usually, advisors are interested in both.

If for example, you desire the better economics, let’s make sure you understand what those economics are and how they compare to what you have now.

Or, if there are things your current firm won’t allow you to do, and you hope you can do them in the RIA model, let’s make sure you are correct about that. Let’s make sure that’s valid.

Perhaps you are restrained on how you can market your practice, or the types of services you can provide your clients, or how you can charge your clients. It’s important to understand, will I be able to in the RIA model?

One of the first conversation points I have with advisors is understanding those motivations. What are you hoping to accomplish? That starts to help answer this question of, is the RIA model the right fit for your practice.

Another consideration that you would want to think through is, what is your asset mix?

As I have mentioned on several episodes, as it is a common misconception, you do not have to be 100% fee only with your practice to move into the RIA model.

You might have a need or a desire to retain some amount of legacy commission business. It might be existing variable annuity positions that are paying a trail. It makes sense for the client to stay in those positions. Walking away from those positions is not reasonable.

There are solutions available to accommodate that legacy commission business, and/or if you want to do new commission business going forward as well.

But the reality is, it depends on what that mix is. Clearly, if you are 100% fee only, the RIA model is going to work as far as the asset split question goes. If you’re 90% fees, if you’re 80% fees, typically that math and the solutions available work as well.

Where it’s not as clear cut is if you’re perhaps say 50-50. Half of your revenue is generated from fee-based assets, half of your revenue is generated from commission assets.

It’s still potentially doable to move into the RIA model with the solutions available that can accommodate the commission assets. The question is, if you’re at that 50-50, is the RIA model really the best way to try to go about doing things?

After all, the typical broker-dealer model, whether wirehouse or independent broker-dealer model, that’s what they cater to. Advisors that have a large chunk of commission assets, and some amount of fee-based assets as well.

It could potentially be accommodated in the RIA model, but if your practice is what an independent broker-dealer or even a wirehouse type firm is set up to accommodate, then that is something you need to consider. It might be your best bet to stay in that channel and not try to make a move over.

That is who broker/dealers cater to. They have decades of legacy technology, compliance processes, to serve the commission based advisor (broker.)

To the contrary, that’s why you see advisors leave those solutions as the advisor becomes increasing fee-based with their practice. Their legacy broker/dealer is not as accommodating to what their practice has become. As they become more fee-based with their practice, they will likely explore the RIA model.

But to the degree the commission side is substantial part of your business, and you want to continue doing meaningful new commission business as well, oftentimes you are going to be better in one of the more broker-dealer-centric models.

The next consideration to be aware of, do you want to be a business owner?

As a financial advisor, regardless what of model you’re in, you are a practitioner of the craft of being an advisor, helping your clients, providing advice. Whether you’re at a wirehouse, independent broker-dealer, RIA, whatever the case is, you’re always a practitioner. You’re never going to have to give that up unless you choose to, unless you choose to build something and eventually run it and have the practitioners underneath you.

However, in the for instance, W2 broker-dealer model, at the end of the day, you are not a business owner. You are a practitioner of the craft. You run your practice with your clients, but someone else is handling all the infrastructure, the overhead, the managerial decisions on how the practice is run, etc.

That might suit you ok, but to the degree you say, “I want more flexibility, I want better economics” that’s where the RIA model and a more entrepreneurial approach, as a business owner becomes more appealing.

If you start your own RIA, or when you join an RIA as a 1099 model, you are now also a business owner. You’re still wearing the hat of a practitioner, but also now the hat of a business owner, and that comes with additional responsibilities that you don’t solely have as a practitioner.

The trade-off though, if you are able and willing to take on those responsibilities, the better economics generally make that well worth your effort and your time, and the flexibility you gain by managing it yourself can often be substantial.

That’s why advisors are increasingly willing and able and desiring to move into a business ownership structure. But make no mistake, you need to understand what the additional responsibilities will be. Are you able and willing to take on those responsibilities? And what rewards will you get from doing so? That’s a common conversation I have with advisors.

Now, to be certain, if you conclude that joining an existing RIA is the path you should be taking, there are some W2 RIAs out there that you can join that will still enable you to primarily focus on being a practitioner if that is your preferred structure.

But if you’re going to go in one of the more independent pathways, your own RIA or a 1099 advisor of an existing RIA, you are going to be a business owner. You are going to be responsible for your local P&L, profit and loss statement. All kinds of benefits go with that though.

The last item I’ll mention on today’s episode – and as always, when I have lists, these aren’t exhaustive lists –there are certain roadblocks that might make it not possible for you to move into the RIA model, even if you want to.

I did a separate episode on this topic if you want to really dive deep on it. But at a high level, a couple of quick items I’ll note here.

If you’ve been terminated from a firm or you have extensive dings on your CRD or broker check, it is not a guarantee that the RIA model is even an option for you. You ultimately would have to be approved, if you have your own RIA, by either the SEC or the state.

If you join an RIA, they must be comfortable doing business with you.

If you manage assets, you must have at least one custodian, perhaps multiple custodians, they need to be comfortable with you as well.

So, if you have a termination situation or have a checkered past on your CRD, there could be challenges for you going down this path. Even if everything I’ve said prior up until this point is making sense, you say, “That’s absolutely for me.” Just know that there could be some challenges there. Those all must be looked at on a one-by-one basis. There’s all different kinds of circumstances and scenarios, but just know there’s more that has to be dug into.

Another example of where it could be difficult is if you’re at a wirehouse now and you’re towards the end of your career and you’re deep into, often referred to as a “sunset plan.”

They’re a kind of internal retirement plan where you’ve arranged, often with a younger advisor, a multi-year handoff of the practice. You both have signed something explaining what the economic terms of that are going to be and what the duration terms are.

If you’re deep into that, it is often hard to extract yourself out at that point and go in any other direction. The RIA model would be in that as well.

So, if anyone is even remotely considering entering one of those sunset plans – on either side of that coin, whether you are the older advisor that’s near the point of needing the succession, or you are the younger advisor that’s potentially on the receiving end of it – understand what the ramifications would be if you go down a sunset path. It could heavily inhibit, if not entirely prohibit your ability to one day move into the RIA model.

It’s not that the RIA model won’t be acceptive to your scenario, it’s extracting yourself out of, in this example, the wirehouse, will be very difficult.

Another example of a deal breaker – I won’t name firms, but it’s been in the news lately – if you have sold your practice to another firm – for whatever reason, succession, you felt that was the right time to take chips off the table and they could help you grow, whatever the desire was – if you have done that, if you’ve crossed that bridge and now you’re perhaps not happy with your dance partner, it is very difficult to then say, “I’m going to go start my own RIA instead and take my clients with me.”

As you can understand, if you were the buyer of a practice, you’ve paid the agreed-upon economics for it, you would not just sit back and allow the seller to have received the money from you and then leave and try to take their clients with them.

Most of you listening to this call have not gone down that path, but if you have already sold your practice, it is understandably very difficult to potentially leave that situation and go on a new path, whether it’s the RIA model or any other model for that matter. Just be aware of that, that would be a challenge.

And then the last example I’ll give, there are certain extremely captive scenarios that just realistically speaking, it would be very hard for you to leave. You can always leave a firm and go in a new direction, but leave and take your clients with you. There’s not very many of these very captive scenarios that can’t be successfully navigated out of, but it’s worth understanding.

For instance, if you work for a retail branch of a custodian – I won’t name names, but you can figure out there’s a few of them out there – and you’ve been hired as an advisor, you’re paid a salary and they’ve basically handed you an entire book of business to manage. You can understand they don’t take lightly if you were to try to leave and go start your own RIA and take those clients with you. They feel those are their clients.

That is a unique situation that’s very different from the majority of advisors who have built the practice themself, have attracted clients themselves. But my point is, and I won’t belabor it here, is just know there are some very captive scenarios that are very difficult to extract yourself out of and potentially go into the RIA space.

Again, this was not an exhaustive list, but if you’re asking yourself, “Is the RIA model right for my practice?” From hundreds of conversations I have every year with advisors, it is something most advisors should at least be considering.

However, as I said at the top, there is a subset of advisors that it might not be a fit for. There’s nothing wrong with considering it to learn more about it. That’s how you determine whether it’s a fit or not.

You need to ask, “How does the model work? What would the additional responsibilities be? What does a transition to it look like? What are the economic benefits? What is the increased flexibility?”

That’s what I help advisors with. It starts at the generic educational level of understanding the model, and then how the model would look for your specific practice based on the clients you work with, the services you offer, and/or the services you want to offer. All the variables that come with it. These are important things to keep in mind as you consider, “Should I make a move to the RIA model?” I’m happy to have that conversation with you.

As I said at the top, my name is Brad Wales with Transition To RIA. Helping advisors understand these variables is what I do all day long. Whether it’s at the top of that process, at the education level, to where we’ve worked through all the steps and we’re trying to pick out the specific solution providers and vendors that you’ll need to support your practice. That is what I help advisors with. I’m happy to have the conversation with you as well.

If you start by going to TransitionToRIA.com, you’ll find all the episodes I make here 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 connect and have that conversation.

Again, TransitionToRIA.com.

With that, I hope you found value in today’s episode, and I’ll see you on the next one.

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