Q65 – Mistakes Financial Advisors Make When Transitioning To The RIA Model

Also available as podcast (Episode #65)

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Mistakes Financial Advisors Make When Transitioning To The RIA Model.

The ecosystem of solution providers supporting the Registered Investment Advisor (“RIA”) model has evolved significantly over the years.  While this has been a positive for advisors, it also has added complexity to the process of breaking away and moving into the model. To navigate a transition of your practice successfully, there are a number of common mistakes that are important to be aware of and to avoid.  These mistakes involve variables around how to learn about the RIA options available to you, the timing of a move, how to keep yourself out of legal trouble, etc.

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Full Transcript:

Mistakes advisors make when transitioning to the RIA model? That is today’s question on the Transition To RIA question and answer series. It is episode #65.

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. You can find all of the resources I make available to help you better understand the RIA model. I have this entire series on video format, podcast format. I have whitepapers, articles, all kinds of resources available for you. Again, TransitionToRIA.com.

On today’s episode, we’re going to talk about mistakes financial advisors make when transitioning into the RIA model. This won’t be an exhaustive list of every possible thing you might want to be aware of, but these are some of the more common things I see come up in conversations I have with advisors, as well as what I see happening in the marketplace.

I have five mistakes I want to talk about on today’s episode.  This is not an exhaustive list, and is in no particular order. But I think you will find these helpful.

Mistake #1:  Not obtaining legal advice when breaking away.

The first mistake is not obtaining legal advice to help you navigate the process of breaking away from your current firm.

No matter what kind of firm you’re at now, whether you’re at a wirehouse firm, an independent broker-dealer firm, maybe even an existing RIA, you assuredly signed some sort of agreement with that firm when you first joined them. It likely outlines certain parameters of things that can or can’t happen – at least in the firm’s opinion – if and when you were to depart.

It’s important that you be aware of what that language is. What does it allow you to do or not do, and how to navigate the steps of leaving your current firm.

While you should read your agreement yourself, and I will give you advice on it as well, there are specialty attorneys that understand what’s in these agreements and understand what the marketplace is currently allowing advisors to do and not to do as they make the move away.

It’s very important that you have that looked at. If you don’t know where your agreement might be, perhaps you’ve been with your same firm for 20 years or so, because this is the primary focus of these specialty attorneys, that they will typically know – if you’re at one of the larger firms – what the agreements typically looked like 5 years ago, 10 years ago, or 20 years ago.  They’ll know what you likely signed and the parameters that were likely in that agreement. They can help you navigate that.

If you can’t locate your agreement, you typically would not want to go to your firm now out of the blue and say, “Can someone please give me a copy of what I signed 15 years ago?” That would likely be a heads-up to them that you’re looking at options. It’s generally not in your best interest to do that.

If you have your agreement, great. If you don’t, there’s still way to work through that process.

Every so often an article will come out about some advisor that ran afoul of their prior firm when they left. I always click on those articles because I want to learn from them. In almost every instance, the advisor did something ill-advised. To put it bluntly, they did something stupid. There could be exceptions, but in most instances, they did something ill-advised.

You need to get the legal advice, and just as importantly, follow that advice.  It is often advisors doing neither of these, that gets them tripped up. It’s usually something a good, experienced attorney would have advised that you not have done.

After the fact, it’s essentially too late, you’re in damage control trying to repair the situation. You can usually avoid those landmines before you possibly step on them and cause you bigger issues as you go along.

Also important is you might have the benefits of the broker protocol. I did an episode on that you can check out as well. The protocol could potentially benefit you and make the transition easier.

The specialty attorneys can help you understand if you can take advantage of the broker protocol or not. And if you can, what the specific parameters of the broker protocol are. It can be advantageous to you, but you have to follow it meticulously. These attorneys will help you understand how it applies to your specific situation.

Now, you might also be thinking, “I’m at an independent broker-dealer and I own my book of clients, so I don’t need this advice. I don’t need these resources. I know they’re not going to come after me.” In many cases, that will likely be the case. However, there are additional variables that you need to be aware of.

For example, privacy policies like Reg SP. Or maybe your particular state has certain privacy rules regarding your client’s data and what you can or cannot take. Just because your firm might be okay with you perhaps taking certain client data or contacting your clients in certain ways, there might be privacy regulations, either at the federal or state level that you need to be aware of as it applies to your specific situation. Even if you’re in that independent broker-dealer world now that you might be departing. So, again, these attorneys help you understand it.

I am specifically referring to “specialty” attorneys in our industry. Some advisors have told me, “I have an old buddy of mine that took a look at my agreement and he does a lot of contracts.” Those kinds of attorneys can understand the generic language in a contract and I’m sure they can give some great advice on that.

However, you really need these focused, specialist attorneys. That is primarily what they do. They not only are good at interpreting the language in agreements, but they know what’s happening in the marketplace. They know which firms are taking issues with which steps advisors may or may not be doing.

It is what it is. You can’t just go to a general contract attorney to have a look at your agreement. You want those specialty attorneys and their specialty expertise and knowledge.

Bottom line, if you’re not willing to spend the money on an attorney, you should not be making the move out of your current situation into the RIA model. It is what it is.

The cost is not measured in hundreds of dollars, it is measured in thousands of dollars. So, there is a cost to it. But taking this step is a bedrock of making a successful transition as it applies to your specific situation, your specific agreement, and the specific firm you’re at now.

So, mistake #1 is skipping this step altogether. If you want to know who some of these specialty attorneys are, feel free to reach out to me. There are some great ones in the industry. I’m happy to pass along some names and contact info.

Mistake #2:  You only consider one firm/model.

Mistake #2 is to only look at one firm or model. I’ve talked on a lot of episodes about how there are multiple different pathways into the RIA model.

For example, you might start your own RIA and build out all the solution providers yourself. Or you might start your own RIA and utilize a supported independence platform. Or you might join an existing RIA. There are different kinds of flavors and pros and cons to different firms you can join and what their value propositions are.

The problem is, if you only look at one firm, that one firm likely only offers one of the various pathways into the model. Ultimately, that might be the model that is best for you and that they might be the best firm to deliver that model for you. But if you only look at one firm, how would you know that? And of course, when they talk to you their narrative will steer you to their particular offering.

Again, that might be where you end up landing. But it’s important to understand what the different models are, and how they differ.

It might be simple to think, if you go from one wirehouse to another wirehouse, that for the most part, it’s the same model. I would agree that’s generally correct. In the RIA world, there are multiple different models use can use to support your practice.

Something I come across from time to time – it happened most recently just a few weeks ago – while early in our conversations, he mentioned three firms that he thought would be good solutions for his practice. He thought they were roughly all the same model, and they weren’t at all. They were distinctly three different approaches.

Now, it’s not this advisor’s fault. That’s part of why my entire business exists is because if you’ve perhaps only been at a single firm or a single affiliation model your entire career (that’s not the RIA model), why would you know of all these different models and all these different firms unless you’re spending considerable time, like I do, to understand them?

In this case, the advisor thought he was comparing apples to apples, when in fact it was apples to oranges. So, again, you don’t want to look at these options in a silo and only look at one possible approach, one possible pathway. But it’s also important to understand these different options so you can compare them as apples to apples.

Mistake #3:  You don’t learn about the responsibilities of the RIA model.

Mistake #3, you don’t take the time to learn and understand the additional responsibilities that come with the RIA model.

If you’ve listened to any of my episodes, watched my videos, read my articles, you know that I’m a straight shooter. There are additional responsibilities that typically come with the RIA model that you likely don’t have now. Particularly if you are a W2 employee advisor somewhere, there will almost assuredly be additional responsibilities you will have in the RIA model that you do not have now.

The different pathways into the model each have various responsibilities that you will have to take on. There are pros and cons to each. And keep in mind, your current firm has pros and cons, as you assuredly know.

It’s important to understand not just how the models are different, but what the responsibilities are.  Are they something you are able and willing to take on? And how will you be rewarded for taking on that responsibility?

If anyone doesn’t point out to you both the pros and cons of a particular approach, they’re not giving you the full picture. You need to understand the responsibilities, how they differ, and the pros and cons of it.

Now, don’t be intimidated by the thought of having additional responsibilities. An example would be if you were to start your own RIA, you will now have the responsibility for implementing a compliance program. The beauty of the RIA world is that it has evolved to the point where there’s an enormous ecosystem of solution providers to help you manage and fulfill these responsibilities.

Thousands of advisors have come before you and have made the move and have used these resources to help them manage these responsibilities. But you first need to understand what those additional responsibilities are, and decide whether you are able and willing to take them on? And then, how to solve for them. What are the solution providers in the marketplace that can help.

Mistake #4:  You let the transition process take longer than necessary.

Mistake #4, you let the transition process take longer than it needs to be. I did an episode on how long it takes to transition into the RIA model. What I’m referring to here is the process leading up to your go-live date.

The time needed to understand the RIA model, the different pathways, the responsibilities, etc. is measured in months, not weeks. You also will have the logistical setup steps involved in the process as well.

What I often see though is advisors arbitrarily prolonging the pre-go-live process longer than it needs to be. That presents challenges.

Now, there are valid reasons you might need to extend your timeline. Maybe it’s nearing the end of the year, and you don’t want to go live right in December, right before the holidays, where it is maybe going to be difficult to get in touch with your clients. So, there are variables as to why you might need to strategically pick a date a little farther out.

But there is oftentimes a tendency to kick the can because of the work involved. And it is a lot of work. Now of course, it’s worth doing, that’s why so many advisors do it. You have a lot of work in a short period of time, but the rewards make it all worthwhile.

Sometimes it’s just easier to arbitrarily kick the can, even if you’ve decided, “This is best for my practice that I do this. I’ve done all my due diligence. I’ve explored the pathways. I’ve explored the responsibilities. I’ve chosen the solution providers I’m going to work with.” At some point, you just have to say, “Okay, we’re going to do this. We’re going to pick a date. We’re going to choreograph everything. We’re going to line everything up, and we’re going to make it go live. But we’re not going to arbitrarily push that process out any longer than necessary.”

I’ll give you some examples of why you don’t want to do that.

First, once you’re going on this path, and you’re getting excited, and you’re going to do this, the reality is you’re going to take your foot off the gas of trying to onboard new clients. You’re not going to do as much business development or prospecting. The reason is because you’re not going to want to bring a new client on knowing you’ll have to be going back to them shortly after to move their account.

As a result, you will take your foot off the gas from onboarding new clients. While you can afford to do that on a short-term basis, you don’t want to make that period any longer than necessary. You need to continue to grow your firm. So, again, don’t arbitrarily make it longer than is necessary.

The next reason you don’t want to make the process any longer than necessary is there will be some awkward conversations you have with existing clients.

Let’s say you’ve choreographed the whole process of when you’re going to go live, and it’s a month before that period. You then have a meeting with an existing client. In most instances, and again, this goes back to getting the advice from the specialty attorneys, you would not want to be divulging to your clients ahead of time that you will be making this move. There are complications with that. The general rule of thumb is that you don’t share the news until after you’ve left your current firm or current affiliation model.

So the challenge is you will have some awkward conversations because you will be meeting with existing clients and you know full well in the back of your mind, “A month from now I’ll be reaching out to you.” And they’ll be thinking, “I just saw you a month ago. Why didn’t you tell me about this then?”

You’ll have to explain, “Unfortunately, this is how the industry operates. It was not appropriate for me to do it at that time and I’m able to now and I’m happy to do so.

Point being though, there is no reason to make that period where there could be those awkward conversations any longer than is necessary. So, again, don’t arbitrarily kick the can just to do so.

The last point regarding a timeline is, once you’ve made up your mind to do this, once you’ve got all the steps in place, you’re getting excited, you’re making this move, you’re going independent, you’re going to have your own practice, every little thing that your current firm does that aggravates you is going to be multiplied times 10.

Likely a reason you’re leaving your current firm is maybe you want more flexibility or they’re monkeying with your payout and it’s squeezing you economically or whatever the case is. You likely already have a number of frustrations with your current firm or your current model.

Once you get excited about making this move and it’s in motion, and you haven’t yet reached your go-live date, trust me, every little thing (at your current firm) is going to needle you. Every little pushback from compliance, everything is going to be amplified in your mind times 10. It will be very aggravating.

Because you’re excited about going to this better situation, this better model, everything negative at your current firm is going to feel amplified. No need to arbitrarily make that period any longer than is necessary.

Mistake #5:  You don’t get independent advice.

The last mistake is self-serving for me to point out, but it is when you do not get independent advice about the things I’ve been talking about here. It is self-serving for me to point out because this is what I do with my firm. I help advisors understand all of the different models, all of the different firms and solution providers in the marketplace. It is important to have that independent advice.

I know this firsthand because before I launched Transition To RIA, I used to work at a custodian. One of the challenges that I struggled with is because I was at that one solution provider, I was tasked with explaining to advisors how only that one solution works. As a result, there’s a particular narrative that’s associated with that.

Now, there’s some wonderful business development people at all the different firms and models, and they are doing their job. They are explaining how their solution can help you.

The challenge is they are not, by nature of how they’re employed, necessarily going to say to you, “Oh, hey, our solution works. But, in your case, because of your specific practice profile, you’d actually be better over here in this model or with this firm because they provide it better than we do over here.” They’re not going to say that. They are in the business, as they should be, of explaining their solution.

Whereas if you get an independent voice – again, that’s what my business does – I’m agnostic, I’m independent from any one solution. I can say, “Here’s how the models and firms differ. Here’s the pros and cons of them. Here’s why you might consider one over the other.”

I can independently help you think through how they compare and which might be the best for you. You need that unbiased, independent advice.  That’s why I started my firm is to be that independent provider. I’m happy to have that conversation with you as well.

So, again, mistake #5 is not having an independent perspective to help you navigate the options available to you.

Like I said, my name is Brad Wales with Transition To RIA. This is the sort of thing I help advisors with. Avoiding these mistakes. Understanding the responsibilities. Understanding the options available to you. Helping you navigate the timeline of starting your own firm. I’m happy to have that conversation with you as well.

If you’re not already there, head over to TransitionToRIA.com. You can find all my resources. The videos, the podcasts, whitepapers, articles, all kinds of resources.

At the top of every page is a contact link. Click on that, you can instantly and easily schedule a one-on-one conversation whether you want to talk about the topic of this episode or anything else RIA-related. I am 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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