Q25 – Should I buy an existing RIA or start my own?

Also available as podcast (Episode #25)

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Should I buy an existing RIA or start my own?

There are multiple ways to transition into the Registered Investment Advisor (“RIA”) model.  One such path would be to buy an existing RIA, transfer your existing client assets underneath it, and use that as your springboard into the model.  That is in comparison to logistically starting your own RIA from scratch.  While there are perhaps some benefits to using an acquisition approach, the challenges and potential pitfalls of such a strategy generally make it a less appealing option.

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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:

Should I buy an existing RIA or should I start my own? This is the Transition To RIA video series. It is question #25.

Hi, I’m Brad Wales with Transition To RIA where I help advisors just like you understand everything there is to know about why and how to transition to the RIA model.

Today’s question is…and this is geared towards advisors that already have assets, that already have a book of clients but are looking to transition their model. This is not geared towards (for example) an entrepreneur that is not currently an advisor that wants to buy into our industry or anything like that.

I’ll preface this by saying this is my opinionated answer. I wouldn’t say there’s a perfect answer to this question, and certainly, other people might have different opinions. I did want to share my opinion with you on this because I think there’s some things to think through about this concept of….”if I want to transition into the model and maybe I’ve identified a target RIA for one reason or the other, is the best path to simply buy into that, or should I actually start my own (from a logistical standpoint)?” That’s what we’re going to talk about here on today’s video.

One of the paths to transitioning to the RIA model is to simply join an existing RIA firm. There’s absolutely benefits to that, and for the right profile advisor and for the right services that an existing RIA can provide, it absolutely is something worth considering. That’s part of the conversation I have with advisors that sometimes haven’t even thought of that. They say, “Oh, I need to start my own.” And maybe you should. And maybe that is the best path. But maybe joining an existing RIA is something worth thinking about as well.

This (today’s topic) is not referencing or referring to that concept of going into one. The idea is here, this is more of the advisor that has current assets, that has decided – they’ve worked with someone like me to understand everything there is to know about how this works – and they say, “Okay, I do want to go down this path. Would it be logistically simpler for me to buy an existing RIA to get my foot in the door, to get things going, as opposed to starting one from scratch from a logistical standpoint?”

The reason I bring this up is in the broker-dealer world, and I will say I am by far more of an expert on the RIA world than I am in the broker-dealer world. But it’s my understanding that if you wanted to start your own broker-dealer today – which is less and less likely that you see that going on – it’s a much more cumbersome process. There are a lot of rules and regulations.

Decades ago, it was much more common, even smaller advisors or teams might consider starting their own broker-dealer. With the cost and complexity of running a broker-dealer nowadays, you don’t see that. But there are some instances (in theory) where maybe an advisor, or a team, or some existing firm does want to start a broker-dealer.

It’s my understanding – again, I’m not an expert on broker-dealers – that in that scenario, sometimes it is worthwhile considering simply buying an existing broker-dealer as opposed to trying to start one from scratch. The main reason is because the length of time needed to get a new broker-dealer up and going and approved by the regulators is quite extensive. Much more so than starting an RIA.

So one path people have taken with starting a broker-dealer is you go and, as they say, buy one off the shelf. Maybe these were broker-dealers that existed, small broker-dealers, that existed a long time ago and now they’re barely being used, or they’re not really being used at all but they haven’t technically shut down. They’re sitting there on the shelf, and an opportunity for someone to come along and buy the broker-dealer and immediately go live with this new broker-dealer. Then do whatever it is they plan on doing with that broker-dealer.

That’s something that happens in the broker-dealer world. The question is, in the RIA world, is that a quicker, easier, less expensive way to get your foot in the door and have your own RIA?

I’m of the opinion, which I’m going to share here, that the answer to that is definitely no. Starting up your own RIA, and this is something I help advisors with all the time of how this works, is a process. It does cost money. There is some time involved, but it’s definitely doable, absolutely. With the right planning and the right people you are working with, it is absolutely doable and much easier than this idea of starting up your own broker-dealer.

So you really have to think, “Why would I maybe even consider buying an existing RIA versus simply starting my own?” The only thing I can think of is if there’s an RIA out there that has built a fantastic brand, they are very well known. It might be in your local community and could be very valuable from a client business development perspective.

If that RIA has a well-known brand, and a well-known place in that community, there is value in that. In that circumstance, it might be worth considering….”I’m not just buying the book of clients. I’m buying this brand. I’m buying this name recognition. I’m buying the 20-year history in the community.” There can be value in that. But again, that’s specifically if that scenario exists.

Is that really strong enough to consider that as a reason to go down that path? Related to that, I wanted to give some examples of things you might want to be cautious about. As even if at face value it seems great, and it still could be worthwhile – all the good could be maybe worth more than the risks – but here are some things to be aware of.

If you were to look at an existing RIA…and again, I’m not suggesting you can’t buy practices. That’s a common thing that happens. But usually, what will happen when a practice is acquired is….let’s say I have my own RIA, I’ve already transitioned, and here I am and then there’s a practice I want to buy. The typical arrangement would be I’ll buy the practice. And you’re really buying essentially the book of clients. And I’ll move them into my RIA.

I’m not at all suggesting you shouldn’t consider that. That’s a wonderful growth strategy and it’s happening all the time. The question more so is as you launch, as you first launch your RIA, should you buy an RIA outright and take over their name and everything they have going for them?

The first thing is, even if you think….”This firm has a great name and a great reputation,” maybe they do, but maybe they don’t. How do know that 20% of the clients don’t think highly of the firm and are out in the community bad-mouthing the firm, and the name, and that they don’t think well of it?

You weren’t there during, for example, the 20 years that all that was being built up. You had no control over that. You don’t get credit for the good, but you also weren’t the cause of potentially the bad as well. No firm in any industry will have a 100% positive footprint out there in the marketplace. It’s tough to know which part of that is negative.

When you start your own firm and from day one you have your own firm, you at least know full well the full history of that firm. The full history of clients being happy or not happy. When you buy into a name that you’re now going to absorb, you’re buying the good and the potential bad, and it’s sometimes hard to even know what that is.

Another example is with regulatory exams. In this example I said they’ve been around for 20 years. They’ve certainly gone through a number of regulatory exams over that time. I did a whole separate video on the frequency of the exam process if you want to learn more about that.

Presumably, as the RIA still exists, the exams they received over the years went ok, if not great. But generally, regulators do find things that need to be corrected. You can be sure the next time they come in, they’re going to double-check to make sure you fixed all of those issues.

This can be challenging because what happens if the most recent exam, which could have been a couple of years prior, there actually were a lot of issues? At face value you can’t necessarily tell that from how the RIA looks and what you’re hearing out there in the community. Maybe there are a lot of issues that maybe they did or did not fix.

Now, of course, there’s due diligence you could do on that and ask to see their exam results and things like that. But perhaps they burned a bridge with the regulators the last time they were there and they battled them over issues. Now guess what? The next time the regulators come back and they remember that, they’re not necessarily going to care that there’s a new owner in town. They might give you a little sympathy on that, but it’s still the same firm if you’ve bought it and kept it going.

Now, to be fair, I’m painting all the bad here. There’s a lot of RIAs where that absolutely would not be the case and they’ve had great exams. So I don’t want to give the impression that that’s how it always works because it’s not at all the case. However, it is something to be aware of that could be a variable that’s in play with that.

Another thing nowadays are online reviews. Obviously, there’s particular compliance requirements, what you can or can’t do, or encourage clients to do one thing or not. But you can’t control if a client wants to go out on some website and review that firm. While you could do a cursory look and try to see if those are mostly all positive, how do know that there’s not negative ones out there that you’re not aware of?

Maybe certain clients are very unhappy and they simply haven’t…or now maybe ex-clients….and they haven’t got around to going on there and dinging the firm online because they’re upset about something.

Again, you’re buying into that. You’re buying….now, you also get to buy into perhaps a lot of positive things being said, so there’s two sides to the coin. But if you’re not around from the beginning of the existence of that firm, you don’t know what has or hasn’t happened. You can attempt to ask….”How’s your relationship been with your clients over the last 20 years?” That’s hard to articulate. Only if you’ve been there from the beginning, do you truly know what you’re getting into.

The last example….maybe that RIA has a great marketing approach that they’ve put in place. It seems to generate a lot of new prospective clients coming in. Maybe that’s part of what I want to buy into. If I change the name and all that stuff because I’m only buying the book and not the firm, maybe that all messes it up, and maybe that is a great marketing apparatus they have in place. Maybe there’s a lot of value there. Maybe it is absolutely worth you buying.

However, to think through the different variables here, how do know that maybe they’re doing one approach and it’s with seminars and they have a seminar marketing company they work with. But over here on the side, oh, it turns out they’ve run afoul with Google advertising because they kept violating Google’s terms of service of what you can and can’t do with ads. Maybe they’ve been kicked off of the Google ad platform. But you don’t know that because all you see is what’s working over here.

Hey, maybe in the long run, maybe you don’t need to ever go back to the Google ad platform because there’s other things working or you’ll try other things. But again, that’s the proverbial skeleton in the closet that you might get because you’re buying into this. You buy into the good, you buy into the bad as well.

When you buy a practice and you’re going to keep the practice exactly as is, you’re buying everything. You’re buying all of the positive, all of the goodwill, obviously, the client base, that’s the main thing you’re buying, but you’re also buying the potential other side of the coin. There is the other side of the coin. The question is….how much baggage or skeletons come along with that?

You might find an RIA that’s 98% good and 2% bad. Or 90% good and 10% bad, and the 90% so far outweighs the 10%, that it’s an absolutely good business decision to make. The challenge is identifying that other side of the coin. Is it 2%? Is it 10%? Or is it 30%? It’s tough to do.

That’s why I say unless the brand and the footprint in the community far outweighs the risks, it’s simpler to start your own RIA. Even if your transition – again, this is my opinion – if your transition to the RIA model and it’s going to be simultaneous of bringing your existing clients, and I’ve identified maybe someone I’ve known a long time and I want to acquire their practice, we’re going to do this all at once, I do encourage you to structure it so you technically start your own RIA. You buy the book of clients, you bring those into your RIA because your RIA is starting fresh from a reputation standpoint, a regulatory standpoint, a client perception standpoint.

Again, pros and cons to that. You won’t necessarily…well, you hopefully get the goodwill of the clients you’re buying…but you’ll be foregoing maybe the goodwill of that name in the community. But again, you have to think of both sides to that.

This is my opinion. Other folks might have a different opinion, but I did want to do a video on this. I’ve been asked this before, to lay out some of the variables that are worth considering of the path to get there. Some of you, or maybe most of you, weren’t even aware of that whole broker-dealer thing, of that’s a way to get into the broker-dealer world. Because you probably you have no interest in starting your own broker-dealer. But to the degree you ever heard of that, this idea of, “Oh, should I buy one off the shelf and go with that?” I did want to do this video to show how it’s way different in the RIA space than any of that broker-dealer pathway is.

With that, like I said, I’m Brad Wales with Transition To RIA where I help advisors like you understand everything there is to know about why and how to transition to the RIA model.

Whether that’s…what does your current firm look like, you want to make a transition, should you do what we’re talking about today? Should you buy a practice? Should you buy a book of clients? Or should you start with your own clients and maybe you do that down the line? That’s the sort of thing I help advisors think through all the time. I’d be more than happy to have that conversation with you as well.

If you’re not already there, jump on over to TransitionToRIA.com. I’ve got plenty more videos posted. Whitepapers on the economics of the RIA model. The easiest thing is right there at the top is a contact link. I encourage you to jump on that. You can instantly and easily schedule a specific date and time that we can have this sort of conversation and cover whatever subject matter you would like to learn more about. What it might look like to maybe move your existing practice and transition it to the RIA model. I’m more than happy to have that conversation with you.

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

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