Q51 – Should I join an existing RIA?

Also available as podcast (Episode #51)

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Should I join an existing RIA?

There are pros and cons to starting your own Registered Investment Advisor (RIA).  As a result, there are circumstances in which joining an existing RIA firm might be more advantageous for you.  An ecosystem of purpose-built RIA platforms has been created to deliver the pros of the RIA model, while reducing the challenges of running your own firm.  Depending on your specific circumstances, joining such an existing firm can be well worth your consideration.

? See also episode #89 where I explain how to perform due diligence on a potential RIA you might consider joining.

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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 join an existing RIA? That is today’s question on the Transition To RIA question and answer series. It is question #51.

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 into the RIA model.

In today’s episode, we’re going to be talking about the pathway of joining an existing RIA as opposed to starting your own RIA. We’re going to talk about some of the pros and cons, the ways to go about doing it, why you might want to do it, and why you should be considering the path as you consider all of the available options.

I explain to most all advisors that I’m talking to – I did an entirely separate episode on this, it’s episode #42, if you want to go back and listen – there are 3 primary ways you can transition your practice into the RIA model. And there’s a variation of the third one, which I’ll touch on.  If you want the deep dive, go into episode #42, you can hear the whole thing.

At a very high level, the three main options are one, start your own RIA; then on the other end of the spectrum, join an existing RIA – that’s what we’re going to be talking about today; and then there’s an option in the middle of that spectrum, where you have your own RIA, but you outsource a lot of your middle back-office functions to partners that are specially aligned to do that sort of thing.

I’ll reference back to the these three models as we go through this, but primarily here, we’re going to do a deeper dive into why you might want to join an existing RIA.

When I say join an existing RIA, in theory, there are thousands, tens of thousands of RIAs out there, so that phrase could apply to joining any one of those firms.

What I’m referring to is not the guy or girl down the street that has an RIA that just happens to have an empty desk in the corner and would love to have you come sit in that desk. That does exist, and that might be a good fit for you particularly. What I’m referring to here is more of what I call RIA platform.

These are purpose-built RIAs to cater to financial advisors – for the reasons we’re going to explain in this episode – that would prefer to join a platform as opposed to starting their own RIA. So, again, don’t think of it as, “the RIA down the street or the one that wants to buy me out as my succession plan,” that exists as well.

These are purpose-built to cater to advisors that generally still have a fair amount of runway left in their career, and they want a lot of the benefits of having their own RIA, but maybe want the easier path both short-term and long-term of simply joining an existing RIA.

I would also preface it – this is another thing I’ve ranted about in episode #44, if you want to go back and listen to that one – there is no minimum amount of AUM required to start your own RIA.

There’s certainly people out there in the industry that will quickly tell you that’s the case and say, “You’re too small to have your own RIA, you should only join an existing RIA.” The reality is, you can start an RIA with zero. There is no minimum requirement.

Now, there’s reasons you might not want to do that because of the economics, and the scale, and things like that. But don’t assume that your size, whether small or large, should dictate whether you should start your own firm, or join an existing firm. And again, we’ll dive into that a little more here in a moment.

So, a quick recap on what it is like to start your own RIA, so you can appreciate the differences of joining an existing RIA platform, and how it compares. If you were to go down the path of starting your own RIA firm, in short, you create the RIA – there’s a whole process, a whole ecosystem of people out there that help you logistically set it up.

You create the RIA, and then you surround yourself by a set of solution providers, or service providers, or vendors, or whatever you want to call them that help you with all of the necessary components of running an RIA. That’s things like having a custodian or custodians, plural, having a technology stack to support your RIA, having a compliance apparatus in place. You have the RIA, and then you build out each of these pieces around it.

The benefit of this is the whole RIA ecosystem is there for your choosing, and you can go out there and find all the different vendors you want to pick and choose from. Particularly, when it comes to technology, there’s literally hundreds of options of all different vendors you could put together. And so it does give you a lot of flexibility to do that.

Likewise, there is also a lot of work and responsibility that goes to maintaining all of these relationships, and sourcing out all of these different vendors, and making sure, particularly with technology, that they all integrate to each other, both initially and stay integrated on an ongoing basis.

There are pros to that and cons to that. Like all three of the options, I always remind people, there’s pros and cons to all of them. There’s no guaranteed answer, “Because you’re a certain size, because you have a certain way you run your practice, this is for sure the best path for you.” They all have pros and cons. It’s a matter of understanding those pros and cons and deciding which one is most advantageous for you.

The question is… Brad, there’s this whole ecosystem out there to do this. There’s people like me that help you figure all this out, and I absolutely do. Plenty of advisors go down that path. It makes sense for them to do it that way. So, you might say, “Well, why would I ever then consider joining an existing RIA firm, an RIA platform?”

The firms I’m describing on this episode – again, there are different flavors, different variations of it beyond this – these are platforms that enable you to do things such as keep 100% ownership in your practice, use your own doing-business-as name for branding purposes, have the ability to leave at some point in the future if it’s no longer a good fit.

There are different RIA flavors to this though. There are firms that will acquire your practice, there are firms that will insist that you use their brand. There are different reasons those might be a good fit for you. What I’m describing is more to try to replicate that, starting your own, but being able to do so by simply joining a firm.

The value proposition at a very high level of these RIA platform firms is basically saying… “Mr. and Ms. Advisor, you can go start your own RIA, you can build out all this stuff around it, but guess what? That’s going to take a lot of work, it’s going to be a lot of complexity. That’s a lot of things that have nothing to do with working with clients, managing money, which is perhaps or arguably what you like doing the most. So, what we’ve done, as an RIA platform, we’ve gone out there and built that whole platform for you. We’ve sourced custodians. We’ve chosen a best-in-breed technology stack. We’ve sourced a TAMP solution to the degree you want a TAMP solution. Oh, and by the way, because of our size, we have way more scale than you arguably will be able to ever accomplish on your own, and so we can get better pricing on technology, we can get better pricing on TAMP solutions, and we can instantly give you access to be multi-custodial – where if you do it on your own, you maybe you don’t have enough assets to spread out among multiple custodians, or you don’t want to do that initially, because of the logistics. But if you plug into our firm, you automatically get all of that right from the jump and we take care of it and if there ever was an issue, we, the RIA platform, figures that out, you, the advisor, don’t have to figure that out.”

“You can, in theory, have your cake and eat it too. Take what you like of having your own RIA firm, working with your clients, having the independence of branding your practice, but instead, take the logistical things that you might not like as much and let us handle it for you.”

Now, again, I said pros and cons to everything. The pro is this approach is much simpler to move into than doing it entirely on your own. And arguably, on an ongoing basis is simpler to run than trying to do it entirely on your own.

The con is you have less flexibility, in part, because they’ve gone out – as an example – and built the technology stack. As part of your due diligence of such a firm, you would make sure you like what they’ve built out with the technology and the TAMP solution, all those things. And if you do like it, then it might be a great fit because let them handle all of those logistics. If you don’t like it, then it’s not going to be a fit.

I’ll give you an example. There’s a team I’m working with that absolutely loves technology. They love everything about it. They love searching for new technology solutions. They are not intimidated at all by the hundreds of different tech vendors out there that you can piece together. They like that, they want to go out there and build their own tech stack. That team had no interest in joining a platform where it’s already done for them.

Likewise, there are other advisors that don’t want anything to do with making sure APIs integrate with each other, and negotiating contracts, and if one part of the tech stack goes down, how do I fix it. They’d rather just outsource that to someone else entirely and let them handle it.

That’s the value proposition of RIA platforms. It’s essentially done for you, but you have to like what their value proposition is to want to join such a firm.

One of the big benefits of joining such a firm is they handle the compliance responsibility for you. It’s their responsibility to make sure the ADV is updated, and distributed, and all those sorts of things. It’s their responsibility to respond to and handle an SEC exam when it comes along. It’s their responsibility to know when a regulation changes and where that might have to change within the firm as well.

Again, pros and cons to everything. It’s great that they do that for you. Whereas with your own RIA, you’re responsible.

With your own RIA, again, there’s an ecosystem of support providers, compliance consultants that will help you with that. So, don’t think it’s not doable, but there’s no doubt it is easier to outsource that to someone else. But you must be comfortable with how they manage that.

It is the entire value proposition. You have to ask, “Is this a good fit for me?”  If it is, that can be a wonderful pathway for your practice. You might think though, “what’s that going to cost me?” If someone is going to do something for you, obviously, you have to pay them.

Here are some hypotheticals because it’s easy to describe it this way. If you were to join one of these RIA platforms, they have a wide range of pricing, and a wide range of value propositions. That’s one of the things I help advisors with is understand how one firm compares to another firm. There is a wide range of what you pay and what you get. It’s finding a firm that has a good proposition that you like.

Part of how these firms will describe it is… “Mr. or Mrs. Advisor, our platform is priced at…,” – again, I’m just making up numbers here – “25 cents on the dollar you have to pay us and we provide all of this value in return for you. It’s all wrapped up and taken care of for you.”

You might think… “I don’t want to pay 25 cents on the dollar to someone else.” But the reality is, with your own RIA, it’s going to cost you maybe 20 cents on the dollar to build it all out because you do have to pay for all of these things – technology, TAMP solutions, maybe custodial fees that could be involved.

If that’s hypothetically 20 cents on the dollar, don’t think of it as… “Oh wow, to join an RIA platform, it’s going to cost me 25 cents on the dollar.” No, it’s only going to cost you the incremental (5 bps) more that you must pay above what you would have had to pay to do it on your own.

In some cases, that delta is not even there because these firms have much bigger scale so they can get better pricing on things like TAMP solutions and technology than you arguably could on your own.

You must look at not only how much does a particular firm charge, and how does that compare to the other firms of a similar flavor that you might consider. But how does that compare to what it would cost you to do it on your own. Both in hard dollars, and in the intangibles of your time and responsibility of doing all that. You do need to put a value on that to properly compare it to the other option there.

There’s a great book, many of you have probably read it, “The E-Myth” by Michael Gerber. It was released in 1988, so quite a while ago. He’s done some revisions to it, but it is one of the all-time business classics. If you haven’t read it, I strongly encourage you to go read it. Lots of great business lessons, takeaways in the book.

The main theme the author weaves into the storyline is he tells the fictional tale about a baker. This person likes being a baker, and she decides to start her own bakery. This is her dream come true, she’s going to be an entrepreneur, she’s going to be a business owner, she’s going to be independent, all those sorts of things because she loves baking.

The reality though is as she gets into the business, she ends up spending an excessive amount of time not on baking but on things like ordering the supplies, dealing with employees, keeping the store maintained, the rent paid, and all those sorts of things. Likewise, her experience is less than ideal because she loved baking, and now she’s only spending a minority amount of time on what she enjoys doing.

Now, that’s a story that you might hear a lot of the larger wirehouse firms tell you, “Hey, you can be a financial advisor and not have to worry about any of these other tasks.” The reality is that that comes with a lot of…a lot of constraints in that captive W2 wirehouse environment. I’ve done lots of episodes on that, written lots of articles on some of those challenges.

Part of what the RIA platforms say is, “You like being a financial advisor, you like working with your clients, you like managing money, you like doing financial planning, great, you can still do that. You can be independent, and all the benefits of that – 100% book ownership, doing-business-as names, your own brand, that sort of thing. Let us handle the bulk of that non-client-facing responsibility.”

If the baker could write a check once a month and someone else handled all of the non-baking things, she’d get to really focus on what she liked doing, which is baking and maybe promoting and doing business development. Let someone else do the blocking and tackling.

That’s a lot of what RIA platforms position themselves as is you do the part you enjoy, we’ll do the part you don’t enjoy as much. We’ll do it for you, we’ll do it for, arguably, cheaper than you could do it yourself. And even if it is more expensive, from a time and satisfaction level, you’re better off just outsourcing it to us. Again, that’s the argument, pros and cons to both of those approaches.

And then last – you can go back to episode #42, I dive into all 3 models that I talk about – but know there’s kind of a middle option there as well. On one side, we have start your own RIA, build everything out. On the other side, we have joining an existing RIA platform and all the pros and cons of both.

Then there’s a growing ecosystem there in the middle of firms who their value proposition is…you can still have your own RIA – for one reason or another you’re dead set on having your own RIA – but you can still outsource a bulk of the middle office or back-office tasks to us, this middle office firm.

Just know that there are some flavors out there of that. That’s beyond the scope of this particular episode. Maybe I’ll do a future episode on those as well. If there any of those three approaches you want to learn more about, that’s the sort of thing I have conversations with advisors about daily. Please don’t hesitate to reach out, we can dive into that.

I’ll leave you three takeaways on this subject.

First, be open-minded to all three of these approaches. I only did a deep dive on one of them on this episode.  Most of the time when advisors reach out to me to begin a conversation about moving into the RIA model, they are mentally thinking… “I only want to consider starting my own firm.”

That’s all they maybe know exists of a way to go about doing this. I completely understand that. For many advisors, that is going to be the best path for them and the path they go down.

But I always suggest, let’s understand each of these three approaches. Let’s understand the pros and cons of each of these approaches. More often than not, my experience is that after someone has been exposed to all three paths, they generally will look at at least two of them.

It’s rare to have an advisor say they want to look at all three, because by design, there’s variability to them of what you get. But pretty quickly advisors usually, after I lay this out – I have a visual I use to show how it works, the pros and cons, etc – pretty quickly, advisors say… “I’m not interested in the first option,” or, “I’m not interested in the third option, but I do want to learn more about this one and this one.”

That’s usually how the conversation goes. So be open-minded, learn about all three, learn about why you might consider one versus the other. You’ll be surprised, sometimes you’d think… “I’m for sure only going one path”, and then you come to learn maybe a different path is actually a better fit for you.

The next takeaway is that advisors of all sizes go down each of these three paths.

Today we’re talking about joining a firm. Smaller advisors join existing RIA platforms and very large advisors or teams with hundreds of millions if not billions join existing RIA platforms.

AUM is an important factor because there is scale that comes with having your own RIA and having assets involved in that, but if anyone tells you… “How much assets do you have? Oh, because of that, this is the path you should go,” I think that’s incredibly short-sighted. That is a variable to consider, that is a variable to talk about as part of this, but, again, there’s advisors of all sizes who go down all three paths.

And then the last thing I’ll tell you is – because it’s the focus of this episode – there are a number of RIA platforms out there to choose from.  There’s no shortage.  When RIAs learn what I do and learn about the arena I operate in they often reach out to me, and they say, “Brad, we’d love to have you keep us in mind, and maybe recommend us to advisors.”

Part of my value proposition is sorting through all of those available options out there. I will tell you – and I’m supportive of anyone that’s trying to be entrepreneurial – but it is what it is, some platforms are significantly farther along, significantly more advanced, have significantly more resources than others do.

You have a lot of great choices to choose from, if that’s the path to go down. But even within the ones that I think have a wonderful value proposition, that have very competitive pricing, even then you have different flavors, which I think is great.

Some are focused on a particular niche. I’ll give you a couple of examples.

There’s some that say… “We are believers in a very passive investment approach. Even though we’re not going to tell you how to manage your assets, we’ve built our entire value proposition, and resources, and support around that kind of advisor.” If you’re that kind of advisor, that would be a great fit. If you’re not, they’re not a great fit. And that’s perfectly fine.

Others say… “We are very financial planning focused, so we’ve built this value proposition based around supporting you doing deep financial planning with your clients.” If that’s a fit for you, wonderful. If financial planning is not part of your value proposition with your own clients, that firm is not going to be a fit.

This is a beautiful thing for advisors. If you decide joining an existing RIA platform is best, you then have some wonderful choices within that. But again, they vary both on what kind of advisors they’re catering to, what their value proposition is, what the pricing is, and it goes across the entire spectrum to select from.

With that, like I said, my name is Brad Wales with Transition To RIA, and this is the type of thing I help advisors with all day long is have this sort of conversation, how do you go about transitioning into the RIA model.

Talking about this option of joining an existing RIA firm, joining existing RIA platforms is absolutely something I help advisors with. I help you sort through all those different flavors. Know what you can expect from a pricing perspective to what you can expect to receive back as the value proposition. Why one firm might be a better fit for you than another. All those sorts of things I help advisors with. I’m happy to help you as well.

If you are not already there, if you head over to TransitionToRIA.com, you can find all kinds of videos I’ve made, podcasts, whitepapers, all kinds of resources available for free.

At the top of every page, there’s a contact link, you can click on that, you can instantly and easily schedule time to have a conversation with me about this exact topic to say… “Brad, here’s where I’m at, here’s what my practice looks like, here’s the kind of clients I work with, here’s what I want to do going forward. Help me understand my options. Help me understand if this is even something I should be considering.”

And if it is, then we can get into the details of the specific approaches or pathways that might be the best fit for you. I’m happy to help you with that conversation.

Again, TransitionToRIA.com, all kinds of resources, and you can get a hold of me. On each page, just click on that contact link.

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

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