Q104 – Should I Transition To The RIA Channel At My Multi-Channel Firm?

Also available as podcast (Episode #104)

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Should I transition to the RIA channel at my multi-channel firm?

You’ve done your research and concluded that transitioning your practice to the RIA model is a good fit. The firm you’re currently affiliated with has multiple affiliation models, with an RIA channel option as one of them.  Should you transition over internally to that channel, or should you look outside of your firm for a solution?  Advisors that are at such firms have this additional variable to consider as part of their due diligence.  For some advisors, an internal transition is a good fit.  For others, external solutions provide a better path.  Either way, advisors shouldn’t make the decision based solely on what the easiest path is, instead you should focus on what is best for your practice long term.

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Full Transcript:

Should I transition to the RIA channel at my multi-channel firm? That is today’s question on the Transition To RIA question & answer series, it is episode #104.

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 RIA model.

Again, TransitionToRIA.com.

On today’s episode, we’re going to talk about an advisor scenario I come across often. It’s sometimes thought of, “should I make an ‘internal move’ within my firm to this RIA channel they have?”

Depending on what kind of firm you’re at, maybe you’re in a W-2 model or 1099 model, but let’s assume you’re at a so-called multi-channel firm. Examples of those are LPL, Raymond James, Wells Fargo. They have multiple affiliation channels and one of those is the so-called RIA channel, or that’s how it’s sometimes expressed.

Advisors in other channels, W-2 or independent contractor, are saying, “Maybe I want to transition my practice to that. Is that a good move for me?” That’s something I help advisors with frequently. That’s what we’re going to talk about on this episode.

The first thing you want to think through whenever I hear this question asked is exactly what are we referring to when we say the RIA channel of your multi-channel firm?

I hear it used referring to different things. I want to give a couple examples of what some of those flavors are and then clarify what I’m going to be talking about on this episode and then we’re going to dive into some details of that.

In some instances, firms will refer to their RIA channel as their corporate RIA offering –  I’ve done an episode on what is a corporate RIA. If you’re at a traditional “broker-dealer” and you’re already offering fee-based accounts to your clients, you are already under some flavor of a corporate RIA now.

Be careful though, as sometimes firms want to position that as, “That’s our RIA channel.” As the reality is you are under an RIA in that. They could call it the RIA channel, but it’s typically not what advisors are thinking when they’re talking about, “I want to move to the RIA channel.” But it might be what their firm is referring to. So keep that in mind.

Another variation I sometimes hear is where a firm is referring to their corporate RIA, but where the firm says, “You can be under our corporate RIA and not have any tie to our adjacent broker-dealer.”

In that scenario, you are dropping your 7, you’re dropping the broker-dealer, you’re dropping FINRA, you are going to be, as they say, “IAR-only” under the corporate RIA. I’ve heard some firms that will refer to that as their “RIA channel” when it’s essentially often not a whole lot different than what the advisor might have now. It just so happens to be the advisor is fully breaking away from the broker-dealer side of things and are going IAR-only in that capacity.

And then another example relates to firms with hybrid solutions, and you’ve heard me rant on a couple of episodes, I’ve done specific episodes on what is hybrid. That’s another buzzword. You gotta be careful because it’s used in different capacities by different firms, and you must understand exactly what model they are referring to.

Even in that “hybrid model” that could be a version of their so-called RIA channel where they say, “Come under our corporate RIA, and if you have commission assets you can use our broker-dealer for that.” And the reality is that’s pretty much simply describing what we think of it is an independent broker-dealer channel. But next thing you know, they’re calling it the RIA channel, they’re calling it the hybrid channel. So again, you must be careful with exactly what is being referred to in that regard.

The flavor of RIA channel that we’re going to talk about in today’s episode is what most advisors reaching out to me are referring to. Where their firm has a custodial channel. Their firm might have a W-2 employee channel, might have a 1099 independent contractor channel, might have other channels, but they also have a custodial channel.

Advisors reaching out are thinking, “If I wanted to leave the channel I’m in now, start my own RIA, but instead of taking my assets and my clients elsewhere, I’m going to make the so-called ‘internal move’ to the custodial channel that my firm has. Maybe that’s the best path for me.”

That’s what we’re going to dive into here about is that a good path, should that be something to consider, pros/cons, those sorts of things.

One last item from a definition standpoint. There are some solutions that essentially position their offering as a custodial offering, but the reality is their firm is not self-clearing. They’re calling it an RIA channel, a custodial channel, but they are not the underlying custodian that is holding the assets.

It’s not to say a firm that’s not self-clearing is automatically not going to be a good solution for you, but that is a fundamentally different approach and model and perhaps has ramifications for you than a solution that is self-clearing. It’s something to be aware of.

But again, on this episode, we’re primarily talking about that advisor that’s looking to make an internal move to a custodial channel with their firm.

There are two challenging scenarios I want to discuss. I could probably do a separate episode on these, as I encounter this quite frequently.

The first scenario involves when you are at a small or mid-size independent broker-dealer that is not large enough to be self-clearing. They are reliant on a different clearing firm. The two biggest players in that space are NFS, which is Fidelity, and Pershing. So, you might be at a broker-dealer now, but the assets are likely at either NFS or Pershing underneath it.

You might want to leave that broker-dealer and start your own RIA, but you like Fidelity or Pershing. You’d like to keep your assets there. That scenario is a flavor of an “internal transition.”

There are some challenges to this. I won’t go too far into it here because I could make an entire episode out of it. But at a high level, it’s a challenge for the custodian because the custodian’s main client in that relationship is not you, the individual advisor. It is the broker-dealer you work for. Again, they (the custodian) are a clearing firm for your broker-dealer, and your broker-dealer is a much larger client to them than you are individually.

Consider if you reach out to them and say, “I want to leave my broker-dealer, I want to start my own RIA, and I’d like to keep my assets with you.” While that custodian is obviously in the business of keeping assets, it does put them in a jam because they don’t want to give any impression that they are doing anything to facilitate stealing away, if you will, advisors from their large broker-dealer client and accommodating them still on the platform.

That’s a challenging situation I come across all the time with advisors. It’s challenging for custodians as well. So just know, if you’re at a broker-dealer, and it’s not self-clearing, and you think, “I just want to make an internal transition with my own RIA and keep the assets where they are”, it’s not necessarily a simple process.

And then a similar example, if you are with an RIA now that’s not your RIA, and you say, “I want to breakaway, start my own RIA, I like the custodian I’ve been using, and I would just as well like to continue using them, but I want to do it under my own RIA.”

Again, that’s the same challenge for the custodian. They would love to keep your business. But they also need to honor the relationship they have with your current RIA and not give the impression they’re going behind that RIA’s back to try to help you facilitate some sort of exit. This scenario creates some challenges.

Custodians tend to handle these scenarios differently. The main takeaway though, and then we’ll move on, is if you’re at a broker-dealer (that is not self-clearing), or you’re at an RIA, and you want to keep your assets where they are, just know it’s not a snap your fingers and it’s all going to even be available to you, let alone easy to make happen.

That’s something I’m happy to have a conversation with you about if you’re in that situation, but it’s something to be aware of.

Now we’ll move on. We’ll take these two challenging situations out of the equation.

We’re going to say you’re at one of these multi-channel firms. Perhaps you’re in the W-2 channel or you’re in the 1099 independent contractor channel and you want to make that internal move. So, a couple of thoughts on that.

First, your firm might express publicly and privately, “Yes, we allow our advisors to make moves within these channels.” But make no mistake, they would prefer you not, not move to the custodial channel under your own RIA.

Regardless of the wordsmithing that is put into public press releases or the executives up on stage and how they express this. Whatever the case is, make no mistake, if you’re an advisor and you’re in a W-2 channel or a 1099 independent broker-dealer channel, they will make more revenue and more income off you (now) as opposed to you sliding over to the custodial channel. That’s due to the economics of how these different models work. And so they’re not going to be excited about this.

Now, at the end of the day, they might not stop you from doing it and it might be part of their value prop to say, “We allow advisors to make this move.” But they’re not going to be bending over backwards to make this possible, to help you with the steps involved.

You can understand their situation, “We’re not gaining any new clients, new assets here, but now we’re going to make less revenue and less income than we did before.”

They might allow it, but they’re not going to get excited about it as opposed to if you were from an external firm looking at their solution. That’s a whole different story because you’re bringing entirely new revenue, new income, new assets to the firm. It’s looked at entirely different. So at least go into it knowing the perspective that the firm’s going to have regarding that.

Next variable….making an internal move is generally, as I say, the easier glide path for a transition. And so a couple of things by what I mean by that.

First, it’s an easier story to perhaps tell clients. They are already familiar with the firm you are at now. If you were to move over to the custodial channel, even though you might have to explain to clients what you’re doing, why you’re doing it – I did an episode on how to explain the RIA model to clients – but the underlying assets are still at the same firm that the clients are familiar with. The story is arguably easier to tell and explain to clients.

Another example with an internal transition, the paperwork involved is generally easier than if you were to go elsewhere entirely.

In some, but not all instances, you avoid an ACAT process of moving the accounts. Though nowadays with the right technology, ACATs are significantly easier than once was. But typically, though not always, with an internal transition you can avoid the ACAT.

There is still paperwork involved. It’s not just flipping a switch and everything instantly moves. There is still paperwork involved. But it’s often less than if you were to move to an external solution altogether. That’s often an appealing part of why advisors look at an internal move.

Even with the easier glide path, I encourage advisors to step back, understand the competitive landscape of custodial solutions, and ask yourself, “If I wasn’t already at this firm, would I choose my firm’s custodial channel as the landing spot if I had to move my assets regardless? What’s best for my practice?” That’s what I encourage advisors to do is at least understand what that looks like.

Now you might say, “Even if I was external and looked at what my firm offers in their custodial channel, that is where I’d want to go.” And if that’s the case, that’s wonderful, because it’s going to be the easier glide path, if that’s the solution you would have arguably picked anyways.

But if it’s not, and you say, “All other things equal, I probably would have gone with this solution over here”, that still might not convince you to do that, but at least you’ll understand where the gaps are between what your internal solution is and what else is available.

Perhaps that competitive gap is narrow enough that it doesn’t overcome, again, the easier glide path. Or perhaps going through that process you realize maybe you’re better off looking at external solutions and need to seriously consider them.

Run that exercise. If you weren’t already preconceived, or had a preconceived idea that you’re going to do the internal transition, which would you go to otherwise?

When making such comparisons, it’s also important to consider how each respective custodial solution prices out their offering.

Every custodian will build a profile of your practice. The kind of assets you hold, the amount of cash you hold, do you use lending, etc. I’ve done an episode on how a custodian generates revenue if you want to dive deeper into that.

They’ll look at your practice profile and they’ll put a pricing package together for you. I encourage you, whatever they give back to you, hopefully, it’s a competitive package, but make sure that is the same package that they would offer someone coming from another firm with your same practice profile. “Is it the same pricing package you would have offered someone coming from a wirehouse externally to you?”

It should be the same. But as I noted prior, the challenge is the firm is not as excited about you making an internal transition. If anything, you’ll be making less money, less revenue, less income for them. Whereas the external advisor would be fresh new assets for them.

I get it. That’s business. They’re trying to grow. There’s nothing wrong with that. But I also feel strongly they should not discriminate against you, particularly if they freely express, “We have these multiple channels and you can move however you want.”

If that’s the case, you should not be at a disadvantage of what you’re offered just because you happen to be coming internally versus the same practice profile of someone coming externally. So, I would ask about that.

There are three main takeaways from this.

First, this topic is more complicated than at first seems. If an advisor says, “I want to go to the RIA channel,” do we even understand what definition of RIA channel we’re referring to in that capacity?

I’m not trying to discourage anyone, but you need to put in the effort to understand it and understand specifically to your scenario with your practice profile to be able to make sure you’re making a good decision. So, that’s number one.

Number two, don’t let a short-term decision overrule a long-term decision.

As you pick a custodian – and one day you might be multi-custodial, I’ve done episodes on that – you are very unlikely to move your assets again unless you get very frustrated with that custodian.

So, this is a very long-term decision you are making about what custodian you go with. Just because a particular path might be the easier glide path in the short term, are you letting a short-term decision decide what will be a long-term relationship?

If your firm’s custodial solution is a good solution for you long-term, then you’re fine. There’s nothing wrong with that. But if it’s not, and you’re choosing that solution solely because it’s the easier near-term process, I would challenge you to think long and hard about that because you’re going to be in this for a very long time, and likely with that custodian. So something to think about.

The final takeaway, is essentially a go-between of my prior point.

I have seen advisors say, “Maybe my firm’s custodial channel is not my ideal solution long-term. But it is what it is, it’s the easier glide path. I want to get my new world figured out first. I’m going to have new responsibilities, the regulatory stuff of this new RIA. I’m going to do a two-step process. First, I’m going to do the internal transition. I am going to take the easier glide path. I am going to go to my existing firm’s custodial channel. And after the dust settles, after I get my new world figured out, I might then add another custodian.”

As an RIA, you can be multi-custodial. Again, check out episodes I’ve done on that. Or possibly you replace your existing custodian that you initially transitioned to.

But unlike most transitions where it’s a rip the band aid, everything must be done at once, one of the beauties of the RIA space is if you have one custodian, you can add another custodian and have them both simultaneously. Then to the degree you want, slowly move accounts to the other one.

Or, you might simply add another custodian and new assets going forward are opened with that custodian.

So, there are some strategies that even if you’re inclined to ultimately have some other custodial solution, either in its entirety over your current firm’s custodial path or as a complement to it, you could do that all at once as part of a transition or you could look at maybe a two-step approach to it. That’s a conversation I have with advisors often as well.

I hope this episode has been helpful, not to add confusion to the process, but to know there are several variables involved. Even when it involves a so-called internal transition at your current firm, there’s still a lot of things that you need to be thinking through as you evaluate what’s going to be best for your practice going forward.

With that, like I said at the top, my name is Brad Wales with Transition To RIA. This is the kind of conversation I have with advisors all day long. Is the RIA model a fit for your practice, as well as all the decisions that go into transitioning your practice to it.

First things first though, head to TransitionToRIA.com where you’ll find all the resources I make available. This entire series 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 a 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 in today’s episode, and I’ll see you on the next one.

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