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Also available as podcast (Episode #134)
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What Are The Biggest Ways To Screw Up A Transition To The RIA Model?
TL;DR – White not an exhaustive list, five critical areas where advisors can make mistakes: 1) Not thoroughly researching the RIA model to understand if it is a fit for your practice; 2) Not thoroughly researching your options of how to transition into it; 3) Misjudging your client loyalty; 4) Not getting proper legal advice on how to navigate the departure from your current firm; 5) Not following a time-tested approach on how to navigate a transition successfully.
Host:
Brad Wales
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Full Transcript:
What are the biggest ways to screw up a transition to the RIA model? That is today’s question on the Transition To RIA question and answer series. It is episode #134.
Hi, I’m Brad Wales with Transition to RIA where we 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 we make available from this entire series in video format, podcast format. There are articles, whitepapers. All kinds of things to help you better understand the model.
Again, TransitionToRIA.com.
Today’s episode is a bit of a fun one. Well, fun, but serious. And that is… what are the some of the biggest ways you can essentially screw up a transition of your practice to the RIA model. With the idea being let’s identify what some of these are so you do not screw these things up during a transition with your practice.
I have five examples I want to go through on this episode. There are other things that are very important to this whole process that I talk a lot about in these episodes. I’m happy to have a one-on-one conversation with you about different topics. But these are five of the bigger ones that are important to understand.
Mistake #1 – Not researching the RIA model thoroughly.
The first way to screw up a transition is to not research the model thoroughly.
I am obviously a big believer in the RIA model. The entire business, Transition To RIA, is based on the premise that the wave of advisors and teams moving to the RIA model will only continue to pick up steam as it has for years now and that the trend is going to continue.
However, it is not for everyone. It is not for every advisor. It is not for every team.
You really need to understand what does it look like? It comes with significant advantages, which I talk about in lot of these episodes. Whether it’s economic advantages, flexibility advantages.
But it also, no matter which pathway you take, typically comes with more responsibilities than you likely have now. So yes, there are advantages, but what are the responsibilities? Because if you’re not able or willing to handle those responsibilities, you will be screwing this up if you go through a transition and only find that out on the back end.
You want to educate yourself, based on the profile of your practice, are you a fit for the model?
Just because someone else has made the move, perhaps even someone, if you’re at a wirehouse, perhaps even someone in your branch, they’re at the same firm you’re affiliated with and they’ve made the move.
Well, hopefully they did their homework and concluded that it made sense for their practice. But just because it made sense for their practice doesn’t necessarily mean it’ll make sense for you.
You want to ask those questions, get educated, what would my practice look like on the other side? Am I a candidate for it? Can I accommodate, for instance, the remaining commission assets that I have? If you manage money in a particular way, will I be able to continue to do that on a going forward basis?
You want to figure these things out because there’s no reason trying to go through a transition and screwing all this up if you’re not a good fit to begin with.
And I would just say careful who you take that advice from. This is self-serving for me to say this. This is my entire focus. This has been my entire world for almost 20 years is helping advisors understand this.
There are folks however that will be out there trying to help you with this that have only been in the industry for one, two, or three years. Or they have no actual industry experience with what they are now trying to consult to you on.
Again, not to make a sales pitch, but I spent almost 20 years in the business before I shifted to advising advisors and teams on this topic. So just careful who you take advice from. Do they actually have the experience to be giving you the advice as to whether a transition to the RIA model is a good fit for your practice? You screw that up, you could have some problems.
Mistake #2 – Not researching the options available to you.
Next example, if you get past number one, you don’t want to screw this up by not researching the options available to you.
There are multiple ways to go into the RIA model. For some of you it might be starting an RIA. Others of you it might be joining an RIA. There’s a flavor in the middle. And even within those pathways, there are multiple different flavors.
As an example, I see this at times, an advisor will assume the only way to perhaps join an RIA is to sell your practice to them, and they don’t want to do that.
There are some RIAs you could join where it does involve, or even require, that you sell your practice to them. Others, that’s not their business model at all. You would remain 100% owner of your practice. You’re 1099. You use your own brand.
There are lots of different flavors, all these options, and you need to understand them. How do they differ? What are the advantages and benefits of each of the pathways? What are the responsibilities you would have on each of those pathways?
Again, don’t prematurely assume you would never go down a route because of X. Perhaps you won’t go down that route, but perhaps you’re incorrect about what you think are the only options with that route.
There are pros and cons to the different options that are out there in the marketplace. There are reasons you might choose one custodian over another. There are reasons you might choose one RIA over another if you were to join one. There are reasons you would choose your various vendors one over the other.
You need to understand and take the time to research these options. Again, if you screw that up and you find out after the fact – not that you can’t make changes with a lot of these solutions, but it can be very disruptive – it can essentially screw up the transition if you don’t figure this out until afterwards and now it’s to a degree too late, or it’s going to be very disruptive to make a change.
Related to the prior point of careful who you take advice from… there are some very good people in this industry that can help you explore these pathways. But you need to be careful who you’re talking to.
For example, if through this process, the only thing you do is reach out to a single RIA to potentially join, you might talk to someone that could be very knowledgeable at that firm and very helpful, but they are representing that firm.
Perhaps you’ll get lucky and the one option you look at, and the one person you talk to, is the right solution for you. But you might look at that and conclude it’s not for you, and then discard every other option because you’re not aware that there are other ways of doing this.
If you only talk to one particular person – again, there are some very good people, very knowledgeable – but if they are representing one particular solution, whether that could be a custodian, or a support vendor, or an RIA you could join, they are going to tell a story that aligns with what their offering is. You need to take that with a bit of a grain of salt.
As an example, I’ll hear some RIAs that you could join. These are very good solutions. And sometimes an advisor will come to them with X dollars in AUM. Because they (the person at the RIA) are in the business of trying to have you join their RIA, if you ask them… “What do you think if I start my own RIA”, guess what their response is… “You’re not big enough to start your own RIA. You don’t want to do that.”
Now there might indeed be reasons you don’t want to have your own RIA, and joining an RIA would be better for you. But if the sole person you’re getting that advice from can only lead you down one pathway, you’re risking screwing it up by not being aware of what those other options are.
Mistake #3 – Misjudging your client loyalty.
Next way to screw-up a transition, and these are in no particular order, this won’t be an issue for most of you, but it could be an issue for some of you, is misjudging your client loyalty.
You will generally know deep down in your heart how loyal your clients will be to you.
Obviously a big part of a successful transition is to have your clients follow you. You don’t want to go through this entire process and expend all this time, effort, resources, and then wildly miscalculate how many of your clients come with you, and then maybe the new path no longer works and you’ve completely screwed up the transition.
For most of you that have had clients for a long time, they are loyal to you much more so than they’re ever loyal to the firm you’re with now. If you were to make a change, they will almost generally always follow you.
But there are some circumstances you must think long and hard about. If you work in a bank setting and with the majority of your clients you didn’t go out there and source on your own, you came to the bank at some point, they hired you and you inherited all these clients, maybe you realistically don’t talk to them perhaps as often as would be ideal, and they’re very loyal first to the bank, perhaps they have their checking account there, and are less loyal to you as the individual, you need to be realistic.
You’re not going to move 95% of those clients on your new path. Now you might move a big chunk of those and that math might still work for you to go on a new path, but you need to be cognizant of, from a realistic standpoint, where is my client loyalty and how many are likely to follow me?
The topic of how many clients will follow is often a point of anxiety and concern for all advisors and teams. But for most of you, there should be little concern.
From my 20+ years doing this, generally if you have gone through this entire process, you’ve taken the time to understand the model, you’ve taken the time to research all your options, you’ve taken the time to understand and think through your client loyalty, I don’t recall a single instance where someone has gone through all of that work, and all of that due diligence, and turned over all those stones, and then turns out wildly miscalculated their client loyalty and it was an epic failure of what actually moved over.
Generally, with transitions that are a failure there was some wishful thinking involved, or some other circumstances that necessitated that it didn’t work out.
For instance, if you’ve been terminated from your firm abruptly and you weren’t planning any of this and now you’re trying to very quickly go on a new path, that’s very disruptive, your ability to move clients is going to be dramatically different than someone that’s gone through this process at the normal methodical rate.
So, there are exceptions. Thankfully for the overwhelming majority of you, this is not at all going to be a problem, but it can absolutely screw up a transition if you misjudge your client loyalty as part of this.
Mistake #4 – Not obtaining proper legal advice.
Next way to potentially screw up a transition, and a very important one, is if you don’t receive legal advice on how to properly leave your current firm, and just as important, follow that legal advice.
For some of you, you might already be in an independent setting and this won’t be as important of an issue. But even for you, there are still variables involved, such as what client information you’re perhaps allowed to take, regardless of your “independent” status. There are still privacy laws, or maybe rules of your firm of what you can or can’t take, whether it’s protocol. You need and want to get legal advice even if you’re independent now.
And certainly if you are at a wirehouse firm, that W2, that traditional brokerage firm model, you will want the advice.
There are specialty attorneys that this is essentially their primary and sole focus is to be very good at saying… “What kind of firm are you coming from? What have you signed (in an agreement?)”
If you have a copy, that’s great, they can look at it. Or if you signed something 20 years ago and you have no idea where it is, because these law firms specialize in this, they generally will know what you likely signed. What language was in it. What you agreed to.
They’ll help you understand how to successfully depart your firm, and successfully move clients, being cognizant of possible non-solicits you might have, which are common in many instances. Or potentially non-competes. Or sometimes there are even non-client acceptance, which can get a little tricky.
You will want to know what is your legal landscape for departing and being able to take clients with you. It’s imperative, particularly those of you currently in a captive environment, to get that advice. It’s a necessary expense associated with making a transition.
I can help you get connected with these specialty attorneys. But again, not only do you need to get the advice, you then need to follow that advice.
Thankfully it doesn’t happen all that often, but every so often in the industry news you’ll see some article comes out and some firm has gone after an advisor that departed and is attempting to put a TRO, a temporary restraining order, against them, or they’re coming after them in other ways.
I always read the article to understand what happened, see if there is anything to learn from whatever the advisor did.
In almost every instance, they did something stupid. They did something ill-advised that had they got legal advice, and had they followed the legal advice, they would not have been in that situation.
I’ll give you an example. Occasionally you’ll see a departing team will have – and this is an extreme example – but will have gone back into their practice the night before they left, and the print logs show that they printed out 700 pages of client documents.
Clearly, you were doing something you probably weren’t supposed to do when you’re doing it in the 11th hour at night, and the security camera has you with a box filled with printed paper walking out to your car.
You might think that doesn’t happen. But it does, unfortunately. Thankfully, not often, but if you’re in the game long enough and pay attention long enough, mistakes like that are being made. It’s very hard to justify doing stupid things like that.
But even if you think… I’m not that stupid, I’m not going to do that kind of stupid thing, there are other things that can trip you up you might not even be aware of. It could be a protocol related issue, or reg SP, privacy related issues.
You want the advice. Get the advice and follow the advice. Don’t risk screwing that up.
Mistake #5 – Not following an established process for making a transition.
The final example of how to screw up a transition, is not following the established process for making a transition.
I don’t care what kind of firm you’re at now, I don’t care how your practice is, what kind of clients you serve, you are not charting new territory here transitioning your practice to the RIA model.
There are 30,000 RIAs out there. Not 30,000 advisors, 30,000 RIAs. About half SEC, half state registered. There are a couple hundred thousand advisors underneath those RIAs.
The industry has been around long enough to make this a much more seamless process than it was 20, 25 years ago. There’s a methodical way you plan everything. There’s a methodical way you know who are the solution providers you need to lean on to help you with this. There’s a process for setting the timeline for all of this.
You do not need to try to chart new territory, nor should you think you’re charting new territory. You can ride the backs of advisors that have done this in years, decades prior.
You can learn what process has worked previously. What’s the process for people generally in my situation, where I’m leaving from, what I aspire to do. I want to start an RIA, join an RIA, what’s the best way to navigate that?
There is a well-choreographed processes established for how to do that. If you’re not willing to learn that or willing to follow that process, you highly risk screwing up your transition.
There is no reason to risk that when people have done it before and you can learn from them. Just go through the same steps that they have gone through to successfully navigate a transition.
That’s a big part of what I help folks with is, with all my experience, all my years doing this, is to explain how it typically works. This is how it works generally with someone leaving your firm, or a practice of your size. Here’s the things you need to be thinking about, here’s the process of how that typically plays out.
You do not need to reinvent the wheel. You need to get the advice and again, you need to follow the advice if you want your highest chance of success.
And as I reiterated to earlier, be careful with who you’re getting that advice from. Do they have the experience? Have they actually been in the industry or have they’ve just essentially been a consultant the whole time?
And then again, there are some great people at the solution providers. But you need to remember they are ultimately trying to position their solution as what might be best for you and your practice.
With that, like I said at the top, my name is Brad Wales. This is the sort of topic I talk about with advisors and teams all day long. How to make a successful transition, and of course the opposite, how to not screw it up and have a bad transition.
And that assumes you should even be transitioning in the first place, like we talked about it. Does it make sense? That’s what I help you with from that very first part of the conversation all the way through the entire process if it makes sense for you and your practice. I’m happy to have that conversation with you as well.
First things first though, head to TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, there are 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, 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.
And with that, I hope you found value in today’s episode and I’ll see you on the next one.
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