Q63 – What Are The Largest Expenses Of Running An RIA?

Also available as podcast (Episode #63)

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What Are The Largest Expenses Of Running An RIA?

At it’s most basic form, transitioning your practice to the RIA model is an exercise in identify what your current firm (affiliation model) provides for you now, and determining how to replicate those services on your own.  Ideally for a lower cost, and with more flexibility.  Naturally, each of the needed solutions comes with an expense.  These are generally not “new” expenses, as you are paying for them now.  The costs are simply bundled into your payout.  In the RIA model, you will instead see each expense item individually.  In return though, you’ll have more control over how much to spend on each.  While there are a multitude of expenses to consider, some of the largest expenses include office space, team members, technology, TAMP solutions, and compliance.

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Full Transcript:

What are the largest expenses of running an RIA? That is today’s question on the Transition To RIA question and answer series. It is question #63.

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 over to TransitionToRIA.com. You can find all the resources I make available, from the entire question and answer series in video format, podcast format, I have whitepapers as well. Again, everything at TransitionToRIA.com. Check it out.

On today’s episode is a question I get asked frequently. In addition to being asked about what the bottom-line income of the model generally is, I am often asked, “What are some of the largest expenses of running my own RIA? What does that look like? What are those costs?”

It’s hard to give an across-the-board answer on some of those because every practice – this is one of the benefits of the RIA model – every practice is unique regarding what their overhead costs will be, what services they will offer, etc. So it’s hard to give any one answer of, “It would cost X dollars.”

In this episode though I will go through some of the biggest expense drivers and give you some perspective on how to consider them, how those prices can fluctuate, what you can do about it, etc.

To start, I want to frame it with what the exercise is of leaving a firm/affiliation for the RIA model is. Whether you’re at a W-2 type firm, like a wirehouse firm, or you’re at an independent broker-dealer firm, or maybe you’re even at an existing RIA and you want to breakaway and start your own, the exercise of transitioning into the RIA model is to ask yourself, “What does my current firm provide for me now? And how will I replicate that if I start my own independent shop?”

I have a checklist on this that helps visualize that process. If you’d like it, reach out to me, I can send it over to you. But that’s the exercise, at its most basic level, saying, “What are they providing for me now?”

If you’re at (for example) a wirehouse firm, they’re providing you things like an office, technology, for better or worse, they’re providing compliance, etc. And so, you identify what is being provided for you, and then you identify how will you replicate it on your own. The goal is to do it for less money than it’s currently costing you, as well as provide you more flexibility with what you want to do with your practice.

Having that conversation is something I do with advisors all the time. Walking through these variables. In this episode, I want to dive into a couple of them.

Now, don’t think of this as I’m going to have to “pay” for certain things. The reality is you are paying for these things now. Go through that checklist, and say, “What does my current firm provide for me now?” You are paying for those items. It’s just as part of your payout.

You might have heard me say before – I’ve written a number of articles on this as well – I always encourage you to look at your “payout” in the inverse.

Using very simple numbers, assume you are at a wirehouse firm and you are producing $1 million in trailing-12 production. Let’s say, again using simple numbers, your payout is 40%.  It’s never that simple though as there are all kinds of variables, gotchas, and changes to it that would make that fluctuate. But let’s just say, it’s 40%, again, for simplicity.

By producing one million dollars in fees and commission revenue, and with a 40% payout, you get to keep $400,000. Stop thinking of it this way though. Think of it as you keep 100%. After all, it is you generating this revenue for the firm. In return, to support your efforts, the firm is providing you with certain things. Perhaps an office and technology, and maybe staff members, things like that. In return for that, you are paying them.

Instead of looking at what you keep of your payout, look at what the inverse is. If you’re receiving 40%, that means the firm is keeping 60%. Or to quantify it – which I always encourage advisors to do – you’re paying $600,000.

So, the exercise is, “Can I replicate what they are providing me with for less than $600,000, and with more flexibility than I have now?”

So, don’t think that you’re not paying for it now, you are. The challenge, if anything, is you are getting a single non-itemized bill for all the expenses. As opposed to seeing an expense line item for office rent, here’s what you’re paying for compliance, etc. it’s just a single lump sum (the inverse of the payout.) And you have little to no control over those expense items.

You are paying your 60%, your $600,000, or if you’re a $2 million producer, obviously, it’s going to be nearly twice as much. They provide you services, but you pretty much have no say over how those expenses are managed and where you might choose to spend more or less. The payout is always going to go to the firm, and they are who manage the expenses.

Whereas in the RIA model, you will be running your own P&L, your own profit and loss statement. You choose which resources you need and how much to spend on them. You have a lot more flexibility to manage your P&L, and to surround yourself with the specific services and solutions that you are satisfied with, not just a non-itemized bill of solutions that’s presented to you.

So, to dive into a couple of these topics, this is in no particular order, these are some of the larger expenses of running your own RIA.

Office space

The first item I’m going to talk about is your office or real estate. This is often one of the largest expenses of having your own RIA. Typically, it is a fixed expense. Yes, if you lease an office, the rent might go up occasionally. And if you own it, property taxes could go up. But it’s mostly a fixed expense. It’s generally a sizable expense to be considering. And again, you’re paying for real estate now, it’s just via your payout.

The way to view office space has really changed because of COVID. There was a time the default assumption would be that you must build out an office that’s like your current arrangement now.

Maybe that involves multiple offices for you and your other team members. You might have desks or offices for members of your staff. Maybe you need one or two conference rooms. This was all based on the assumption that clients demanded this sort of thing. That mindset has generally gone out the window with COVID.

I’ll give you three examples of approaches to real estate that I hear about nowadays.

The first is the more traditional office where you replicate a lot of what you might have now, as I just mentioned. But perhaps you locate it in a more convenient location, or to accommodate more or less team members, etc.  Something like what you have now with your clients. I hear advisors wanting to still do this, and that’s fine.

Next, there are advisors saying, “Because of COVID, I’m meeting with a lot of my clients virtually (ex: Zoom) and a lot of them want to continue to do that. I don’t need as big of an office complex, and the cost to go with it. Maybe I can have a smaller footprint where I have a nice conference room that I can bring clients or prospective clients to if need be. But other than that, maybe we only have one or two offices that are visiting offices for whoever is in that day and needs one.”

As an RIA, you control the P&L. If you can get by with less office space, the savings of a smaller real estate footprint flows right to your bottom line.

Finally, there are some advisors who say, “I go to go see my clients. That might be at a house or some third-party location. Other than that, it’s mostly, if not entirely, virtual via something like Zoom.”

You see this in part by advisors who have changed states, lately in part due to COVID perhaps. They move, yet they keep their same clients, it’s just done virtually. Maybe occasionally they fly in and complement the virtual approach with an office suite they rent by the day or by the hour and use that sort of thing.

A wirehouse team I’m talking to is considering this latter approach.  They meet with most of their clients virtually.  But when they do need to physically meet up, they usually do so at a local social club they are members of.  This is a higher-end social club that has meeting facilities, clubhouse, restaurant, etc.  They meet their clients there now, and the clients really like it.

They’re thinking, “Maybe we don’t need an ongoing office footprint, we’ll go virtual, we’ll go to the client. When we do need a physical meeting, we’ll just reserve space at the social club to use. The cost of doing that will be significantly less than us having a permanent real estate footprint. And then we can write off the cost of our membership in the social club too.”

So, lots of options on how to manage your real estate expense. Do you want a full buildout in the highest floor of the fanciest office tower in town? Well, guess what? Your expense is going to be the largest for that.

Or, do you want something towards the other end of the spectrum?  Mostly virtual, with some sort of physical footprint to use only when needed? That’s going to change your economics. You have control over how much, or how little you want to spend.

Consider creative approaches you might want to use. Five years ago, everyone generally defaulted to the standard setup. For many advisors, that still will make sense because of how they interact with their clients. But again, we live in a different world now with COVID having come, so think that through, as you think about your office expense.


Next, is your staff or team. You have a lot of flexibility regarding the size of your team as well. The larger the team you have, the higher your expense will be.

Part of this is asking yourself, “How much do I want to outsource with my practice?” I’ve talked about this in articles I’ve written, in episodes of this series I’ve done. You can do everything in-house, on-site, or there are an increasing array of third-party solutions that you can outsource a lot of the middle and back-office tasks of running an RIA firm to.

Yes, you must pay for it, but you don’t have to manage the staff on your own. You don’t have to worry about hiring or firing staff. You don’t have to provide them with benefits because, again, you’re outsourcing it to a third-party. So, as you think about staff and how big of a team you need or want, consider what you want to outsource to reduce some of that cost.

An extreme example I’ve heard about, there was an advisor who I think had close to a billion dollars in AUM who only had one other person on his team. He outsourced almost everything. He outsourced the asset management. He outsourced the middle and back office. He ran a very lean firm successfully.

He focused on the things he liked doing, that he felt he added value with, and was not afraid to outsource the rest and let someone else handle it.

As you think through staff – again, we live in a different world now, whether that staff needs to be physically present, whether you can do virtual or remotely located staff, a lot of flexibility – but staff is one of the larger costs of running an RIA. How big is your team going to be, and what’s the cost structure of that look like?


Number three is technology. I did a recent episode on what a technology stack is. If you want to dive further into that, please check out that episode as well.

At a very high level, in the RIA model, there’s several different ways to access technology. The most widely used approach is to build what’s often referred to as a third-party technology stack. While you might use some of the technology of your custodian – or custodians, there might come a time you’ll have more than one custodian – typically, you separate the core technology from the custodian so that you can more easily manage and have an efficient practice, particularly if you are multi-custodial.

The cost of that technology stack will be part of your P&L. There are some key components to that. Again, if you look at the episode I did on technology stacks, it goes into more detail, but there are some main core pieces.

You will need a portfolio management tool, which does things like performance reporting or rebalancing of accounts. You will need a CRM to keep track of all your existing and prospective clients. You will likely, if you do financial planning, need a financial planning tool. There are other kinds of bells and whistles you can add in as well. It is an expense you will have to cover. The cost will depend on what type of tech stack you build.

Again, don’t think you’re not paying for technology now, you are. Your firm is providing you technology. Often you have no choice regarding it. If you’re at a large W-2 firm or independent broker-dealer, you generally must use the technology they provide. Hopefully it’s technology you like. But if it’s not, you have no recourse, you have no ability to go out in the market and say, “Wow, this is actually a better CRM,” or, “This is a better financial planning tool.”

In the RIA space, you have the flexibility to build out what you want. You must accept the mental exercise of seeing an itemized bill for it all. Whereas if you’re in a traditional broker-dealer environment, it’s a blurred, non-itemized bill they give you. But you’re paying for it now.

The question is, would you rather create your own bespoke set of technology solutions, but be forced to see the bill for each one, or do you want it bundled up together? I’ll get into how you can bundle it up if that’s still appealing to you. But make no mistake, technology is a meaningful expense.


Next is a TAMP solution. So, TAMP is turnkey asset management program. I did an episode on this as well, so I’m not going to go into too much detail here. But in short, if your value proposition is such that you outsource the management of the assets to a third-party – that could be separately managed account managers, model marketplaces, that sort of thing – a TAMP is the platform that gives you access to those solutions. There are costs involved with that.

By the way, if you manage assets in-house yourself, you need to factor in both the tangible costs – perhaps salaries of members of your team – and the intangibles – the time required of it all. Or if you outsource it to a third-party TAMP, there is cost involved with that as well. You will want to understand what those costs are and how that impacts your P&L. There’s an entire range of options, both from basic, to more extravagant, and price points all along.


Finally, is compliance. I’ve done all kinds of episodes talking about how you satisfy your compliance requirements. At a very high level, if you have your own RIA, you are required to have a designated chief compliance officer, a CCO. That doesn’t have to be a standalone CCO. It’s generally someone wearing multiple hats.

You might say, “I’m not a compliance professional. I have no interest in being a compliance professional. How or why would I ever want to do that?” And the reality is there’s an entire ecosystem within the industry to support what you need to do to satisfy that requirement.

The typical approach is you use third-party specialty compliance consulting firms that you hire and say, “I have this responsibility. Apparently, there’s things I’m supposed to be doing throughout the year. There’s once annual exercises I need to be doing. As rules change, how do I adapt?” Well, you don’t have to worry about figuring that out, you pay these firms to help guide you on that process.

But, there is an expense with that. There’s a range of options available, up to having a fully outsourced CCO. That’s going to have a higher price point though.

I often hear advisor proclaim they will have to pay for compliance if they go the RIA route. Again though, you’re paying for compliance now, it’s just built into your payout.

However, if you’re in a broker-dealer environment, you have no say in that compliance apparatus. If you are not satisfied with the team members or how they deal with things, or if they are responsive or not to you, you have no say. You are captive to that compliance department, take it or leave it.

In the RIA world, for the first time likely in your career, you are the client of compliance. If you engage one of the compliance consulting firms you do need to listen to what they tell you. If they say you can or can’t do something, you’re hiring them to help you understand the rules and stay within them.

But, to the degree they are not responsive, they are not willing to think through creative solutions, they’re not timely in getting back to you, you can fire that compliance consulting firm and hire another one. The flexibility to manage your compliance is significantly better in the RIA space.

Again, you must be willing to mentally see an itemized bill that says compliance on it, because you will have to pay for that. There’s a range of compliance consulting solutions from basic, which then puts more of the onus back on you, to a very full-service type offering, but obviously comes with a higher price point. So, that’s going to affect your P&L as well.

Those are five of the larger costs of running your own RIA. It’s not an exhaustive list. There are other costs, of course, like marketing, how are you going to market your firm, what that cost is going to look like. Or obtaining errors and omission insurance, E&O insurance. I’ve done episodes on both of those topics.

There are other smaller expense items as well, so I don’t want this to come across as some all-inclusive list of the expenses you’ll have. Again, reach out to me. I have a checklist that will help you think through the things that you would need to replace that your current firm is already providing for you.

The last thing I’ll touch on, one of the benefits of the RIA model is your flexibility to pick from hundreds of different solution providers in the industry. Everything from technology to custodians to compliance consulting firms.

A lot of advisors love that and they say, “I want to pick and choose from all these different things, and I want to figure out why I like this one versus this one, and what are the costs and all that.” While other advisors say, “I want more flexibility than I have now. I want the benefits of the RIA model. But I don’t prefer to piece together a technology stack or figure out how I’m going to do my fee billing, or maybe get a TAMP platform integrated.”

There’s an increasing group of solution providers that recognize that and say, “Advisor, as opposed to you piecing those together – which you’re not really adding any extra value with some of those commoditized items, your clients are not attracted to you because of your behind-the-scenes tech stack or how it is you logistically perform your fee billing every quarter – we bundle up those core pieces for you from the best-in-breed options available. And by the way, we have more scale than you have, so we’re going to be able to obtain those services for a lower price. All you must do is your due diligence on us and what we’ve built out.”

This sort of approach simplifies your P&L, simplifies the logistics of running your firm.

There are pros and cons to both approaches. Some advisors love building their own bespoke solutions from the hundreds of options. Others say, “I want to focus on things where I can really add value with my clients, and I want to outsource the rest. I’d rather outsource to as few vendors as needed because that would be easier for me to manage, and I get some cost savings with that.”

So, just be aware those options exist. These are expenses you must cover. You can do it entirely on your own, or you can outsource some of it.

There are even solutions where you’re effectively outsourcing almost every expense that comes with it. You are almost solely wearing the hat of advisor, not business owner at that point, because someone else is handling most of those expense items and the logistics associated with them.

It’s important to understand these options as you think through what is best for you.

With that, like I said, my name is Brad Wales. This is the kind of conversation I have with advisors all day long. Talking through topics like this. What are the expense drivers? How much do they cost? Who are the solution providers in each of those spaces? Do you want to use one of these bundled solution approaches or build it out yourself?

That’s a typical exercise of thinking through how to transition to the RIA model. I’m happy to have that conversation with you as well if you’d like.

If you’re not already there, again, head over to TransitionToRIA.com. You can find all my resources. My explanatory episodes in video format, podcast format, I also have whitepapers.

At the top of every page is a contact link. Click on that, you can instantly and easily schedule time to have a one-on-one conversation with me. We can talk about today’s topic or anything RIA-related about potentially transitioning your practice to it. I’d be happy to have that conversation with you.

For now, though, I hope you found value in today’s episode, and I’ll see you on the next one.

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