Q133 – What Are The Steps Involved With Breaking Away From A Wirehouse To Transition To The RIA Model?

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Also available as podcast (Episode #133)

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What Are The Steps Involved With Breaking Away From A Wirehouse To Transition To The RIA Model?

TL;DR – There are three main steps involved with breaking away to transition your practice to the RIA model:  1) Is the RIA model even a fit for your practice and your vision for it going forward?; 2) Which pathway into the model should you choose?; 3) Which solution providers within your chosen path should you utilize? Within each of these three steps are multiple individual variables that also need to be understood and considered.

Host:

Brad Wales

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Full Transcript:

What are the steps involved with breaking away from a wirehouse to transition to the RIA model? That is today’s question on the Transition To RIA question & answer series. It is episode #133.

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. We have articles, we have whitepapers. All kinds of things to help you better understand the model.

Again, TransitionToRIA.com.

On today’s episode we are talking about if you are in that wirehouse model, that W2 broker-dealer model, and you are thinking about going on an RIA path, what are the various steps involved with making that sort of change to your practice?

There is a lot of information we’re going to cover on this, but this is really meant to just help you understand there is a process out there. And you need to follow the process. You need to be aware of the process.

Not to give some sales pitch, but this is what I can help you with is walking you through all of this.

But here this is going to be high level to get you start thinking about what some of those initial steps are.

For starters, there are three main decisions, if you will, that go into should you transition your practice to the RIA model; in this context coming from a wirehouse breakaway type scenario.

First, should you even be considering such a transition?

The RIA model is the fastest growing channel in the industry. It has been for several years now. You’ve probably seen all kinds of news about teams of all sizes, smaller teams and very large teams breaking away to the RIA model.

You’ve probably heard that the economics are supposedly better, the flexibility is better. But is it necessarily a fit for your practice?

So, the first thing you need to do is understand, how would it look for my particular practice? Is my practice even a good profile for the RIA model?

Determining that is based on literally the types of clients you have, the services you offer, the investment solutions you use, what you’re desiring to do or not as part of being an advisor. And does that vision even fit the RIA model?

If it’s not a fit for the RIA model, you don’t need to worry about all the other steps and variables we’re going to talk about in this episode.

So, first decision is getting that initial education. Should you even be exploring this further? Is it a potential fit for your practice? That’s number one.

Next, number two, is to then understand the three main pathways available to transition into the model.

I help you understand, and if applicable, help you explore all three. My comments are never meant to suggest that one is better than the other. All that matters is for your specific practice, which one is better. But advisors of all sizes consider all three.

At a very high level, the three are, on one end of the spectrum is you start your own RIA and you build out the necessary solution providers around it.

On the other end of the spectrum is you join an existing RIA platform. Now, don’t come into this with any sort of preconceptions of what that means. There are several different flavors of that approach. Some solutions you would find very attractive to consider, and some you wouldn’t want to consider at all. That usually comes down to again what you’re trying to accomplish at this point in your career.

It’s not to say that they are bad RIAs you could join (though bad apples could in theory always exist), but that not all models will be attractive to all advisors.

Perhaps you’re not interested in selling your practice at this juncture in your career. Well guess what, that (the selling approach model) exists, but that’s only one of the many flavors available.

Make sure to come into this process with an open-mind, as there are many flavors to be aware of.

So, on the other end of the spectrum is potentially joining an existing RIA platform.

And then the third pathway is in the middle. That is where you have your own RIA, but as opposed to working with perhaps 10 different solution providers, you work with one that bundles up about 80% of what you need and provides it to you via a single point of contact.

Again, pros/cons to all three.

Notice though I have not mentioned any specific solution providers yet. That is because this second step in the decision process is understanding at a generic level, how do these work? What are the pathways?

They all have pros and cons. If anyone tells you otherwise, they’re either not being truthful, or they’re simply unaware.

Which wherever you are now has pros and cons as well that you would want to consider and weigh against this.

Most everyone starts this process leaning in a particular direction initially. Then, as you go through this discovery process, you might find yourself leaning towards one of the other pathways. That’s why this second step is important, to make sure you’ve made an informed decision about which path is best for you.

The final of the three main decisions is then, based on the pathway you’re ready to initially explore… “who are the solution providers that can support me as needed to get me along that path?”

If you’re leaning in the direction of joining an RIA, who are the RIA platforms that have the flavor of models that is going to be appealing to me at this point in my career? And why might I choose one over the other. As just one example of the decisions on that path.

Or if you’re leaning towards having your own RIA, what are the different pieces that you need to put together? Who are those solution providers?

Same with the middle pathway.

But you don’t need to worry about the specific solution providers until you’ve first got past decision steps one and two.

The three steps are in that order by design. If you can’t get past step one, there’s no reason to go to step two. And likewise, if you can’t get past two, there’s no reason to go to step three.

So, at a high-level, that’s the decision process. The high-level steps you would go through for breaking away from the wirehouse to transition into the RIA model.

Next, I want to give you examples of some of the various things you will need to solve for, regardless of which of the three paths you potentially go down. It’s a matter of will you be the one piecing them together, or will you rely on a platform that has bundled many of them up for you?

This is not an exhaustive list, but here are some of the variables involved. Which a big part of what I help advisors and teams understand is, what do you need to know, what do you need to solve for, who are the vendors out there, what you can expect from a price perspective, what you can expect from a timeline perspective, etc.

The way to think about this as a breakaway advisor is… “what does my current firm provide for me now, and how will I replicate that on my own?”

Which for the sake of this conversation, we’re going to assume you’re either starting your own RIA, or you’re joining a platform on a 1099 basis. Which with either approach, you’re responsible for your so-called “local expenses.” I did an episode on that recently.

If you were to instead join an RIA as a W2 advisor, or sell your practice to an RIA, that involves a different exploration process. For this conversation, think of this on the independent side.

Again, what does my current wirehouse firm provide for me now how will I replicate that on my own? A couple examples of those variables…

First, one of the largest variables is an office.

If you’re a wirehouse advisor now, they are providing you some sort of office, generally a conference room, maybe a place for team members to sit.

And so the question is, if you plan to still have an office going forward, and typically advisors do, though there are more and more RIAs that are 100% virtual, but most advisors want to have some sort of office footprint. So how are you going to procure that on your own?

There are many pros to why you might want to procure your own real estate footprint on your own, but it does come with responsibilities. It does come with a process.

So one of the big steps you need to understand, to breakaway and go on an RIA path is… “how would I procure my own office footprint and what are all the options with that that I want to be considering?”

Another big variable is what custodian are you going to use?

If you’re at a wirehouse, your client assets are currently held at your wirehouse firm. You are going to need a place to custody your client assets and there are several different custodians to choose from.

I’ve done episodes on how to choose a custodian. Each typically has a unique place in the marketplace of what type of advisor or team they appeal to. You want to understand why one might be a better fit for you than another.

Long-term, you might even be, as they say, multi-custodial. You might have more than one custodian. And typically, larger RIAs do ultimately have more than one custodian. But initially, as part of a transition, in large part for operational and logistical simplicity, you would want to start with one custodian.

Part of this exercise, breaking away, is how will you custody your client assets going forward? What custodians do you have available to choose from? Why you might choose one over the other and how they differ.

Next variable, keep in mind a custodian is for your advisory assets. You might also have remaining broker-dealer commission assets.

As I talk about frequently on these episodes, you do not have to be 100% fee-only to potentially consider going down this path. You can potentially, as I often say “solve” for your remaining broker-dealer assets.

But for some of you, it’s a big enough part of your business, and perhaps you also aspire to continue to be able to offer certain brokerage commission products going forward.

That sort of path is generally doable. Now I say generally because there are some variables involved in that. The typical solution providers you can lean on with your commission assets typically have minimums. But if you have a reasonable amount of commission assets and you need or want to retain that going forward, that’s another thing you’ll need to solve for, what is my broker-dealer solution going to be for those particular assets?

Next, another variable to solve for is your tech stack.

You might choose a custodian that provides you with the bulk of the technology you need. Other custodian’s approach is instead of providing you with most of it themselves, they work to integrate with the third party tech providers in the marketplace.

In this latter approach, you go out there, you pick the best of breed from all the available solutions, and the custodian helps you build the tech stack to then integrate with them as custodian.

There are pros and cons to both of those approaches, and it’s something I walk you through of why you might choose one approach over the other. But choosing technology will be a big part of this. Whether you’re getting it directly from a custodian or you’re piecing third party tools together, or more often there’s some combination of those both.

But again, what tech are you getting from your current firm (for better or worse), and how will I replicate that on my own? How will I have a CRM? How will I do financial planning? How will I manage and trade the portfolios?

That’s all thought of in that “tech stack” realm of the RIA model. Again, I’ll help you understand how that works.

Another big variable, and this relates to if you have your own RIA, is how you’ll manage your compliance responsibility. Both registering the RIA on the front end, and then how will you manage your regulatory and compliance responsibility going forward?

This is not something you should fear. Though there are naysayers.

Oftentimes people at your current firm will say things like… “You will get buried in compliance. You’ll spend all your time on compliance. The SEC will come after you.”

That’s all a scare tactic.

Now, you do need to take this serious. You do need to understand what the responsibility is. You do need to understand the vendors that help you manage that and what you can expect from them, what you can expect to pay for that service. But it is all entirely doable. Albeit there’s more responsibility than you likely have now. It is something you need to solve for.

That’s if you have your own RIA. An example of one of the comparisons, if you were to instead join an RIA, that is part of their value prop is they are taking that compliance responsibility off your plate. They are doing it for you.

Now you might ask…. “Which one is better?” There’s no perfect answer to that. It comes back again to each individual practice. What are you able or willing to handle yourself? Do you need to handle compliance yourself?

Sometimes there are certain circumstances that are just not a fit for joining an existing RIA, where you essentially outsource the compliance.

So again, you want to understand how does this work? How does it vary between the different pathways, pros, cons, and which one might be the best for your practice?

But again, compliance, however you solve for it, is another big step in this process.

And now for two smaller pieces to this, but still very important.

If you’re starting your own RIA, you’ll have to procure your own E&O policy.

You’ve probably always had (at your current firm) built-in E&O that you didn’t really have any say in. There perhaps is a standalone cost that’s assessed to you, and here’s the terms of the coverage, and it’s been provided for you.

And that is nice that it’s been provided for you, but you don’t necessarily have any flexibility or say in that. In the independent space, if you start your own RIA, you are procuring that on your own.

Again, nothing you should fear. It’s just a matter of knowing how that process works, what kind of coverages you need, who you lean on to get it, the process involved, etc.

And if you’re joining an RIA, that’s typically part of what they’re providing.

Again, different pathways have different ways to approach this. But obtaining E&O in one fashion or the other is another step.

And then the last step I’ll point out, which again, this is not an exhaustive list, is marketing.

If you’re at that wirehouse captive world now, you have probably been able to do very little marketing. When I say marketing, that’s everything from the website that you have, which is probably not your own website. A brand, which is not your own brand. It might be some byline of the parent company. And then your marketing approaches. Perhaps you aspire to have a podcast, or make videos, put out whitepapers, have a blog.

All those things you typically need to solve for. Now, that doesn’t mean you have to solve for them right from the jump. Things like a website you would want to have right from the jump.

And that’s not as much replacing something your wirehouse is currently providing you with, because they’re probably giving you little to none of that, at least from a flexibility standpoint.

So, this is an exercise in taking advantage of your newfound flexibility in the independent space to really build a business, build a brand, put your name out there. It’s all through that marketing apparatus.

Again, just a matter of understanding what needs to be solved for, who can you lean on, what’s that process?

And then while it’s not really a variable in the sense of what your current firm provides for you, but certainly an important piece of this process, when breaking away is to make sure you are going to successfully navigate the legal considerations of breaking away.

That starts with understanding your current agreement with your wirehouse firm.

For some of you, you might have signed something a very long time ago that you maybe don’t even have a copy of. Others, you might have a copy, it might have non-solicit language, perhaps you acquired a practice at some point and you signed something related to that. Maybe you’re still burning off a transition assistance vest period because you joined the firm six years ago and you signed a 10-year commitment on it.

These are all things where it’s an important process when breaking away from a wirehouse to work through that, understand that, get the needed legal advice on how to navigate that safely.

And again, there’s nothing to fear. You just need to know who you can lean on for that advice? When in the process should you be getting the advice? And you need to make sure that you then follow that advice.

So, while it’s not replicated, certainly your current firm is not providing you breakaway legal advice, this is an important step in the process nonetheless.

I’ll wrap up with, and again, I’ve touched on all this at a fairly high level, but the wrap up here is just to say, and I’ve alluded to it, is do not fear this process.

If you’ve made it this far in the episode, you clearly have some interest in exploring an RIA path for your practice. And I’ve rattled off all these decisions you need to make, these variables you need to solve for.

Yes, you do need to do all that, but it is entirely manageable. But you will always hear people trying to scare you out of it. Typically coming from your current firm now, they will try to tell you you’ll get buried by compliance. you’ll never have the scale that we have to get some of the resources.

They’ll artificially say the technology’s not as good, which by the way, I’ve talked about in various episodes. That’s not at all the case any longer. It perhaps was 20 years ago. It’s the exact opposite now.

You will hear a lot of scare tactics telling you why you shouldn’t do this, or you can’t do this, or why it’s not going to be good for you or your teammates or your clients.

Put all that aside, at least educate yourself. You’re watching episodes like this, that’s a good starting point to learn… how does it actually work regardless of what these people are chirping in my ear and is it a fit for my practice?

So, beware of the naysayers.

Next, know that the industry has evolved tremendously over the last 5, 10, 15 years. There are all kinds of support platforms. Sometimes you’ll hear supported independence. I’ve done an episode on that.

To the degree you say… “I want a lot of these benefits. I want the better economics. I want the better flexibility. But Brad, you just rattled off all kinds of things. And I get some of those I need to be responsible for under any circumstance.”

There are pathways where you can outsource most of that to someone else, perhaps the compliance, managing the tech stack, figuring out the E&O. There are some wonderful supported independence routes, again that second or third bucket that we talked about earlier, that can help you with that.

So, don’t let any of the topics I’ve thrown out there today intimidate you thinking you can’t solve for it.

However, some of you will go through this whole process, learn everything, and want to do everything on your own (via your own RIA.) I can help you with that path.

Or you might say… “Brad, help me understand that, but also let’s compare it to some of these supported approaches.” And while it’s still to be determined, you might decide that some of those are a better pathway for you as well. It’s worth understanding how they all work. Again, pros/cons to all of the approaches.

And then the last thing just to tie a bow on this is again, I’m here to help you with all this.

You should not be overwhelmed by any of this. You should not be intimidated by any of this. But the reality is, if you’re in a wirehouse firm and you want to break away and transition to the RIA model, you likely almost assuredly have never done this before.

I couldn’t even tell you an instance of an RIA advisor that has been in the RIA model and has gone back to the wirehouse model. That in itself is very telling. You should think about what that means.

But the idea being, you likely assuredly have never done this before. You will only most likely do this one time in your career. You need advice from someone like myself – that has done this hundreds of times, and has hundreds of conversations a year – to help you understand how all these options work and just walk you through the process.

You do not need to fear it. You do not need to be intimidated. But you do need to take the time to talk to someone that has extensive experience doing it, to walk you through it and help you fully understand all the options. And as the title of the episode is, all the steps involved as well.

Like I said at the top, my name is Brad Wales with Transition To RIA. Again, I’m happy to have this type of conversation with you. Whether you’re at the very first part of the process, or you’ve already decided you want to go on this path, but you still have all these variables to think through. I’m happy to have that conversation with you as well.

First things first though, head on over to the website, TransitionToRIA.com where you’ll find all the resources. This entire series in video format, podcast format. There are articles, there are whitepapers.

And at the top page 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 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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