Q88 – What Are The Three Key Decisions Involved With Considering The RIA Model?

Also available as podcast (Episode #88)

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What Are The Three Key Decisions Involved With Considering The RIA Model?

Determining whether to transition your practice to the RIA model does not have to be intimidating. The entire process can be simplified down to three key decisions, sequentially addressed in order:  1) Is the RIA model a fit for my practice; 2) What are the available pathways into the model; 3) Who are the solution providers that support my chosen pathway?

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Full Transcript:

What are the three key decisions involved with considering the RIA model? That is today’s question on the Transition To RIA question and answer series. It is episode #88.

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 to TransitionToRIA.com, you’ll all the resources I make available to help you better understand the model. This entire series is in video format, podcast format. I have articles, I have whitepapers. All resources to help you understand the model and what it might look like for your practice.

Again, TransitionToRIA.com.

On today’s episode, we’re going to talk about the three key decisions you would need to make as part of this process of whether you should move into the RIA model.

I like to frame it this way with these three steps. Some of you have probably already heard me say some of this. Others in the industry, might steal the explanation for their own use.

This is the most concise way to break down the main decisions you must make if you’re considering the RIA model.

At first glance, the process of considering the RIA model for your practice can seem very complicated or overwhelming. Perhaps you’re at a wirehouse or independent broker-dealer now and you keep hearing about the RIA model, seeing people go to the RIA model, supposedly it’s better. But there just seems to be a gazillion choices involved and a gazillion vendors to choose from. It can seem overwhelming. It doesn’t have to be.

The analogy I usually give, is the same thing you do for your clients. You have a new client come in and let’s say it makes sense to use mutual funds with that client. Well, there’s 8,000+ mutual funds. To a client that doesn’t know any better or hasn’t had the chance to be guided on how to narrow that field, that can be quite overwhelming.

But there you are to tell the client, “Don’t be overwhelmed by the 8,000 choices. We don’t need to be worried yet whether to use American funds, or Fidelity funds. We first need to conclude whether you should even be investing in mutual funds.”

The same thing you do for your clients to simplify the process is what I’m going to do on this episode of simplifying the RIA process. The three main decisions you would make as part of that.

If you can’t get past the first decision, there’s no reason to go to the second one, and then onto the third.

As I go through these three steps, notice that in steps one and two I don’t mention any solution providers.  At these first two steps, it is premature to even be considering specific providers.

Decision #1 – Is the RIA model a fit for my practice?

First decision is, does it even make sense for you to transition your practice to the RIA model?

Answering that involves understanding how the model works and all the options.

There are two main motivating factors for why advisors go into the RIA model.

I often start conversations with advisors when they first reach out to me by asking, “What has motivated someone like you to be talking to someone like me?” I want to understand what their motivations are for considering the RIA model.

And generally, no matter how they answer, it can generally be put into one of two buckets. It’s either economics or flexibility. And often, advisors are seeking both.

If the economics are supposedly better, and the flexibility is supposedly better,  do you understand why that is? You first need to understand how the economics work, understand what the flexibility is, and then compare it against what you have now.

For those that have listened or watched my episodes, you know I say the RIA model is not for everyone. I’m not naïve. I don’t come on here and say 100% of advisor scenarios should go to the RIA model. That’s not the case. However, in most cases, it is more favorable to what the advisor has now.

But part of that exercise is to understand, what do those economics look like? What the current-day income would be for your practice on your P&L, what the enterprise value of your practice could be under the RIA model. And then, how does that compare to what you have now?

After you understand how those look in the RIA space, you then must go through the exercise of how is that different from what you have now?

I ask about motivations because I want to make sure the reasons an advisor is considering or thinking that the RIA model might be for them, we want to make sure that that’s accurate and that it’s validated.

For example, with respect to flexibility, if there’s something that an advisor would like to do at their current firm and is being told no they can’t do it, or it’s very challenging to be able to do it, they might assume in the RIA model it would be much easier.

Perhaps it will be. But let’s understand that, let’s validate that because there’s no reason to make a change with your practice if what you’re trying to get to is not going to be reality.

So, again, part of this is what are the economics, what’s the flexibility, and then how does it compare to what you have now, and are your expectations of what it would be in the future reasonable? Can that be met?

You might not currently know how some of these things work in the RIA model.  That is understandable. That’s where I help advisors, “Here is how the economics work. Here is how these particular levers in that flexibility bucket would work in the RIA model.”

You need to understand them both in your current state the future state, and how they differ.

Now, it’s also important to point out that these benefits generally come with additional responsibilities than you likely have now. No matter how great the economics and flexibility, “am I able and willing to handle those additional responsibilities?”

Part of what I help advisors with is understanding what those additional responsibilities are, and how to manage them. It’s not something you should fear or something you should think you can’t accommodate.

There are over 30,000 RIAs. RIAs have figured it out. There are solution providers to help you handle those responsibilities.

An example of an additional responsibility is compliance. If you have your own RIA, you are responsible for your own compliance. If you’re at a wirehouse or independent broker-dealer now, it is done for you. Now, it’s done for you for better or worse. They might not be a good compliance partner, but they are handling that responsibility. In the RIA model, if you have your own RIA, you must handle it.

I’ve made several episodes on how to manage the compliance responsibility. But you might decide to join an existing RIA. Part of that is they will manage the compliance for you. So, if you don’t want to manage it yourself, you can mitigate that as well.

But the idea is, again, at that first level, does this make sense for you? You also need to understand what would your additional responsibilities be over what you have now, and is the upsides on the economic and flexibility worth it for the additional responsibilities, and worth it to make a transition?

Consider an extreme example regarding economics. If going from where you are now to the RIA model would only net you an additional $3,000 a year in income (again, this is an extreme example), you likely would conclude it’s not worth going through a transition solely for an extra $3,000 a year.

It is a big process to go through a transition. There are new responsibilities. It must be worth it for you.

There are however advisors that go through a transition knowing it won’t result in an immediate increase in income.  Depending on where they’re coming from or whatever the circumstance, their flexibility will be significantly better and their satisfaction will be significantly better, and their ability to grow their practice in that new flexible environment will be significantly better. Which more growth ultimately adds to the economic bucket.

So, it matters what’s important to you. And is the upside significant enough to make it worth going through a transition?

I’m very open with advisors on this topic. Let’s map it out. Let’s make sure you understand it. Make sure it is worth your while to consider this.

Again, the first decision is does it even make sense for you to be going down this path? Most advisors’ situations it does, but it’s not 100%. You need to go through this exercise to determine it.

Decision #2 – What are the available pathways into the model?

Number two. If, and only if you get past number one – if you can’t get past number one, there’s no reason to keep going through the process – the next thing to understand is the available pathways into the model.

There are many variables and nuances to this, but at a high level, there are three main ways into the model.

One end of the spectrum is starting your own RIA. As with any standalone RIA, you must compile the necessary solution providers around it to support it. That is providers like custodians, compliance consultants, technology solutions, etc.  The types of things that are necessary to run a modern-day RIA. This is essentially the DIY approach.

On the other end of the spectrum, you’ll see why I’m jumping over like there, is to join an existing RIA. There are some wonderful, I call them “RIA platforms,” you can join.

There are over 30,000 RIAs. Many of them would in theory like to add advisors. I am not referring here though to some RIA down the street that has an empty desk in the corner and they’d love to have you come sit in it. That typically does exist. And if it’s a good match and culture for you and you like the people, that might be something you want to consider.

But what I am referring to here are RIA solutions that were purpose-built from the beginning to recognize there are advisors who say, “I want better economics. I want better flexibility. But maybe I don’t want as much of the responsibilities of the do-it-yourself approach on the other end of the spectrum.”

There are some wonderful solutions who have compiled the custodial relationships, they’ve built the tech stack, they handle the compliance for you. As opposed to you having to build and manage those pieces on your own, they say, “We’ve chosen best-in-breed solutions in the marketplace. We’ve bundled it up for you. And by the way, we have more scale than you will ever have by yourself so we can get better pricing with custodians, tech vendors, etc. We’ve bundled it up and we give this value to you (typically) for a single-bundled price.”

There are many different flavors of this approach, which gives you a lot of different options to choose from. So just know that this exists, purpose-built RIAs that cater to advisors that want a lot of the benefits of the RIA model, but would rather have it bundled up and provided for them.

So, that’s on the other end of the spectrum.

Then in the middle, and there are not as many players in this space, is where you would have your own RIA – and the compliance responsibilities that come with it – but you still want to utilize a bundled solution provider approach.

There are solution providers in the middle that say, “We bundle up a lot of the needed solutions for you. As opposed to you doing everything yourself, you can have your own RIA and still access a bundled set of solutions.”

So, that’s the middle ground.

The question therefore is, which of these three approaches is best?

There is no golden goose. Each of these three pathways have pros and cons. If anyone tells you otherwise, they’re either disingenuous or they simply don’t know what they’re talking about. Every pathway has pros and cons, including your current firm or affiliation model.

Part of this exercise is first fully understanding how these three pathways work, and then equally, what are the pros and cons of each? And again, we haven’t mentioned any specific firms or solution providers yet. You want to first understand these options at a generic level. How does each pathway work? What are the pros and cons?

I help advisors down all three of these pathways. After I’ve explained each of them it’s common that an advisor/team will initially lean in one direction. That’s natural as you hear about the pros and cons.

I typically suggest that the advisor/team choose which of the three pathways we should start with, but to also consider at least one other pathway to compare it against.

As part of my value proposition is to help you understand all three, you typically won’t need to do a deep dive into all three. Digging into at least one, if not two is more typical.

Now, on to the third decision.

Decision #3 – Who are the solution providers that support my chosen pathway?

If you’ve made it past the first decision, and you’ve made it past the second – which BTW, being able to do so involves a lot of education. That’s a big part of what I do for advisors. That’s not a 10-minute conversation. It’s not, “What’s your practice look like….and here’s your solution.”

You must take the time to understand everything. Someone like me can help you with all those things.

If you’ve got past decisions one and two, the third key decision is…. “who are the specific solution providers I should be using based on my selected pathway into the model?”

If you decide to start your own RIA, it includes decisions like what custodian to use. “Which custodians are available to me based on my size? Which of the custodians can accommodate my business best based on the services I provide to my clients?”

You need to know what the marketplace is, who the players are, which ones are available to you. And then even then, there are pros and cons to each.

Other variables include understanding the compliance consulting firms, understanding the technology solutions, understanding how to solve for E&O. It’s all doable. It’s nothing to be intimidated by. You just need to work through the process slowly and step-by-step.

I have a checklist that identifies the main variables to solve for. It’s just a matter of going through the exercise, understanding how each one works, understanding how you would engage each piece of the puzzle, who the providers are, why you might choose one over the other. And then you ultimately do a deep dive into the ones that might be the best fit.

It’s a due diligence process. You’re checking off boxes as you make selections. It’s the same process no matter which of the three pathways you’re leaning towards.

As you work through the steps, you’ll usually want to consider more than just one solution for each of the variables. Even though someone like me can help you understand why you might pick one vendor over another, you generally want something to compare an option against.

Whether you’re looking at technology vendors or looking at entire RIA platforms, you typically want to say, “Let me do a deep dive on this one, but let me also have another one or two to compare it against. To see which is the best fit for me.”

So, the third decision level is identifying who are the specific solution providers to do a deeper dive with.

That brings us back to our mutual fund example. Before you’ve started to work on selecting specific funds to use, you’ve first worked to determine if that client can even benefit from your services, do they have assets to invest, what is their risk tolerance, etc.? You don’t need to consider specific mutual funds to use, until you’ve worked through the process.

It’s the same thing when considering the RIA model. It’s becoming educated on how it works. You must go through these steps if you want to do it right.

A challenge though, are you getting unbiased advice when talking to a particular vendor?

If that’s the first conversation you have about anything to do with the RIA model, guess what….they are going to present you with a pathway that aligns with their particular solution.

Their solution might ultimately be what’s best for you. You might get lucky and nail it with who you had your first conversation with. But generally, you want to go through the first two steps first and then get to the third one to make sure you’re not letting the tail wag the dog.

So, to recap, there are main key decisions: 1) Is the RIA model a fit for me; 2) what are the three main pathways into the model; 3) who are the specific solution providers in the marketplace that support each of those pathways?

Educate yourself on the entire process, know what’s available to you. This is a big transition. Ideally, the last transition you ever make. It’s worth investing the time to understand it all.

As I said at the top, my name is Brad Wales with Transition To RIA. This is what I help advisors with.  Helping you understand each of these three key decision points, and how to navigate them.

I hope these episodes have helped guide you on the process, help you start to understand if it makes sense for you. Every practice is unique, every practice is owned by a different advisor or team that have different visions for what they want to do going forward, their willingness to take on new responsibilities, etc. Everyone is so unique that you need to do a deep dive with this process. That is what I help advisors with.

If you go to TransitionToRIA.com you can find all the resources I mentioned. This series in video format, podcast format. I have articles, 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 with me to talk through 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 with today’s episode, and I’ll see you on the next one.

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