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Also available as podcast (Episode #138)
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What Is A 1099 RIA Model?
TL;DR – While it is not always referred to as a “1099 model”, there is a type of RIA platform offering that many financial advisors and teams find to be an attractive alternative to running their own RIA. These “1099 models” come in various flavors but they typically share the following (among other things): 1) you retain 100% ownership of your practice; 2) use your own brand; 3) control your local expenses; 4) access a suite of technology and solution provider resources; 5) if applicable, provide solutions for your remaining legacy commission assets; etc. If considering starting your own RIA, it’s worthwhile understanding how these models compare.
Host:
Brad Wales founded Transition To RIA in 2020 after nearly 20 years of prior industry experience, including direct RIA related roles in Compliance, Finance and Business Development. He has an MBA and has held the 4, 7, 24, 63 & 65 licenses. He has been quoted or featured in 100+ industry articles including in the Wall Street Journal, Barron’s, and most every other major industry publication. He is well known for his RIA video explanatory series, and Kitces named his podcast as a “Top Podcast for Financial Advisors.”
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Full Transcript Of Video:
What is a 1099 RIA model? That is today’s question on the Transition To RIA question and answer series. It is episode #138.
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, there are whitepapers. There’s a new vendor profile series as well. 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 the 1099 RIA model.
Now, to be certain, that’s not really terminology used in the marketplace. You don’t typically hear someone say… “I’m looking for a 1099 RIA model.”
But what we’re going to talk about today is something a lot of advisors are looking for. They learn more about it and find it to be an attractive and good fit for their practice.
We’re going to go over in this episode what I’m going to refer to as that 1099 RIA model.
The backstory to build up to that, keep in mind, and something I talk about often, there are three main pathways you could take into the RIA model. I help advisors down all three. They all have pros and cons that you want to understand.
It’s not to say one path is generally better than any of the other paths. Ultimately, your job is to understand how they all work and to figure out which path is best for you and your practice.
But as a reminder, those three pathways are, and I’m going to do this high level, but on one end of the spectrum is you start your own RIA and you build out all the necessary solution providers around it.
On the other end of the spectrum, you join an existing RIA platform. And as we’re going to talk about today, there are all kinds of different flavors of that out there. But that join an RIA is on the other end of the spectrum.
And then there’s a flavor in the middle, which is a little bit of a mix of the two where you have your own RIA, but you’re still leaning on a single provider for most of the needed resources.
So this episode is focused on that join an RIA side of the spectrum.
I will tell you from hundreds of conversations with advisors, that option is often misunderstood.
When I walk advisors and teams through these three pathways, and I talk about joining an RIA, or sometimes I like to refer to it as an RIA platform so they don’t have a misconception about it, I’m not referring to just some RIA down the street that has an empty desk in the corner that would love to have you come sit in that desk.
That RIA probably does exist, and that desk probably does exist and they’d love to have you come sit in it. If that’s a fit and you’re aware of that RIA, by all means have at it and explore that as a potential option.
What I’m talking about here, in particular the 1099 model, are more call it institutional sized platforms that were built for this specific purpose, to service advisors, not just because they have extra capacity they’re trying to fill in.
To give you an idea of the flavors of the join an RIA, or join an RIA platform, and where 1099 falls in that…..to be certain, there are some RIAs you could join that as part of that, you are forced to sell your practice to them. Now that might be very appealing to you if you are at the point in your career that you need your succession event to occur and you’re selling your practice. There’s nothing wrong with that, assuming that’s where you are and that’s a good fit for you.
But as we’re going to talk about, again, that’s not all platforms or all offerings. That’s some. I will hear advisors sometimes say when I mention the possibility of joining an RIA, they say… “I don’t want to sell my practice yet.” And it’s like, okay, understood, but just know that that exists. And that might be something you’ll find attractive in 10, 15, 20 years, but that’s not the only flavor that exists in the join an RIA bucket.
As examples, there are some RIAs that require that you sell your practice to them.
There are others that require, whether you sell it to them or you’re just joining them, that you became a W2 employee advisor of their firms. For some advisors that’s attractive, others that’s not attractive.
There are some RIAs that if you join them you must use their brand, and they would position that as a good thing because… “Look at all this brand recognition we have in the marketplace.” But that may or may not be attractive to you.
There are other RIAs that if you join them, you must turn over your investment management to them. Some of you might be looking for that. Some of you might be looking to take that off your plate and that’s a good fit. Others that’s not a good fit.
My point of this backstory is to recognize not only are there are different pathways into the model (start an RIA, join an RIA, etc.), but with the join an RIA path there are multiple different flavors.
If you only take the time to research one flavor, or talk to one RIA, that might ultimately be a good fit for you. But don’t make any assumptions that that’s how all the options operate. That’s just their flavor that they’re positioning for you to consider.
So, regarding the 1099 model, how does that typically work?
These are mostly firms, again, not the firm that just has the empty desk and the extra capacity, these are firms that were started from the beginning to say… “Advisors, we realize many of you are looking at the RIA model, we realize many of you want a lot of the advantages of the RIA model.”
Which I talk about frequently in these episodes, the flexibility advantages, the economic advantages. But as I note, that comes with additional responsibilities.
And so, “Advisors, some of you might not want to have to handle the compliance function yourself, or might not want to have to integrate and maintain the tech stack yourself, or might not want to manage the client fee billing yourself.”
Now, those are all doable to the degree it makes sense for you to go down the pathway of your own RIA. You just need to put the right solutions in place to solve for all those things.
But there are advisors that say… “I just don’t desire to do any of that. And whatever additional upside I perhaps get from having my own RIA doesn’t outweigh those additional responsibilities. So, if there’s a way to outsource that to someone else, that would be great.”
That’s what these 1099 models have been built for. To essentially be your infrastructure partner doing a lot of the behind the scenes, non-client facing tasks for you.
A couple of the benefits of the flavor I’m describing here is, first, you retain 100% ownership of your practice. You are not selling your practice to these firms. While technically you’re falling under their ADV, think of them more as an infrastructure partner providing you certain services to help you more efficiently run your practice. You are retaining 100% ownership of your firm in this type of model.
Another benefit is you use your own brand. Depending on the type of firm you’re at currently, you will either start or continue to use your own brand and how you market your services. Again, they’re essentially an infrastructure partner behind the scenes. The client facing parts of it, the brand, that is all yours to build and essentially monetize over time.
Another benefit of the 1099 approach – which is sometimes also referred to as an independent contractor – is you control your local expenses. I did an episode on why it’s beneficial to control your local expenses.
There are lot of benefits to that because you get to decide how to move the economic levers, whether it’s your office footprint, the makeup of your team, etc. You get to manage your cost centers, and that gives you a lot of control over what ultimately flows to you at the bottom line.
This all is a big benefit of the 1099 model. The platform typically provides you with a lot of the behind the scenes stuff. But you still control the forward facing elements with your clients, with your team, your office, etc.
And then a key part of these 1099 models, and I certainly encourage you to make sure this is part of any type of firm you would join if this is where you are in your career, is they treat you like a free agent.
They say…. “We would love to have you come join our platform. Here’s all the wonderful things we do for you. Here’s how we price that out. You’ll keep ownership. You’ll use your own brand. But importantly, you’re not going to be forced to sign something that says if you ever want to leave, you’ll have some non-solicit or a non-compete or anything like that. We treat you as a free agent, meaning we know you can leave. You could go in a different direction. You could go to one of our competitors. Our objective is to provide you with so much value and keep you so satisfied that you simply don’t want to make a change.”
Now, that of course is what all firms should be doing. The W2, the wirehouses, all firms should be treating their advisors and teams like that to say…. “We’re not going to put up artificial guardrails with deferred cop handcuffs or non-solicitation agreements. We should be trying to earn your business to make you want to stay.”
There are obviously a lot of firms that unfortunately don’t view it that way.
Now, to be fair, if you’ve reached a point in your career and you sell your practice to someone – perhaps another RIA – it is very fair, reasonable, and expected that they will have you sign something that basically says… “You are selling your practice to us, and we’re paying you a lot of money for it. You can’t just leave two years from now and try to go in different direction and take your clients with you.”
That’s fair. That’s the transaction. You would want that same arrangement if you were buying a practice, if you are giving money and economic benefit to someone for that practice.
But to the degree you’re not selling your practice, you will want that free agent, not only optionality, because you never know where your practice might evolve to five, 10, 15 years from now, but you also want that mentality of the firm that they know you’re a free agent, they know they have to continuously work hard because you could leave, because they haven’t tied you up with deferred comp handcuffs that make it harder for you to leave. They must earn your business every single day.
So that’s a big benefit of these 1099 RIA models as well.
Another benefit, these 1099 models typically will have way more scale than you will ever have individually.
Because they have more assets on their platform, they typically can better terms, pricing, or service from the custodians that are used. They can typically get better pricing from the technology vendors that are used. All because of that scale.
So not only do they take a lot of tasks and responsibilities off your plate, they are also able to deliver it typically with better economics than you could achieve on your own.
These items I’ve mentioned are not all the benefits of the 1099 model, but I wanted to lay out some of the main ones so you know this model exists.
Now again, it’s not going to be a fit for everyone. But a lot of advisors and teams either don’t know it’s out there, or they only talk to one solution and they assume that’s how all the options work.
The main takeaway of who this appeals to is advisors that say… “I want all those benefits. But I don’t want to do a lot of the infrastructure stuff myself. If I can outsource that to a single vendor, that would be appealing.”
This is why I walk all advisors that reach out to me through the three pathways. Many come into the conversation thinking they would only want their own RIA. And for many, that’s the path that is ultimately best for them.
But I say… “Let’s at least understand how these other options work.” Many advisors and teams, after learning about this 1099 RIA model, it turns out it’s something they find a better fit.
The final thought on this, keep in mind this is a two-way street.
Not only are these 1099 RIA models trying to build out an attractive offering for you, an attractive value prop and pricing, so you want to use their services. It also needs to be a fit for them as well.
They’re going to do background on you. Are you the caliber advisor they want? What’s your background? What size practice do you have?
Most of them have minimum sizes and certain kinds of requirements, but it also needs to be a fit.
As an extreme example, imagine you want to have your advisory practice, but you also want to start a hedge fund on the side. That’s generally a step too far for these 1099 RIA models.
They say… “If you want to do all that, that’s fine. But that’s too far out of the wheelhouse of the types of advisors and teams that we’re prepared and able to support.” You probably need to have your own RIA at that point.
That’s a bit of an extreme example, but there are some scenarios where just because you find a particular 1099 offering attractive, it might not be a fit for them.
That’s a big part of what I help with. How does a particular model work? Which solution providers might be a fit for your practice? And is your practice a fit for them?
As I said at the top, my name is Brad Wales with Transition To RIA . This is the type of thing I help advisors with all day long. What does your practice look like now? What would it look like in the RIA model? Let’s make sure you understand the pathways into the model. Let’s make sure you understand the pros and cons of each of those.
And then after we work out which direction you might want to lean, or need to lean based on your circumstances, who are the solution providers you ultimately need to lean on to be able to go down that pathway?
Helping you sort through all of that is a big part of my value proposition. I’m happy to have that conversation with you as well.
First things first, head to TransitionToRIA.com where you’ll find this entire series in video format, podcast formats. There are articles, there are whitepapers. There’s a new vendor profile series.
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, 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 in the next one.
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