Q71 – What Is A “Supported Independence” RIA model?

Also available as podcast (Episode #71)

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What Is A “Supported Independence” RIA model?

A Registered Investment Advisor (“RIA”) depends on an assortment of solution providers to solve for the needs of running a modern day advisory practice.  These solutions include custodians, compliance consultants, E&O providers, technology vendors, etc.  Some advisors choose to identify and integrate each of the providers individually.  Others prefer a bundled type approach, where they lean on a single provider to deliver the needed solutions, as well as provide additional middle and back office services.  There is no universal industry term for such bundled providers, but they are often referred to as providing a “supported independence” type of offering.

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Full Transcript:

What is a “supported independence” RIA model? That is today’s question on the Transition To RIA Question and Answer Series. It is episode #71.

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 can find all the resources I make available to help you better understand the RIA model.

I have the entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of resources free for the taking. And again, if you are a podcast person and you are not already listening to this in podcast form, if you head to any major podcasting platform and search for the “Transition To RIA Podcast,” you will find the entire episode series. Again, TransitionToRIA.com for all the resources.

On today’s episode, we’re going to talk about “supported independence” in the RIA model. What it is, what the different flavors are, why it may or may not be a fit for you, etc.

To start with, there’s no official industry definition or terminology used for what we’re going to be talking about today. You’ll hear it sometimes referred to as middle/back-office providers, partnered independence, or some sort of independent “platform.” There’s no universally accepted term. There are different flavors of the model, but it is often referred to as some sort of supported independence.

On this episode we’re going to discuss when and why it might be a fit for you if you were to move into the RIA model.

The first question is, why do you need some sort of “support” platform or supported independence?

If you were to transition your practice into the RIA model, every RIA must do a couple of things. You must register the RIA itself, but also surround yourself with the various solution providers needed to support an RIA. Providers like custodial partners, potentially a friendly broker-dealer, compliance, technology, etc.

As an RIA, you would piece these solution providers together to support what it takes to run a modern-day advisory practice. That’s entirely doable. Many advisors do go down that path. I help advisors figure it all out.

However, there are many advisors who look at that and say, “I want the benefits of the RIA model, I want the better economics, the better flexibility, the higher enterprise valuation of my practice. I want all of that. However, I don’t necessarily want to be the one responsible for having to put all these pieces together. Not only initially but managing them on a going-forward basis as well.”

This scenario is what has driven the rise of a supported independence approach over the last 10 years or so. To support the advisor that wants the benefits of the RIA model, but doesn’t want to be responsible for the individual pieces themselves. An entire ecosystem has popped up to support that.

On this episode I will go through a couple of the variations of what that looks like and where that might be a fit for you. I’ll go through examples of four variations. Which is not to say it’s an exhaustive list because, again, there’s not even a uniformly accepted term for this.

The first variation is sometimes referred to as a middle/back-office provider. I’m not a huge fan of that verbiage because I don’t think it does a good job explaining exactly what it is. But for lack of a better term, you’ll hear it referred to as a middle/back-office provider.

There are pros and cons to any pathway into the RIA model, just like there are pros and cons to any affiliation model in the industry. I am a straight shooter and try to always explain both the pros and cons to any approach.

Imagine you want your own RIA. The middle/back-office providers say, “We’ve studied the universe of options. Technology providers, how to solve for compliance, how to get E&O, how to solve for your existing legacy commission business you might have, etc. We’ve chosen what we believe are the best-in-breed providers. What we do is you have your own RIA, but instead of you compiling these providers yourself, we provide all the main core pieces to you in a bundled package.”

Such an approach does a couple things. First, it frees up your time. Do you want to manage the individual pieces yourself or would you rather someone else do it for you?

An example from an operational standpoint is a lot of these providers will do your fee billing for you. They set up the technology for it, and then process your fee billing for you. Someone must do that task.  Would you rather it be you and your team, or would you rather outsource that task to someone else?

These providers also fairly point out, “Because we support so many RIAs with our bundled solution, we have much more scale than you do individually, so we can go to (for example) technology vendors and get better pricing on each of these tools than you could ever get on your own.”

They can also potentially provide support services that you might not have access to on your own.  Maybe your firm is not large enough to have a full-time in-house employee that is solely focused on marketing, because maybe you haven’t grown large enough where you can justify that standalone cost. But maybe you could use roughly a third of a full-time employee that helps with marketing.

You can’t hire one-third of a person. However, a middle/back-office provider can say, “We recognize that this RIA needs a third of a marketing person, this RIA needs a third, and this RIA needs a third. We’ll hire that person and provide you with essentially fractional access to them.”

This could be experts on marketing, estate planning, high net-worth expertise, etc. You can get access to experts that you perhaps cannot justify hiring completely on your own in-house.

So, again, they do have the benefit of scale to get better pricing to be able to pass along to you, as well as more resources than you could compile individually on your own.

In return, you must pay for all this. These are for-profit businesses. But don’t solely think of it as, “I have to pay them $X. You’ll need certain solutions to support your RIA whether you source them individually or lean on a supported provider.  You’ll need technology. You must do compliance. You must do your fee billing.

So, the only thing you’re really paying for is the delta between what it would cost you to do it individually and what it costs to outsource it to a bundled provider.

Keep in mind, though, you can’t just compare the tangible hard costs. You also must factor in the intangibles of your time of do you want to be responsible for all these sorts of things? Or would you rather let the bundled solution provider be responsible for having to do it?

That can free up your time to do things more productive for your practice, spend more time with your clients, or just focus on the things you enjoy doing as an advisor.

You can’t just compare the hard tangible costs when you put these side-by-side. You also need to factor in the intangibles of the differences between the two approaches.

Part of your due diligence of these providers is to evaluate what they’ve built. Part of your evaluation will be to say, “Show me what you’ve bundled in your package, and how you support advisors with it.”

Then ask yourself, “Do I like what they’ve packaged up? Do I like what they provide? How does it compare to other providers in the space?”

The second variation of supported independence I want to talk about is the evolution of TAMP models, Turnkey Asset Management Programs.

I did an episode on what are TAMPs, so if you want to dive deeper into this, check out that episode as well. So, I won’t go into super deep details on this episode because of that, but at its core, what I’m referring to in this episode is there are TAMP providers that have gone beyond the traditional TAMP service of asset management.

If your service model involves outsourcing the management of your clients’ assets, you are likely using some sort of TAMP platform.  Such offerings have evolved to where many TAMPs now do much more than just asset management. They increasingly offer middle and back-office services as well to help you run your practice.

This is essentially a variation of the first example I gave. Some TAMP providers started with asset management and have evolved closer to the middle/back-office providers, helping with things like fee billing, opening accounts, etc.

Some TAMPs still do only asset management.  Increasingly though, TAMPs are providing more and more middle/back-office type services for advisors. So, that is arguably a form of supported independence as well. Your due diligence is to ask, “What would this TAMP provide for me?  Is it a better solution, than me trying to do these pieces individually?”

So, number two on the list are variations of TAMP providers. They have come a long way from when TAMPs first arrived in the industry.

The third variation of supported independence is to join an existing RIA. I did an episode on why you should consider joining an existing RIA, so I’ll keep it light here.

What I’m referring to here is not some RIA down the street from you that happens to have a couple of extra desks in the corner, and would love to have you and your team come sit in those desks and be part of their firm. That inevitably exists around the country, but that’s not what I’m referring to here.

I’m referring to purpose-built RIAs in the marketplace that from the beginning were built with a value proposition of, “Mr or Mrs Advisor, maybe you’ve considered a supported independence approach of having your own RIA, and outsourcing to a middle/back-office provider. However, as long as you have your own RIA, you are responsible for the compliance and regulatory matters associated with running it.”

I’ve discussed in several episodes how you can manage that responsibility as your own RIA. There are solution providers that help you. It’s entirely doable. However, to be fair, it is indeed a responsibility that you will have.

The RIA firms you can join instead say, “We know you want the benefits of the RIA model. The economics, flexibility, higher enterprise value, 1099 status, etc.  You like the idea of outsourcing middle/back-office services. However, by joining our RIA, we will also handle the compliance responsibility for you.”

To the degree you want to outsource all of this, there are RIA platforms purpose-built to accommodate. They come in all different flavors.

They check the boxes advisors are generally looking for: 1099 status, retaining full ownership of your practice, the ability to leave if you ever wanted, your own brand, etc.

These providers bundle up their services and say, “We have more scale than you will ever have on your own. That enables us to build more resources, have more technology, custodial providers, etc., than you could accomplish individually. You can get the benefits of your own RIA, without as many of the responsibilities.”

Your due diligence is to say, “What do you provide? What am I still responsible for? What does it cost?”

You want to compare their offering and cost, to what it would take for you to build and manage it on your own.  Again, keeping in mind both the tangibles and intangibles. There are some compelling platforms available that are worth your consideration.

The final variation of supported independence I want to discuss are providers that take it a step further and say, “You can either start your own RIA, or join our existing RIA platform, we’ll provide you with similar middle/back-office services, and we’ll also help you set up and manage your local expenses.”

That is things like finding and building out real estate, setting up and managing payroll, maintaining your P&L, etc. They help you set up and manage all that.

People defending the captive W2 model often say things like, “Oh, you don’t want to go that independent route. You’ll have so many responsibilities. You’ll have all kinds of tasks you won’t want to do.”

That’s not factually correct anymore. There might have been a time there wasn’t the level of support available now.  But such proclamations are no longer true. There are providers that have bundled everything up for you. You get the benefits of the RIA model, and can check the necessary boxes via a fully bundled solution. There are compelling value propositions to help advisors with that.

So, that’s the fourth variation. Providers that take it even farther and, again, help with things like real estate set-up, payroll, accounting, those sorts of things.

There is a lot of variety to choose from with these solutions. Different value propositions, different price points. There is no uniformity, just like there’s no uniformity in what we even call these offerings.

I help advisors become aware of the different models, who the providers are, why you might choose one over the other, how they compare, etc. I’m happy to have that conversation with you as well.

I want to finish with a few takeaways.

First, these types of solutions usually have AUM minimums. It depends on their suite of services, their value proposition, how much they’re going to do for you, etc. Some have minimums in the hundreds of millions of client assets. For them to be able to provide you with the depth of service they do, their economics require that you bring a minimum amount of assets or production to their platform.

Some have minimums under $100 million in AUM, while others require in the hundreds of millions before you may be a possible fit for them. Part of what I help you understand is to know which providers are potentially available for you to use with your practice.

Next, careful who you ask about these solutions. This might be self-serving for me to say, as helping advisors understand these options is part of what I do. But one of the benefits of my approach is I’m independent. I don’t work for any one firm or any one solution. I can talk about all the solutions and tell you how they compare and their pros and cons.

The challenge is if you only talk to a representative from a particular firm, their job is to sell you on their platform and to talk about how their platform can support your practice. That’s fine. That’s what they’re supposed to be doing. However, they’re going to tell a narrative that aligns with what their solution can provide.

Now, some of these folks are good people. They’ll shoot straight with you.  They’ll tell you if their solution is not a good fit for you and point you to something that might be better. But at their core, their job is to bring advisors to their solution. That’s what they are employed to do. They will have a lens with how they view things.

For example, imagine you only reached out to one provider. You didn’t talk to me; you just spoke to one provider. Guess what, you’re only going to hear the narrative of one solution, one value proposition. That might be the solution or value proposition that’s a perfect fit for you and who you ultimately utilize. However, if that’s the extent of your due diligence, you won’t know how that solution compares to other available options and if it is the best fit for you or not.

An example is from an article I read the other day. It was written by a business development person from an independent broker-dealer.  Throughout the article, he kept referring to “independence”, and “going independent.” He was describing his independent broker/dealer solution as if that is the sole version of “independence.” It was as if the entire RIA model didn’t exist, or is never included in references to “independent” approaches.

It was a perfect example of what I’m referring to here. I understand why he was doing it, as his job is to try and attract advisors to his solution. It was interesting to hear someone repeatedly referring to independence and not even acknowledge there’s an entire RIA space out there and all these supported independence platforms.

His solution might be worth considering, but it is by no means the only solution. That was a great example of why you need to be careful with who is describing to you available offerings.

The last point I want to make is to be aware of how much the RIA ecosystem has evolved. This goes back to the W2 folks claiming, “You do not want to go that RIA model, you will have so much responsibility, you’ll have to do your own compliance, you will have to figure out your technology, etc.”

If you want to build out everything yourself, and there are pros to why you might want to do that, you can lean on someone like me to help you solve for everything. There are wonderful individual solution providers to utilize.

If that approach is not appealing to you though, there is a large (and growing) ecosystem providing a supported independence approach to transitioning to the RIA model.  You don’t have to do it alone. You don’t have to piece and manage everything together yourself. There’s a growing set of solution providers to support you. Don’t let anyone suggest you shouldn’t go to the RIA model because you won’t have any support, and that you’ll be on your own.

Now, I am a straight shooter, the RIA model is not for everyone. It depends on the profile of your practice, and your vision for it going forward. It depends on what you do or don’t want to be responsible for. I’m not sitting here suggesting the RIA model is for everyone.

I am suggesting, though, there’s no reason to be under the assumption you must do everything yourself. The ecosystem of solution providers is available to help. I’ve talked about a couple of the approaches on today’s episode.

With that, like I said, my name is Brad Wales with Transition To RIA. I hope this has helped you better understand what supported independence offerings are.

This is the sort of thing I help advisors with. If you are considering transitioning your practice to the RIA model and want to learn more about how the model works, the solution providers available to support you, and how to transition to it, I’m happy to have that conversation with you.

If you’re not already there, head to TransitionToRIA.com. You’ll find all the resources I make available. The easiest thing to do is 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. I’m happy to discuss today’s topic or anything else RIA-related. 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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