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Also available as podcast (Episode #155)
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What is a W2 RIA model?
TL;DR – Many people think of the RIA model as an “independent” model. This is accurate, as many pathways into the model are independent in nature. However, some RIA models feature advisors affiliated as W2 employees. These come in many different flavors: partnership models, traditional grid payout models, buyout models, etc. Depending on your circumstances, such models might fit your practice.
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 Transcription Of Video:
What is a W2 RIA model? That is today’s question on the Transition To RIA question and answer series. It is episode #155.
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 this entire series in video format, podcast format. There are articles, there are whitepapers. There’s a Vendor Profile Series. All kinds of things to help you better understand the model.
Again, TransitionToRIA.com.
On today’s episode we’re going to talk about what is a W2 RIA model that you could potentially join.
Now, one of the reasons I wanted to do this episode is because I previously did an episode on “what is a 1099 RIA model” to potentially join. So I wanted to give the comparative here of what the W2 version of that looks like.
For those of you that are maybe not familiar with this lingo 1099 and W2, essentially at a high level, 1099 is an independent contractor status where you, as the advisor are affiliated with the RIA on an independent contractor status, often referred to as 1099.
The reason we refer to these as 1099 or W2 is essentially that’s the tax forms that are used to reflect what that income is. 1099 typically refers to an independent contractor model, whereas W2 is where you are an employee of a company.
And so in this case, if you’re affiliated with an RIA on a W2 basis, while you’re a financial advisor of that RIA, you are doing so logistically as a W2 employee advisor of that RIA.
And so, like I said, I previously did an episode on the 1099 model, and now we’re going to talk about W2.
Something I talk about frequently on these episodes is that there’s a lot of different pathways you could go down potentially if you were to transition your practice to the RIA model.
Some of you might end up starting your own RIA. Some of you might end up joining an RIA (which is the topic of today’s episode.) There’s a flavor in the middle of those.
That’s a big part of what I help advisors do, is understand, should you even be exploring the RIA model to begin with? And then if it does make sense to explore it, how do these three different pathways compare? They all have pros and cons. Why might you choose one pathway over the other.
But as part of that process, if you conclude that joining an RIA is ultimately going to be the best path for you, well then within that pathway, there are a lot of, as I often refer to them as, “flavors” of different RIAs to choose from.
Something I always suggest you do is do not jump to conclusions about what that entails. For example, if you have maybe spoken to an RIA before that you could potentially join, or you’ve been told about an RIA you could potentially join, well, that particular RIA, whoever that is, has a particular value proposition and a particular model that they have designed for their RIA.
That is their version, their flavor, of what they feel is best aligned for advisors. But that doesn’t mean that’s all that’s available in the marketplace.
For example, just within the realm of 1099 or W2, those are very different models, very different approaches for you to consider.
And then even within the W2 approach, there’s several different flavors that you could potentially consider. And so that’s what I want to go through here is what some of those flavors are in the W2 space.
I’ll give you some examples, but this is not an exhaustive list.
First, a model where you could join a W2 RIA and still own your book. That is part of the value proposition of the RIA is they put that in writing and say… “if you were to join, you will continue to own your book. If the day ever came one day that you want to go in a different direction and you wanted to leave, or maybe you do a succession at some point, this is your book to sell, your book to take elsewhere, and we as the RIA firm won’t try to steal those clients from you.”
That model exists out there. W2, but where you still own your own book.
Next on the list is what I call a wirehouse alternative type model.
What I mean in this regard is to say that wirehouses typically do not explicitly say, or they generally don’t… “advisor, you own your book, you own your practice.” They do not say that.
At the same time, they often have you sign agreements that oftentimes can have non-solicit verbiage in it. So it’s this quasi, what’s your status? Do you really own your book? Not necessarily.
But at the same time, they talk about this is your “business” that you’re running. Yet they’re going to put non-solicit language in there.
There are RIAs out there that are W2 basis you could potentially join that again, don’t they go so far as the prior example of explicitly saying “you own your book,” and it’s this kind of wirehouse alternative.
There are different reasons they would argue that’s why they’ve set it up as such and how that can still be advantageous for you. For the same reason the wirehouses make that same argument.
And so be aware that flavor exists as well, which I coin the wirehouse alternative.
Next example of a W2 model is there are W2 RIAs where part of their value proposition is to say… “We’d love to have you come join our RIA. Here’s all the wonderful resources we provide you. Here’s how we support you. But as part of you affiliating with us, not only are you going to be W2, we (the RIA) are also going to take a minority investment in your practice.”
There’s reasons that might be attractive to you. Maybe you’re looking to take some chips off the table, diversify your net worth.
They would argue… “We will help you grow and maximize the value of practice, and we want to have skin in the game alongside of you with that. So hence that’s why we’re making the partial investment.”
So be aware that exists as well. There might be a reason you want to take some chips off the table, or why that might be advantageous for you with that partial investment by the RIA you could potentially be joining.
A further evolution of that is what I would call the partnership model.
There’s no official definition of partnership model, so different RIAs might use it in different capacities. But there are some W2 firms that say… “Advisor, you come join our RIA. You’re going to be a W2 advisor. You essentially contribute your book of clients to the RIA. While you previously perhaps owned 100% of your practice, you’re going to join and you’re going to become a partner of the entire RIA. And essentially every other advisor that became a partner has contributed their practice to the overall RIA as well. And so now, as opposed to owning 100% of just your practice, you’re now going to own a slice of all of the practices that are now part of this RIA.”
And obviously, they feel there’s reasons that would be to your benefit, and that might be very attractive to you. And so that partnership model exists, where you’re essentially becoming a partner, you’re essentially blending your book, your practice, your equity, however you want to say it, all together. You’re typically still the one servicing your clients. It’s not like it becomes necessarily a whole team approach per se, but that the idea from an equity perspective, you’re all becoming partners collectively of everyone’s practice together.
Another reason you might find yourself in a W2 advisor capacity is if you have sold your practice to an RIA. Typically they want you to stay onboard at least a short period of time to help with the transition. And in some cases, it might make sense for both you and the RIA that you stay on long term.
But generally, in the case where you have sold your practice to the RIA, at that point you’re going to be a W2 advisor of their RIA going forward. Whether that’s on a short term solely succession purpose or longer term with an eventual succession as well.
And then the final example of a W2 type model, and this is not an exhaustive list, is there are RIAs that essentially have W2 advisors that are effectively, for lack of a better term, “servicing advisors.”
This is where the RIA basically says… “Advisor, we’re going to be a W2 advisor of ours. We’re going to pay you a salary. Sometimes it’s salary plus bonus. We, the RIA, are going to give you clients. We’re going to do the rainmaking, we’re going to do the business development, we’re going to bring in new clients and essentially hand them to you, and you’re basically going to service those relationships going forward.”
So, as opposed to you also having responsibility for growth and bringing on new clients, they are doing that for you. You’re essentially a servicing advisor maintaining those relationships.
And in almost every instance, that’s done on a W2 capacity. Either salary, or something like a salary plus bonus.
This hasn’t been an exhaustive list, but it does hopefully at least help you understand how even within just the W2 side of things, there are several different value props out there, several different ways RIAs have set up.
Obviously, they all feel they have built something that’s most attractive to advisors, or at least the type of advisors that they’re trying to work with. And that may or may not match with what your career aspirations are, both short-term and long-term. But it is good that there are these choices. Because for some advisors, it is a good fit.
And you might be thinking… “Some of these are not attractive, why would any advisor want to go down that path?” And so I want to give a couple examples of where perhaps it is attractive.
For starters, if you’re tuning in to my videos or listening on the podcast, you’re pondering the RIA path. And as part of that, you might be considering starting your own RIA.
A typical part of the discovery process I do with advisors and teams is to go over the different ways you can do, go over the pathways. And as part of that, you might consider starting your own RIA, but it might also make sense to join an RIA.
Well, if you’re maybe thinking about starting your own RIA, a comparison that you might put alongside it is probably not a W2 RIA model. It probably is a 1099 RIA model because that is much closer in economics and flexibility to the reasons you would be motivated to have your own RIA.
So, if you’re asking yourself… “Who would consider the W2 model?” Well, again, if you’re coming into this thinking you might want your own RIA and you want something to compare it to, you’re probably not the audience that the W2 RIAs are going after. They’re going after people that maybe aren’t even at all considering the idea of having their own RIA.
Which that subset of advisors does exist, it just may or may not be you. As keep in mind, there are tens of thousands of W2 advisors at wirehouses now, and a huge majority of them will never leave the wirehouse world.
Now arguably, they maybe should be considering an RIA path, but many won’t ever leave the wirehouse model. Or if they do leave the wirehouse model, they’re just going to go to another warehouse.
And so for better or worse, and we could debate it, but there are thousands upon thousands of advisors that are already W2 advisors now. They’re just at a very large RIA at a wirehouse, and either they’re content there or they just can’t bring themselves to ever make a change, or they don’t even know about what a change would consist of.
So it is what it is. There’s always going to be some advisors, for better or worse, and arguably maybe they should be doing something different, but for better or worse, they’re W2 and they are going to stay W2.
And then the final flavor I’ll note, there are some RIAs that say… “Advisor, come join us as a W2 advisor (and maybe they’re going to take that minority investment, maybe they’re going to buy all of your practice) and over the balance of your career, here’s how we’re going to help you, and here’s how you’re going to get compensated.”
And they would argue that it’s more advantageous for you from an economic perspective, in aggregate over the balance of your career to take that path. Where they might say… “We’ll buy your practice now, and you’re going to be W2 and you’re going to be on a grid, but we’re going to help you grow your practice significantly faster than you could have ever grown it on your own. And so in aggregate, even though you’ll be essentially at a lower payout grid then maybe you could achieve on a more independent path, but we’re going to help you grow your practice faster. And so in aggregate you’re going to be better off.”
Whether that bears out for you or not, whether that is attractive to you or not, whether they can back that up or not, obviously that’s all to be determined and that’s in the details. And you must get into the weeds on that sort of thing.
But just know that’s a way it can be positioned and I think for some advisors that that does work out and that is factually correct. But obviously there’s a lot of assumptions there that must be considered to make sure that’s going to be a fit for you as well.
And then the final thing I’ll note, I’ve kind of harped on economics quite a bit here, regarding W2 and how you’re paid.
And by the way, something we didn’t even get into is how you’re taxed in W2 versus 1099, or your own RIA. Taxation alone can be a big difference between those two.
But the point is, while economics are important, I would also remind you, and for those that have listened along to a lot of my episodes would know this, there are many different motivations for why advisors consider transitioning their practice to the RIA model.
It generally falls into one of two buckets. It’s either economics, and then within that, there’s several different variables, whether you’re seeking higher current day income, better taxation, higher enterprise value of your practice, etc.
And then the other main bucket is flexibility. How you can market your services, the brand you can build, the investment solutions you can provide to your clients, etc.
All different motivations advisors have for making the transition. Economics is just one of them. So if you were to ask yourself if a W2 RIA model is perhaps a fit for your practice, first do some soul searching. What are your motivations for even considering making a change? Is it economics? Is it something to do with flexibility? And oftentimes it’s both of those.
And then, which of the pathways, if any of them, will achieve what you’re trying to accomplish with your practice? It might be a W2 RIA path that could accomplish that.
But the only way to determine that is to first understand what are your motivations? What are the options available to you? What are all these different flavors and all the different pros and cons and why you might choose one over the other?
Only then can you really conclude if it makes sense for you and your individual practice.
That’s what I do for advisors. To the degree you say… “I probably should be exploring this. I probably should be peeling the onion back. I should be looking at all these options.” That’s the kind of conversation I have with advisors all day long. I’m happy to have that conversation with you as well.
Like I said at the top, my name is Brad Wales with Transition To RIA. First things first, head to the website at TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. There is a 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 on the next one.
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