Q20 – What is the minimum account size I can have as an RIA?

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What is the minimum account size I can have as an RIA?

As a Registered Investment Advisor (“RIA”), you generally can establish on your own what you want your minimum account size to be.  The flexibility achieved from running your own RIA, particularly with respect to the various fees structures you can implement, can make accommodating smaller account sizes perhaps more feasible than under your current affiliation model. However, there are a number of additional variables to be considering as well, particularly with respect to expectations and/or requirements of a custodian.

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Full Transcript:

What is the minimum account size I can have as an RIA? That is today’s question on the Transition To RIA video series. It is question #20.

Hi. I’m Brad Wales with Transition To RIA where I help advisors just like you understand everything there is to know about why and how to transition to the RIA model.

Today’s question, we’re going to talk about, if you were to make that transition and you have your own RIA, are their minimum account sizes you can have as your own RIA?

There are two things we want to think through with respect to this question. I’m going to go through them in order. The first one is, what requirements or minimums might your custodian have? And then separate, what might you have as an RIA, and what might that mean for you from, among other things, a compensation standpoint? We’re going to go through both of those because you really have to think them through to address the question, is there a minimum account size?

Let’s start with custodians. A quick recap, I talked about this in many videos, but as your own RIA you will set up your RIA and you will need a custodian, perhaps more than one. I’ll do a whole separate video on being a single custodian versus multi-custodian, but you need at least one custodian if you have assets that you manage. As that custodian holds those assets and does the trading and things like that.

With that relationship, you need to ask yourself……does the custodian have a minimum account size that they will allow me to open an account with? The short answer is custodians generally do not have a stated minimum account size that says…..you must be a minimum of $50,000 or anything like that.

Now there are some managed solutions, from an asset management perspective, your custodian might offer that perhaps you choose to utilize. And maybe some of those managed solutions have minimums. But generally speaking, if you plan to manage the assets yourself and you just need to open the account with the custodian, generally they do not have stated account minimums.

Now where it could come into play, and I’m going to do a separate video on this as well, is how the transaction fees occur. I did a previous video talking about who pays those fees, and the world has changed quite a bit. A lot of that now has gone to zero. But for the sake of this video, there’s two ways the remaining fees can still be charged.

Transaction-based pricing, which is perhaps every time a trade occurs, there’s a transaction fee. Then an alternative to that is asset-based price. That’s where the custodian is basically says….“we’re not going to charge you for any kind of trades of any sort, and instead we’re going to charge you some basis points.” Maybe three basis points or something like that. That’s referred to generally as asset-based price.

The reason I bring it up in this video is if you were going to have an account that’s going to be asset-based pricing, it’s conceivable a custodian might say….“if we’re going to do asset-based pricing, then the account has to have a minimum of $X dollars in it.” Because again, if they allow you to open an account with $100 in it and they’re only going to make three basis points on $100, obviously there’s just not much revenue there to cover the cost of actually holding that account as a custodian.

So that was just a quick sidebar on a kind of narrow lane there if you were using asset-based pricing, that it could become an issue. But again, most folks use transaction-based pricing anyways.

A thing to keep in mind is also fees that could be charged by the custodian, or for that matter, not charged. I’ll give you an example. A lot of custodians will waive certain fees once an account, or more so the relationship exceeds some $ level. That could be for little things like sending a wire or things like that. So at some point when you go above that, with that relationship size, they do start waiving those fees.

An interesting way to look at is, are they waiving fees on large accounts….or are they assessing fees on small accounts? It’s the inverse of each other. Whatever way you get there though, they generally have some kind of relationship price in which above that amount, maybe certain account fees are waived. And maybe below that, they’re not. So something to be aware of. It doesn’t necessitate a minimum account size, but it does impact perhaps those smaller accounts you might have.

Then the last piece I would say with custodians is, and this is what I help advisors with, is part of a transition to the model if you’re going to have your own RIA, again you need a custodial relationship to hold those assets. And – ultimately in the long run you could have even more than one – but it’s a two-way street.

Custodians are out there trying to earn your business and you want to be satisfied with what they’re providing as well. But it has to make economic sense for the custodian to enter into that relationship with you.

Kind of an extreme example….if you have $100 million in assets but you have 4,000 accounts, you have a lot of very small accounts. Even if that custodian doesn’t have a stated minimum account size, when they’re evaluating the (potential) relationship whether they want to go into business with you, it might not make sense for them because there is a cost to a custodian to have an account on their platform.

Yes, there’s a lot of scale involved in that, but there is some liability. There are some risks. There are client tax documents that have to be generated. There are client statements that have to be done. With every account, there is some degree of cost to a custodian.

An advisor with $100 million that has 100 accounts is dramatically different than another advisor with $100 million that has 4,000 accounts. The custodian will take that into consideration. It’s something you want to keep in mind with that.

Even more so nowadays because a year or so ago when a lot of transaction charges did go down to zero – so for instance, nowadays, most large custodians’ equity and ETF trades are now at zero – but they used to be call it $6, $7, $8 per trade, something in that range.

Back when that was the case, and there are still some transaction charges on mutual funds and things like that nowadays – I did do a whole video on who pays these transaction charges, so take a look at that if you want more details – but back when there was transaction charges basically on everything – so equities and ETFs – those smaller accounts weren’t necessarily a bad thing for a custodian.

Let’s say an RIA uses (investment) models. Maybe they make their own ETF model that they use with all their clients. For simplicity, let’s say it’s one model. Two extreme examples here….one RIA has 10 accounts – we’re going to use a real extreme example – and another RIA has 300 accounts. Every single one of those accounts is in that model. When that RIA went to go and rebalance, each of those accounts needed to be rebalanced.

The RIA that only has 10 accounts – which in some ways you say, that helps on costs to the custodian – but in that account, there were only trades…rebalancing happening in 10 accounts. If it was 5 trades that had been done in this rebalance, and there’s 10 accounts, that’s 50 trades that the custodian would generate revenue from.

Whereas if you had 300 accounts, each of those were going to do 5 trades – at whatever dollar amount per transaction – obviously, that was more lucrative for the custodian. There would be more trades because each of those individual accounts needed that rebalance.

Now that, at least with respect to equities and ETFs, a lot of those transaction costs have gone to zero. That dynamic is not there anymore. So this whole concept of a custodian looking at your average account size and how many accounts you have is now even more amplified. At least if it was large enough to at least do these rebalances, it still made sense. But now a lot of that is taken out of the equation. So just know a custodian will look at that.

Again, that’s the type of thing I help advisors understand. When you go to engage custodians, and why you should maybe choose one custodian over another, and what you can expect them to ask you. That is one of the things I coach advisors on. They will ask how many accounts do you have? What’s your average account size? Those sorts of things. So some thoughts to be aware of from the custodian side.

From the RIA side, which you will have full control over, you have 100% authority to decide on your own what if any account minimum you will have. Again, assuming there’s no custodial issue like we just talked about.

Most advisers nowadays, most RIAs nowadays do generally have some kind of stated minimum amount. But that’s entirely up to you to decide how you want to do that. There’s no asking anyone’s permission or anything like that. You as an RIA decide….“our account minimum is going to be half a million” or maybe “it’s going to be $100,000” or maybe “it’s going to be a million.” You have full control. That’s one of the great benefits of an RIA. Full control over making that determination on your own.

And to be sure, there is no regulatory minimum out there. There’s no regulatory requirement that an SEC-registered RIA has an account minimum of any size. You don’t need to worry about that either.

The final point on an RIA is how you’re compensated. One of the benefits of having your own RIA is you get to decide how you’re compensated. How you set your fee structure. You have full flexibility on that. Perhaps you can find a way to accommodate those smaller clients and it’s just maybe how you decide to charge on those accounts. When you have full control over that, it gives you a big difference from maybe what your flexibility or opportunities are with your current firm. And so I did want to give that contrast as well.

Let’s say you are with one of the large traditional brokerage firms, maybe a wirehouse type firm. A couple of things which you’re all too familiar with, but I want to touch on them and how they’re different in the RIA space. A couple of things about how these large firms sometimes approach small accounts. Sometimes they outright do not allow them. Under a certain amount, you cannot open an account under X dollars and it’s a hard stop. That’s an inflexibility.

I’m going to give you a specific example of why I think that’s incredibly shortsighted that they do that. But as an RIA, again, you don’t have anyone dictate that to you at all. You have the flexibility to decide if it makes sense or not.

Some of the larger firms now are building in house call center kind of subsidiaries, if you want to call it that. They’re basically forcing advisors that….“oh, that is a smaller account so you have to move it over to this call center” approach and they will handle the relationship. And maybe you get some degree of a residual income off of that, if anything. But basically, they’re forcing that away from you and you have to send it to this call center. In the RIA world, no one’s going to tell you what you can or can’t do with your accounts like that.

The final thing is some firms will let you have smaller accounts, but they’ll pay you a lot less, and sometimes zero on those accounts. I think this is a troubling trend that you see that bar of what the minimum account size to get paid on, or get paid full on, keeps getting raised.

I’ve seen over time it was $100,000, and if you had an account under $100,000, you got a lower grid rate, or in some cases zero. Then I’ve seen some firms now move that up to $250,000. And who’s to say that one day that won’t keep creeping higher and they say….“oh, either you are going to get paid a lower grid rate or, you can move it over here to our call center.” Which of course is great for the firm, not so great for you.

As your own RIA, you don’t have to worry about this….under a certain amount, my compensation is going to go lower. You set what your compensation is going to be on any size relationship. That’s something you establish upfront with the client. No one’s going to dictate to you how that works.

To wrap up with your own RIA….from the RIA’s perspective, there’s no minimums, there’s no regulatory requirement to it. You do want to be cognizant of the potential challenges the custodian might have with small accounts. It’s something to be aware of and again, it’s something to talk through with someone like me to understand how your book…how a custodian may or may not have concerns over parts of your book. But you set the compensation, you have full flexibility to do that.

I want to finish with an example, like I talked about a moment ago. I’ve referenced where I think these large firms are being very shortsighted. There’s this concept that you might’ve heard of called “HENRYs”. It’s an acronym, HENRY, which is High Earning, Not Rich Yet.

The classic textbook example of that is the new doctor that’s just gone through all their schooling and all of their residency and now they’re out there. Their starting wage is quite high, but because of all of the school and what they’ve been going through, at that point in their career, they don’t have much investible assets built up yet. However, there’s every reason to believe, because they’re now a high earner, that over time they absolutely will be able to build an asset value there with you.

For a big firm now to say arbitrarily….“you have under X dollars in your account so your advisor can’t work with you”, or we’re going to pay the advisor less or nothing for that matter, or we’re going to force the advisor to move the account to this call center. How could you turn down that opportunity to work with a new doctor that is going to be making very good income over time?! It just so happens to be that today, it’s (their account size) still modest, but there’s every reason to believe it’s going to grow.

As your own RIA, you absolutely have the ability to work with folks like that because you can see where that path could go and you can set your own compensation structure of maybe how that needs to work. While that doctor doesn’t have much in assets currently, maybe you do a retainer type fee for those first couple of years. A flat $5,000 a year or whatnot for all the services you provide.

Once that account value actually gets to an asset level where your asset price, maybe you do 1%, maybe that works better at that point. But again, the idea is you have full flexibility to do that as your own RIA. You’re going to need that because this stringent approach that these large firms are using, I think is just incredibly shortsighted and holding you back as an advisor.

With that, like I said, my name is Brad Wales. I’m with Transition To RIA where I help advisors just like you understand everything there is to know about why and how to transition to the RIA model.

Today’s question, a perfect example of….if I was going to go to the RIA model, do I need to be worried about account minimums? What might custodians have concerns with? What flexibility do I have? All the kinds of things I talk to advisors about. I would love to have that conversation with you as well.

If you’re not already there, head on over to TransitionToRIA.com. Plenty more videos posted. I got whitepapers. The easiest solution is right there at the top is a contact link. Click on that. You can instantly and easily set up a specific date and time for us to connect and we can begin a dialogue.

What I help advisors with is….let’s look at your practice. What kind of model do you have now? What kind of firm are you with now? What kind of client base do you have now? What might that look like under the RIA model from an economic standpoint, a flexibility standpoint, a control standpoint? I help advisors understand all of that. That’s the “why” part of what I do. Then to the degree that seems like maybe a path you want to explore further, “how” do you go about transitioning to that model? I’m more than happy to start that dialogue with you.

I’m Brad Wales. I hope you enjoyed today’s video and I’ll see you on the next one.

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