Q44 – What is the minimum amount of assets under management I should have before I start my own RIA?

Also available as podcast (Episode #44)

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What is the minimum amount of assets under management I should have before I start my own RIA?

In theory, this should be a relatively simple question to answer.  In practice though, and considering all of the variables involved, it is much more nuanced.  There are a few different pathways to consider if you want to transition into the RIA model.  One of those pathways involves starting your own RIA.  Another involves joining an existing RIA firm.  The challenge is, depending on who you ask as to whether you are large enough to start your own RIA (vs joining an existing RIA), will often dictate what their answer will be.  When in fact, the answer should be based solely on the needs and specific circumstances of each individual advisor or team.  Not based on who is answering the question.

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Full Transcript:

What is the minimum amount of assets under management I should have before I start my own RIA?  That is today’s question on the Transition To RIA question and answer series. It is question #44.

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.

On today’s question, I want to talk about something I’ve seen pop up a lot lately.  I’ve seen online articles. I see blog posts about it. I see people commenting on LinkedIn. I was just asked this same question while on a panel during an industry conference this past week.

The question comes up quite a lot, and is… how big should you be from an asset perspective before you start your own RIA?

So, that’s maybe before you leave wherever you are now to start your own RIA, or where is it better off apparently to start your own RIA versus tucking into an established RIA?

I hear this asked quite a bit and I wanted to come back and dive a little deeper into it here. I did a previous question and answer earlier, and you can go back and find it. I’ll link to it in the show notes as well.  It talks about some of the more basic components to the question. I’ll rehash some of those on this one, things like what’s the regulatory minimum to be able to do it.

But the reason I want to expand on it here is because again, I keep seeing this question come up and it’s frustrating for me to see sometimes how it’s being answered. Now, I completely respect different opinions out there and certainly I’m just one of those opinions. I think it is good that we have different opinions out there, so folks like yourself can hear different perspectives, different angles, and make decisions for your own.

But I also, for reasons I’m going to explain in this video here, I get frustrated sometimes because I think some of the people answering, or the way they’re answering, that there’s an agenda behind it. I think it’s only fair that if that is the case, and you’re the one to answer in that regard, you need to make that clear to your audience of why you might be answering that.

I want to give you some examples of that here on this question and answer so you can be aware of it, and then also give you my perspective on this as well, to add into that conversation.

What I don’t like to see, and I’ve seen this a couple of times here just recently, but certainly it’s been happening for a while, is where someone will pose the question… “How big should you be before you start your own RIA?” And the person gives an answer pretty quick with a particular number.

They’ll say, “Oh, $50 million in assets,” or, “$100 million in assets,” or whatever, $200 million, whatever the case may be. And they give this very definitive answer, they’ve drawn a line in the sand and that’s absolutely the correct answer. And there’s no context necessarily given as to why they are expressing that number.  It’s like… “Oh gosh, if you’re below that, don’t even consider it. You need to tuck into an existing firm.”

And so, I wanted to give you a few examples of where I think you have to be careful based on who’s giving that answer. This is not to demean any of these folks. These are often very knowledgeable professionals. But you sometimes have to ask yourself, is there an agenda as to why they might be answering the question the way they are?

First example, assume you were to reach out to a custodian and talk to someone on their business development team. Now, I was one of those people once, I’m not demeaning the role at all, some wonderful people, very knowledgeable, helpful people. But if you were to reach out to them and say… “I’m either going to start my own RIA, or I’m going to join one….how big should I be before I even consider starting my own RIA?”

Here’s the thing, most all custodians have some amount of minimums before they will enter into a custodial arrangement with you as an RIA. Some custodians are open to startups, but most of the bigger players do have some degree of minimums. Sometimes that go as high as $100 million.

Let’s assume you’re talking to a custodian that has a minimum of $100 million, we’ll just pick that number, and you have something less than that. You have $70 million. If you’re talking to that business development person, and you ask… “am I big enough to start my own RIA or should I tuck into one?”

Well, their custodial option is only willing to accommodate RIAs that have at least $100 million.  If their answer to you is… “Oh yeah, go ahead and start your own RIA at $70 million,” or whatever your number is, they can now no longer help you because their business model says they won’t accommodate a $70 million RIA. So guess what their response is usually… “well, if you’re under $100 million, you should probably tuck in.”

Now, perhaps it might be better for you and your particular circumstances at that size and whatever other variables are involved, to tuck into an existing RIA. But you do have to question whether the answer is because of all those variables or is it solely because unless I tuck in, I can’t otherwise work with you, custodian, in any capacity?

Now, conversely, because we don’t want to pick on just custodians, there are some wonderful RIA platforms out there that would like you to join their firm.  Again, a tuck-in into an existing RIA platform. And generally, those folks have minimums as well.

Because of the economics and the risks that they take on of adding a new advisor, it needs to make sense, so they say… “Well, we do have minimums.” But at the end of the day, the business they are in is having advisors tuck into an existing RIA, in this case, their own RIA.

If you go to them and say… “I have $70 million, $100 million, $170 million,” whatever the case may be and say… “am I big enough to start my own RIA or should I tuck into a firm?” Well, again, if you think about it, they’re in the business of having you tuck into their firm. So what do you think their answer is going to be?  Naturally, they’re going to probably say, “Oh, you’re not big enough. You should tuck into a firm. And we’d love to tell you about our solution.”

And so again, you have to come back to who’s actually answering the question. Now, as long as that person prefaces it and says… “maybe you are big enough to start your own RIA, here’s how that works, here’s what our solution is, here’s why you might choose one over the other”, I think that’s perfectly fine. But if the answer is just… “no, you’re not big enough, you should tuck in”, with no additional context provided, again, I think that’s an unfair answer.

I even heard a story recently, I didn’t hear it firsthand, but that there’s an RIA out there, apparently their response when asked that question is that if you have less than $1 billion in assets, you should be tucking in. As if anything short of a billion, it does not make sense – a billion with a B – it does not make sense to have your own RIA.

That’s incredible to suggest that anything less than a billion cannot make it work. There are some extraordinarily successful RIAs, well south of a billion dollars. So that was the agenda of that RIA because obviously they wanted people to plug into it. That’s their business model, nothing wrong with that, some great solutions out there, but you have to give that context. I think that’s only being fair.

It’s kind of like asking a parent that has multiple children… “which one is your favorite child?”  That’s an impossible question to answer with just a one-word answer, the name of whatever that child is. I’d venture to say 99% of the time, you ask parents that, they’d give you a nuanced answer. They say… “well, my son excels more in sports, that’s where he has an edge, and my daughter maybe does better in academics, or my other daughter is very social and makes friends very easily.”

If you give that nuanced answer, that’s understandable. But it’s almost impossible to give that… “Oh, my son,” as the answer. That’s the same sort of thing when people ask… “how big do I have to be to start my own RIA?” Again, it can’t be answered in just one single number.

I want to dive into a couple of nuances here of the different variables that go into this and why it’s not such a simple answer.

First is regulatory minimums. Again, I did a whole separate question and answer on this, I’ll link to it. But the short of that is you do not have to have any assets to start your own RIA. There’s no regulatory minimum to have assets. Some RIAs never have assets because that’s not how they charge for their services, or they don’t directly manage the assets. They do a fee for service model or something like that.

So, zero is the correct answer of how much assets are you required to have to start your own RIA. There are some other factors as well.  Once you’re above $100 million, you’re SEC-registered versus state-registered. I did a whole question and answer on that as well. So, there’s some variables there, but nothing that precludes you from a regulatory perspective from starting your own RIA.

Next, custodian minimums. I talked about this just a moment ago. Different custodians have different minimums. Some go as high as $100 million or more, some are much lower than that. So if you want to start your own RIA and you need a particular kind of custodial solution, can you even do that? Are you large enough to do that, or are you better off, in that instance, maybe tucking in and getting that instant scale that an existing RIA already has?

Next up is the tuck-in minimum. Again, there are some wonderful RIAs out there that would love to have you come tuck into their firm, but they too have minimums. You might love a particular tuck-in solution, but they might have minimums that exceed what you have currently.

Some RIAs, because they’re carving out their niche, have pretty healthy minimums, sometimes into the hundreds of millions before it makes sense for them to say… “Okay, this would be great to have you join our firm.”

Next up is technology minimums. Part of having your own RIA is building out your own tech stack.  Well, there’s pricing and scale that comes with that. When you go to one of those vendors to establish a new relationship, some of them have minimums which they express in assets, other times in number of accounts.

Or they don’t have a minimum, but the way they price it basically makes it prohibitive for smaller firms, it just doesn’t make sense. If you want to access their solutions, you’re probably better off tucking into a firm that already has that bigger scale that can instantly provide you with that access to those solutions.

Also is the question of profitability. How big do you have to be to make a profitable RIA, to make a successful RIA? There’s no simple answer to that. There are some extraordinarily successful and profitable <$100 million RIAs that run a very lean operation, sometimes solo practices, literally one person, not even support staff. And then there are others, both smaller and larger, that are less profitable because they provide more services, have a higher cost structure, etc.

It runs the full gamut. There is no simple answer. You have to dive into what do you plan on offering as part of your service and your value proposition, and what’s it going to cost to either build that out yourself or essentially outsource that if you tuck into a firm to supply those needed services. So again, not a simple answer on profitability.

Last, is there ever a time that you are too big to tuck into a firm? Is it that once you get to $500 million (for example), should you not even consider tucking into a firm? I would tell you that’s not the case at all.

While having $500 million certainly makes having your own RIA perhaps more accessible for all the reasons I talked about, there are many examples of very large advisors and teams that have considered their options and they’ve chosen to tuck into firms.

They conclude… “what these firms can provide me is either better than I can create on my own, or I simply don’t want to be responsible for having to build some of that out. I’d rather partner with them and have them provide it for me.”

So, there is no kind of maximum either.  It comes down to what is important to you individually, the services you want to provide, how you want to run your practice, and then what are the best solutions available to you and that you would want to consider using?

The main takeaway is there is no simple answer. If you see that question posed, and someone gives a finite, draws-a-line-in-the-sand answer, for what it’s worth, I’m not a fan of that. I don’t think it’s fair to answer that way.

I won’t give a number if called upon. Whether people want to say that’s dodging the question, I’ll take that. There’s too many variables that are specific to each individual advisor and team that have to be addressed before you can try to give that kind of guidance.

So, I’d caution you, careful when hearing that answer provided. Ask yourself who is answering the question. Is there perhaps an agenda behind it?  Are there limitations that they have, whether it’s that custodian that can’t otherwise help you, unless they’ve convinced you to tuck in, or is it that RIA that wants you to join their firm, so they’re going to guide you towards that solution?

Like I said, my name is Brad Wales and I am with Transition To RIA.

This is the sort of thing I help advisors with all day long is answering these sorts of questions. How does the RIA model work? How does a tuck-in work? What are the minimums required of all these different solutions? Why might I choose one option over another option?

I’m happy to help you with that as well. If you’re not already there, head on over to TransitionToRIA.com. Lots of videos, podcasts, whitepapers, all kinds of information you can easily access to learn more about the RIA model.

The best thing to do, and it’s right at the top of the webpage is a contact link. Click on that, you can instantly and easily schedule time to have a one-on-one conversation with me about this very subject because again, at the end of the day, it really comes down to your specific practice.

While I try to provide a lot of information on these videos and podcasts, I can only do this with a general audience on a more macro level. The reality is it’s important to get down into the micro details. I’m happy to do that with you.

Jump over to the website, TransitionToRIA.com. If you’re listening to this via podcast, I would love to have you review the show. I’d very much appreciate that.

With that, I hope you found value in today’s question, and I’ll see you on the next one.

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