Q9 – What is the minimum AUM I must have to start an RIA?

Also available as podcast (Episode #9)

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What is the minimum AUM I must have to start an RIA?

There is technically no minimum Assets Under Management (“AUM”) level required to logistically start a Registered Investment Advisor (“RIA”) from a regulatory standpoint.  However, there are “minimums” worth understanding as they relate to which regulatory body you will be registered with, which vendors you will have the ability to work with (e.g. custodial partners), as well as what your overall strategic plan is for your firm.

? See also my updated/expanded answer where I address things to be cautious of when you see someone answering this question, and how it could adversely impact you.

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Full Transcript:

What is the minimum amount of assets or AUM needed to start your own RIA?  That is today’s question on the Transition To RIA video series. It is question #9.

Hi, I’m Brad Wales with Transition To RIA where I help advisors understand everything there is to know about why and how they might want to transition their current practice to the RIA model.

Today’s question is again, what is the minimum amount of AUM I need to start my own RIA? Now, most all of the advisors I work with already have assets but even if you have assets, the question is, is there a minimum amount of assets needed to be able to transition or start my own RIA?  So that’s what we’re going to be talking about here today.

Technically, you don’t have to have any assets to legally start an RIA. And I’m going to explain this, go through this here. Some RIAs never have assets, which I’m going to point out. But when you go to start the RIA, again, there’s no minimum that says you have to have a minimum of $10 million or $50 million or $100 million. You can, and people do start an RIA solely with no assets.

And to be clear, even if you have assets now, let’s say at your current firm, you have $400 million, and I pointed this out in a previous video, on day one when you start your RIA when it technically goes live from a regulatory standpoint, even you on day one, technically have zero in assets because until you actually move your clients and move your assets underneath the RIA, at that point it does have zero.

And so again, you can check out my prior video on that that talks about how long it takes to start up an RIA and where that asset flow comes into place. But I did want to just have a quick note today on how this works kind of with minimums.

And while it seems like a simple answer…..oh, there is no minimum, there are still some things you need to be aware of. So for starters, you might wonder, well, what RIAs out there have zero assets and don’t have any intention of getting assets?

And there are a growing number of firms out there that want to…a couple of…three different paths they could go on.

The first is they say….“I’m a financial planner. I like providing financial planning services and I have no desire to actually do the asset management part of the relationship. So I will sit down and maybe you pay me a retainer. Maybe you pay me”…kind of more and more popular, you’re seeing this monthly kind of “subscription fee model”.

So there’s a number of different ways this could be paid for. And they say…. “I provide this financial planning services for you, all aspects of your financial life, which we will talk about your assets and how they should arguably be managed but at the end of the day, I’m not going to actually manage it for you. We’ll set you up in another place.” Maybe it’s direct with a mutual fund with maybe models they have, or maybe, go ahead and open a Vanguard account. And “I’m going to tell you or suggest to you how you should manage those assets over there effectively on your own. But at the end of the day, I am not going to manage the assets myself.”

And arguably, is that a good model for an RIA? Is it not a good model? I mean, to each their own. And I think there is a place in the marketplace where that’s going to resonate with certain clients and then other clients are going to say……“no, I want the financial planning and I want you to just do this asset management for me. That’s why I’m paying you. That’s why I’m coming to you.”

So to each their own, there are differences but know that there is a path where some folks have zero on day one and have no desire to grow assets.

And then some of those same firms, kind of their value proposition is pretty similar and they say…..“I provide financial planning. Yes, you need to manage your assets.” And at the end of the day, they perhaps will manage those assets for the client if the client wants them to but it’s not their main value proposition. And as a result, they might only charge a very low fee on that actual asset management piece because they are primarily getting paid through this, you know, fixed retainer or subscription cost, and the asset management is just kind of complementary to it.

So they kind of position it as……“I’m almost doing this at cost.”  Not effectively because you would want to obviously make some money because you have a responsibility there. But…..”this is my core service but if you’d like, I will take it.” So you see some of these RIAs, you know, growing assets that doesn’t, you know, at face value appear to be an impressive number of assets because again, they’re not necessarily trying to grow because they’re not charging primarily, you know, their fee as a percent of assets under management.

And then the last thing I’d point out about that model or kind of the advisor that has no intention or desire to ever actually manage the assets. In that case, you do not need a custodial partner. You do not need a custodian because again, the custodian’s main value add to you as an RIA is to custody and clear the assets, facilitate the trades and hold those assets. So if, as an RIA, you have no desire to actually manage assets, you actually don’t even need a custodial partner. You’ll just kind of be a standalone RIA, providing your service with no custodian needed. Again, that’s not primarily the advisors I help out. I help advisors that generally have existing assets that are looking to transition to the RIA model and want to continue that asset management approach.

Nonetheless, I did want to point it out because technically is if you wonder, “Well, how can someone have zero assets and still be an RIA?” because again, as long as you are providing advice for a fee, you do have to be registered as an RIA even if you’re not technically managing assets as part of that.  So there is a subset of the marketplace out there that that is the model they’re pursuing.

Now, for RIAs that have assets, a couple of things just to still be aware of from a minimum perspective. The first one depends on your assets will be determined whether you are registered with the SEC or registered with the state. I did a whole video on this, so check it out if you want to learn more about that. But the short answer on that, and there’s a bunch of nuances to it so I encourage you to look at the whole standalone video, but in short, $100 million is kind of the over/under line.

So if you have over $100 million in assets, you’ll be registered with the SEC. If you’re under that, you’ll be registered with the state. So it’s not, really a minimum in the sense of having an RIA. It is a minimum in the sense of being registered with the SEC.

Next up is you, with assets, you will be working with, for instance, a custodial partner. You might be using software, third-party software vendors as well. And again, deciding which partners to work with, why one might be better for you than another, that is exactly what I help advisors understand through this whole process, so I’m happy to have that conversation with you. But custodians themselves often have minimums.

So even if you only…the kind of the scenario before and you just kind of, only occasionally take some assets…so you have all of $15 million in assets. Well, these custodians, certain custodians won’t go into business with you as the custodian partner because they have a minimum that says….“hey, for the economics to work for us as the custodian, we need you to have at least X on our platform.” And again, that’s a thing I help advisors think through. But it is something to be aware of. So you can’t just solely take a couple of clients here and there, unless you find a custodial partner that can accommodate that.

And likewise, when you pay for third-party software, oftentimes that is based on a per-account basis.  If you come along and you say, “I have five accounts,” they very well might not enter into a business relationship with you because for them, they just feel that’s not going to generate enough revenue to make the relationship worthwhile.

So again, you kind of have some minimums there as well as far as the vendors that you’re going to be working with. And again, I can walk you through all of that individually.

And then the last thing is just, you know, what do you hope to achieve with your RIA?  So let’s assume you are going to manage assets…and everyone knows there’s different kind of models out there. You might want to have a lifestyle practice where you have a good amount of assets that generate you a reasonable amount of income, and you’re happy with that. And then there’s RIAs that are definitely in growth mode and growing and grow to billions-plus in assets.

What I’d encourage you to think through is even if there’s not any sort of regulatory minimum, and even if you maybe achieve the minimums of what a particular custodian might require is you still have to run the practice. You still have expenses involved.

You have to ask yourself…..”okay, at what point does it just not make sense for me to have the responsibility of running my own RIA?” And that’s a conversation I can easily have with you if you want. Again, that’s if you’re kind of more on the smaller scale now. Anything $100 million and up, it’s certainly a much easier decision of where the economics line up. But you start getting down on that lower end and it is not as clear cut of a decision as…..“hey, does this make economic sense?” Yes, you’ll have a lot more flexibility, a lot more freedom and on a per-client basis make more money, but there are some economies of scale that are achieved with that higher asset level.

And so, again, it’s something to keep in mind. There’s no easy, black and white answer to it. That’s why I can’t tell you here that oh, as long as you have X, it makes sense to be your own RIA. Because it really comes down to what you want to do with that firm. Do you want to grow to be that $2 billion firm, or do you want that lifestyle practice? And maybe if you can keep your costs low, the numbers still work. So again, that’s the sort of thing I help advisors think through all the time.

So with that, I’m Brad Wales with Transition To RIA.  This is the sort of thing I help advisors with. I want to help you understand everything there is to know about why and how you can transition to the RIA model. So I’m happy to help you with that. If you head on over, if you’re not already there, TransitionToRIA.com. Lots of these sorts of questions are posted, some whitepapers, and then the best path is if…you’ll see right at the top is the contact link, you can easily and instantly set up a one-on-one Zoom with me and we can begin a dialogue. I can certainly walk you through any questions you have and everything I think you should be aware of as well as you begin to contemplate the model, and then perhaps actually start walking down that path.

I hope you’ve enjoyed this video and I’ll see you on the next one.

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