Q143 – What Is The Minimum AUM Needed To Have Your Own RIA?

…

Also available as podcast (Episode #143)

Apple  |  Android  |  Spotify  |  Amazon  |  Audible

What Is The Minimum AUM Needed To Have Your Own RIA?

TL;DR – Beware of anyone that gives you an immediate answer, with an immediate AUM figure, regarding what size your practice needs to be before considering starting your own RIA.  There are often biases or ulterior motives behind such answers. You can technically start an RIA with $0 AUM, though there are reasonable arguments to be made regarding when it makes actual sense to do so. The key is to understand what those variables are, and how they apply to your practice and your vision for it going forward.

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.”

Found This Video Helpful?

Want to understand what a transition to the RIA model would look like for your practice?  Schedule a Discovery call to learn more.

While You’re Here

Consider also downloading the FREE WHITEPAPER: “Steps To Take Now If You Anticipate Transitioning Your Practice To The RIA Model Anytime Within The Next 10 Years.”

Full Transcription Of Video:

What is the minimum AUM needed to have your own RIA? That is today’s question on the Transition To RIA question & answer series. It is episode #143.

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 RIA model.

Again, TransitionToRIA.com.

Today’s episode is something I get asked fairly frequently, both in direct conversations or if I’m perhaps being interviewed by an industry publication or I’m on a panel at a conference. Specifically, what is the minimum AUM needed, or the minimum size practice needed, to have your own RIA?  That’s what we’re going to dive into here.

And for those that have seen me or heard me answer that question, I often will rant about it as I’m a big believer that anyone that gives an immediate answer to that question, whoever that’s being asked to, if they give an immediate answer with an immediate number, be very cautious. There’s usually an agenda behind why they have answered so definitively one way or the other.

As we go through today’s episode, and I talk about all the variables involved, you’ll understand why.

As a starting point before I get to some of the variables involved, the very short answer is that there is no AUM minimum required to start an RIA. Now whether it’s a good decision or not is something we’ll get into, but from a regulatory perspective, and even nowadays from a logistical perspective, it is possible to start an RIA with zero assets under management.

So just to give you the clear the deck regulatory answer, zero is technically the number of the hard minimum. And again, we’ll get into factors that might not make sense for you to do that, but it is possible to do.

And spoiler alert, I’m not going to give you a specific number as part of this because as you’ll see, there’s different variables that go into this that will impact advisors and teams in different ways. So there is no single number that applies to everyone.

Hence, one of the reasons I say be careful of anyone that gives you that immediate answer. Again, there’s usually some agenda behind that.

What I want to give you though is some perspective of the considerations you’d want to put into this before making a decision on whether your practice is large enough to go down the path of your own RIA.

And of course, that’s a big part of what I help advisors and teams do is understand what does your practice look like now, understand what your vision is for it going forward, help you understand all these considerations that need to go into this and help you conclude whether having your own RIA makes the most sense and whether you have the size and scale where it makes sense.

I’m happy to have that conversation with you as well. But as a primer to get things started, I’ll give you some general takeaways.

From a “minimums” perspective, the first variable is from that regulatory minimum.

As I noted, there is no regulatory minimum to have an RIA. There is though a regulatory minimum to have an SEC registered RIA.

As a reminder, or new information for those that don’t know, you as your own RIA would either be state registered, typically in the state your office is domiciled in, or SEC registered.

And there’s actually, a lot of people don’t realize, there are a couple variables that could go into whether you would be SEC or state. But in, I’d call it 95% of the instances, the variable that decides that is your AUM.

Currently $100 million and above, you would be SEC registered. Below that, you would be state registered.

Now that number was about a third of that a decade plus ago. And the SEC at the time essentially felt they had too much on their plate and raised it to $100 million to push more down to the states.

There’s been some recent talk of will the SEC raise that again. I think that’s to-be-determined, as it’s easy for them to say that, but the states aren’t necessarily prepared or don’t have the capacity to take on that many more RIAs.

So we’ll see if that happens or not, but for quite a while now it’s been the $100 million minimum that you would want to be aware of.

Now, it’s not a horrible thing to be state registered. It’s not necessarily advantageous or the opposite to be state registered versus SEC registered. The rules are about, and I would defer to the compliance folks that maybe have a slightly different number, but call it 90-95% of the rules that state register RIAs follow, it’s the exact same at SEC level.

At the state level though, you do sometimes have, depending on what state you’re in, some one-off rules that perhaps don’t apply, or disclosures that don’t apply with being SEC.

But make no mistake, if needed, if you were under $100 million, you could start state registered and then what would happen is you grew your practice and exceeded $100 million, you would essentially re-register it as SEC and then hopefully just continue to grow from there.

I wouldn’t call that a “challenge”, but there is a cost involved with doing that. There is some logistics and processes involved with doing it.

So if you’re at $50 million now, and it’s going to take you quite some time to get to $100 million, then go ahead and start at state, and you’ll cross that bridge when you get there.

If you are in the $90, 95 million range, I typically say… you might as well sit tight, continue to grow your practice, and let’s get you over the $100 million so you’re just launching from SEC registered from the jump. And then once you exceed that on the way up, whether you have 200 million, 500 million, a billion, you would be SEC registered.

So, just something to be aware of. Again, it’s not going to stop you from starting an RIA, whether you’re below or above $100 million, but it is something to be aware of, particularly if you happen to be close to that $100 million band above or below it.

The next example of minimums to be cognizant of is some, but not all, custodians have minimum asset requirements to use them as a custodian.

I’ve done an episode on how to choose a custodian for your RIA. You can check that out.

There are many variables that go into choosing a custodian, such as what their value proposition is, what their service offering is, how they price their services, etc.

But at the same time, you must be a viable RIA candidate for them to do to agree to do business with.

Some custodians don’t have minimums They will take you as a startup RIA ($0 AUM.) There are other custodians that have minimums in the four or five hundred million plus range because that’s the area of the market they are focused on.

So be aware, if you say… “I’m going to go ahead and start my own RIA and I insist on using a particular custodian.” Well, that custodian might not even be available to you, depending on what your practice size is.

The next variable, which is a bit related to custodian, is if you still have legacy commission assets that you need or want to be able to accommodate.

As I’ve talked a lot about in episodes, you do not have to be 100% fee only to transition your practice to the RIA model.

Now, there are many RIAs that are 100% fee only. And technically the assets held under any RIA are always fee-based advisory assets. However, it is possible to set up what’s often referred to as a hybrid arrangement where alongside the RIA you also have a way to accommodate your remaining commission assets.

I’ve done episodes on that as well if you want to dive deeper into it.

But depending on how you would like to try and accommodate those commission assets, the solutions for it typically have minimums as well.

One such solution, and it is not the only potential path available, but is to perhaps use what’s referred to as an RIA-friendly broker-dealer.

That is where the broker-dealer says… “You go start your RIA over there. You choose your custodian over there. We are just going to be your broker-dealer for your broker-dealer business. We’re going to take a payout just on that business. We’re not going to take an override on the RIA side of things.”

But because they are only taking a payout on your commission assets, they have minimums of how much commission production you must do to use their solution.

So something to also be considerate of if you want to start your own RIA and you’ll need a way to accommodate your remaining commission assets – which that might be with an RIA-friendly broker-dealer; or there are other approaches as well – but they typically all have some sort of minimums associated with it.

Another variable to be aware of is what I would call scale minimum.

The RIA model is generally a scale game. I’ll give you a few examples of where the bigger you are generally the better the economics get, and so you want to bake that into what might be the best minimum size you should be before considering having your own RIA.

The first example is technology costs.

There are all kinds of fintech solutions you might use having your own RIA. Generally, by far, the most expensive piece of a so-called tech stack is the portfolio management tool.

I did a separate episode on what is a portfolio management tool if you want to learn more about that.

Such tools are generally priced on a per account, per year basis. However, they generally always have a floor minimum expense that you must exceed where regardless of your number of accounts, if the per-account math does not exceed the floor price, you pay the floor price.

So in some solutions like technology vendors, the bigger you get, the better that math is going to get. Because if you haven’t exceeded what that floor cost is, once you exceed it, the math gets better and better as you grow larger. You are able to achieve scale.

Another example is the cost of compliance.

How to manage your compliance responsibilities as your own RIA is well beyond the scope of this episode, but there is a process, there is a method to it. I’ve done episodes on it. I’m happy to discuss it with you as well.

Generally though, the very short answer is you lean on a third party compliance consulting firm to help you manage the responsibility. There’s a whole range of these compliance consulting firms with respect to how much they do for you or versus how much you have to do yourself. And of course, there’s a whole range of prices that go with that.

But the idea being, and let’s take a solution in the middle of that service range, the compliance cost of you having your own with $300 million, would generally be the exact same at $400 million.

The cost is relatively fixed. Now, over time, inflation and whatnot, it will likely incrementally increase, but just to give perspective, you have a $300 million RIA and you grow it to $400 million, your compliance cost generally hasn’t increased.

That is operating leverage you achieved with that larger scale. Just because you can have your own RIA at $300 million, does the math make more sense at $400 million or $500 million or something larger? So again, you want to factor in compliance costs.

And then the final scale example I’ll give, and this is not an exhaustive list, is how you approach real estate.

As your own RIA, you will be responsible for whatever your office footprint is going to be. There are several ways you could approach that, ranging from a completely virtual approach at one end of the spectrum to outright owning the building you’ll be using on the other end of the spectrum.

This is similar to the compliance cost. Whether you lease an office (which yes, does generally have incremental increases each year), or you own the building (which also could have incremental increases with things like property taxes), but the bulk of the cost is generally fixed.

Back to my prior example, if you’re a $300 million RIA or a $400 million RIA, you probably don’t necessarily need a larger office going from $300 million to $400 million. That office cost essentially stays fixed. So the larger you get, the better the overall math gets.

Now, as you grow your firm and perhaps you cross $500 million or $1 billion, at some point maybe you do need a larger office and so there could be an incremental stair step to that. But the idea being it does not go in lockstep. Every new dollar of revenue you bring in does not in lockstep increase your real estate costs.

Again, there is operating leverage the bigger you get.

Those are just a couple of variables to hopefully help you understand why this is not just a simple, easy black and white decision.

I will leave you with a couple takeaways related to that.

First, and this is from someone that talks to hundreds of advisors and teams a year and has done this for coming up on 25+ years in the industry, I would tell you there is no rule on… this size means you should start an RIA, and this size means you should join an RIA.

Advisors and teams of all sizes have pursued starting their own RIA, and advisors and teams of all sizes have joined existing RIA platforms. So don’t think that there’s some rule that says if you’re below a certain amount, you should only join one, or if you’re above a certain amount, that means you must have your own.

It might make sense for you to have your own RIA, or it might make sense for you to join an RIA. But just know, teams of all sizes have gone down both paths. I help advisors down both paths, so my comments are not meant to steer you one way or the other.

I help you understand the pros and cons of both paths, because they both have pros and cons. And we work to figure out what would be the best for your specific circumstances.

So again, there are no rules on a certain size means you start an RIA, and a certain size means you join an RIA.

Related, just because someone you’ve known perhaps in the industry, or you read about in the industry that maybe is a similar size practice as you recently went in whatever path they went down. Maybe they started their own RIA, maybe they joined an RIA. Just because someone else seemingly the same size as you went down a certain path doesn’t mean that’s going to be the best path for you.

Hopefully that team did their homework, did their due diligence, understood it all, understood the pros and cons and determined for themselves based on their practice which of those paths was best to go down.

But there’s way more variables than just that AUM number alone. I’ve talked about some of them in this episode, I’ve talked about them in a lot of episodes, the responsibilities of having your own RIA or joining an RIA.

All kinds of variables go into it, so don’t just look at a peer you know or a colleague or someone you’re reading about in the news, regardless of which path they went down, or regardless of maybe which firm they joined, or whatever the case is, that doesn’t necessarily mean it’s going to be a fit for you just because your AUM size happens to be relatively close to theirs.

Then the final thing I’ll leave you with, and perhaps this is self-serving, this is the value I provide for advisors and teams is helping you understand all of this.

I help advisors and teams down multiple different pathways. I’m not just essentially a one trick pony that can only help you down one pathway. Obviously I’d love you to reach out. I’m happy to help you with this. I’m happy to have that conversation with you.

But be careful with who you take this kind of advice from. I’ll give you two examples.

First, the person providing you a specific answer might be because they work for a particular type of service provider and they are giving you the answer that aligns with what they have to provide.

If you are a compliance consulting firm that is in the business of helping people register their own RIA and you ask them should I have my own RIA or should I join one… guess what their answer is typically going to be? You should have your own, because again, that aligns with the service they’re providing.

Now, I’m not suggesting that the business development people at these firms are not good people or don’t provide good feedback, but it is what it is. That is the service they have to provide.

Or if you go to some solution provider that has a minimum assets to be able to support you, perhaps it’s a custodian or supported independence platform, and you go to them and say… “I want start my own RIA. Will you be able to help me?”

Well, if you’re below whatever their minimum requirement is, they might very well say… “gosh, at your size, you should really join an RIA. And we’d love to introduce you to some RIAs that use our solution. And that’s going to be best for you.”

That might ultimately be best for you to join an RIA. And they might ultimately help you find a good RIA to join. But you do just have to question, was there any bias to why they suggested you only go that one direction? Is it because they couldn’t help you otherwise?

So from a service provider’s perspective, again, these are good people trying to educate you, trying to help you out, but it is what it is. If they represent a particular solution, their feedback is typically going to align with whatever that path is.

And then the other example…I’m sure many of you get relentlessly cold called by industry recruiters.

I won’t name any names, but from observing the marketplace for many, many, many years now and seeing how some of these folks position the RIA model in videos they make, or blogs they write, or articles they’re quoted in, or feedback I get from advisors that have spoken to some of these folks, typically my experience has been that traditional recruiters, particularly ones that might be cold calling you, are generally always trying to steer you to an RIA to join versus walking you through what starting your own RIA might entail.

There a couple of reasons they generally lean that way.

First, the person you’re talking to simply might not, and often does not, have the experience to be able to help you understand all the variables that go into starting your own RIA.

It’s easier for them to essentially position existing RIAs as the better solution that they should connect you to.

Or two, existing RIAs are maybe the extent of the relationships they have that they can refer you to. Because they don’t have the experience of helping people start their own RIAs, they don’t have the relationships with the solution providers that can help you down that path.

Their advice might be limited to essentially who they can refer you to.

And then the third one, and I won’t say this is the main reason here, but it is easier for a recruiter, from their workload, to just try to connect you to an existing RIA and let that solution try to help you with everything and land you as business and they’ll take it from there.

Coming from someone (me) that helps advisors and teams down both paths, it is significantly more work on my part to help you go down the path of starting your own RIA than helping you understand and connecting you to existing RIAs.

And again, that’s to be determined which path is going to be best for you at the end of the day. I’ll help you down whatever path is best.

But for recruiters that, again, either don’t have the experience to help you down the start-your-own-RIA path, it’s going to be easier for them just to refer you to an existing RIA and try to convince you that that’s surely the best path.

Again, I don’t want to paint a broad brush for all industry recruiters in that regard, but just be careful. Particularly if someone’s calling you out of the blue. You don’t know who they are. You’ve never heard of them before. And they’re trying to give you an answer to, what is this minimum AUM you should have?

There’s all kinds of reasons they may or may not have the knowledge themselves to be able to give you an honest answer. And then of course, as I noted, they might have some biases there as well.

Again, I can help you down all paths related to the RIA model.

So with that, I hope that’s given you some perspective of why this is not just an easy answer and why I rant about anyone that gives you an immediate line in the sand number.

Usually, again, there’s ulterior motives as to why they’re doing that. And hopefully going through this, again, non-exhaustive list, is giving you that perspective of why it is a more meaningful conversation. You really need to think a lot of variables through before you should conclude anything related to the best path for your practice.

Like I said at the top, my name is Brad Wales with Transition To RIA. This is the kind of thing I help advisors with all day long. Helping you understand, should you even be looking at the RIA model? Does it make sense for your practice? How would it work if you did make the transition?

And then what are all the pathways and variables and decisions that go into it, depending on which pathway ultimately ends up being best for you? I’m happy to have that conversation with you as well.

First things first though, head on over to 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.

And 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.

Want To Learn More?

Schedule a Discovery call and lets begin a conversation.