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Also available as podcast (Episode #110)
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What is the most popular type of RIA to join?
There are three main pathways to transition your practice to the RIA model. You can start your own RIA, join an existing RIA offering, and there is a model essentially in the middle of the two. There are pros/cons to all three. If you conclude that joining an RIA is the best path for your practice, there are several flavors of models to consider. Which is the best fit for you will be based on the profile of your practice, what you are desiring to solve for by joining an RIA, etc. However, some models overall tend to be more popular than others.
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Full Transcript:
What is the most popular type of RIA to join? That is today’s question on the Transition To RIA question and answer series. It is episode #110.
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 your practice to the RIA model.
If you’re not already there, head to TransitionToRIA.com where you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers. 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 the most popular type of RIA to join?
For those of you that have listened to or watched many of my episodes, you’ll know that I talk about how there are three primary ways you could transition your practice into the RIA model. All of them have pros and cons. All of them have reasons you might choose one over the other. That’s part of what I do is help you understand these three.
On one end of the spectrum is you start your own RIA. On the other end of the spectrum is you join an existing RIA platform. And then in the middle there’s a flavor where you start your own RIA, but you’re still outsourcing a lot of the tasks of running the RIA.
I’m not going to dive into all three because that’s not the point of this episode, but the idea is there are different reasons different advisors go down all three of those paths.
If you determine, for example, that joining an RIA platform is the best path for you, then the question is….which one is the best model of that to go with? What is the most popular way that’s done?
The reality is, there are different kinds of, I use the term, flavors of RIAs. That’s everything from an RIA down the street that happens to have an empty desk in the corner that would love to have you come sit in it, to as I talk about often, purpose-built platform RIAs.
Purpose-built platforms are not just some RIA that has grown and now has an empty desk and they want you to sit in it. These are firms that from the beginning realized there’s a lot of advisors that want the advantages of the RIA model, but don’t necessarily desire to be responsible for all the blocking and tackling pieces of running their own RIA.
Managing their own compliance, managing the tech stack, doing the fee billing, those sorts of things. There are platforms that say…. we have gone out to the marketplace, we have brought together what we feel is the best in breed set of solutions. We’ve bundled it up, we have more scale than you will ever have. Here’s how we price it, here’s why we think you should consider utilizing our platform versus doing it on your own.
There are pros and cons to both approaches. This episode is not to suggest that one is better than the other. Because all that matters is for you individually, for your specific practice, which one is better than the other? I can’t make a blanket statement (about which is better) because every advisor and team is different.
We can put these platforms in a couple buckets. They all have their own little uniqueness to them and value props. This is not an exhaustive list, but I want to go through a couple.
First, and spoiler, of the audience that I have, advisors that are thinking about moving into the model, that are reaching out to me, that are understanding all this, this first option is generally the most popular. But as you’ll see as I go through them, it depends on your circumstances as to what might be the best fit for you.
The first one, I call the 1099 model.
Now just because you’re 1099 (in any sort of model), doesn’t necessarily mean you’ll have all the traits I’m about to describe. But most of the platforms that I recommend, typically have them.
The first trait is that you will retain 100% ownership of your practice. Yes, you are joining an RIA, but make no mistake, and they’ll put it in a writing, you retain 100% ownership of your book of clients, of your practice. If one day you ever want to leave, if one day you want to sell your practice, whatever the case is, it remains 100% yours.
For advisors that are leaving a captive world, it’s not that you’re just maintaining 100% ownership, you’re gaining 100% ownership to begin with. From there on out for the balance of your career, you never have to worry about that again.
You can also use your own brand. You will also be able to control your local expenses. I’ve done episodes on how you can manage that and really drive your bottom line.
They’ve packaged all that up and they say…. as opposed to building out all the back-end pieces yourself, we’ve done it for you. Think of us mostly as a bundled service provider. Yes, you’re technically joining the RIA, but we’ve bundled this all up for a simple bundled price.
It is what most of my audience, the advisors that are reaching out to me, are most interested in. Advisors and teams that are contemplating either starting their own RIA, where you’re going to have a need for similar resources, determine that maybe a better way to go about doing it, without having to give up ownership, without having to give up using their own brand, still be able to control their local expenses, etc. is via a 1099 model.
The next type of model is the W2 model.
There are RIAs that have built themselves to essentially be a better version of a wirehouse. They are saying…. we realize there are advisors in the marketplace that might like some of the advantages of that whole 1099 thing, but at the end of the day, they just like being an advisor.
They don’t want to be responsible for their own local expenses. They don’t want to deal with running an office. They don’t want to deal with figuring out payroll. They just want to be an advisor. But they want a better experience than what the large, bureaucratic wirehouse firms have become.
There are RIAs that were purpose built to attract those advisors. They are appealing to advisors that say…. “I’m not desiring or wanting to go fully on that independent path. I realize I will give up some advantages. I’m okay with that. I’m not against the W2 model. I just no longer like the firm I’m at now. I would like a better culture. I’d like better resources. I’d like better technology. I’d like better economics.”
There are RIAs you could join that try to provide that better W2 experience.
Related to the W2 approach, the next model is what I usually refer to as the partnership model.
There are not as many of these, but there are RIAs that say…. “Not only are we a W2 firm, but we will make you a partner of the firm. Here’s how big we are now with assets. We’re going to add you, that’s then going to be the slice that you’re contributing. We all now collectively own all of this. Because of what you’re bringing to the equation, you are now going to be a (for example) 12% owner of what we have.”
These firms are typically looking for a very specific advisor/team profile. Maybe it’s geography, or specific size. They are basically opening themselves up, diluting their own ownership share, albeit now they’re going to have a bigger pie.
That sort of partnership model exists out there.
The next and final example, and then I’m going to give some takeaways to tie all this together, I’ll call it the acquisition model.
There are typically two flavors to this.
You might be at a point where you are ready to figure out your succession plan. You’re ready to say…. “I have three, four, maybe five years and then I want to move along. I need to solve for my succession. My life’s work has built up this asset that I deserve to be compensated for.”
And so you are trying to find a partner to sell your practice to. That model of RIA exists out there. I call it the acquisition model. It’s what makes a lot of headlines.
It’s a chance to say…. “I’m going to take all my chips off the table.” Not necessarily on day one. It’s usually phased out over time. But you are selling your practice. They are taking over your practice.
Generally, as the selling advisor/team, you stay on for a period of time. Usually measured in years. You generally become a W2 employee of them, of the larger firm at that point. They generally work out a compensation arrangement. It might be some sort of salary plus bonus for the remaining time you’re there.
The idea being that eventually you are going to step away and they will now run it from there. That’s the first version of the acquisition model.
There are also acquisition type firms whose value proposition isn’t to appeal to advisors only three, four, five years to retirement. It’s to appeal to advisors earlier in their careers.
Their pitch is to say…. “We will acquire your practice now. And so yes, you are taking your equity chips off the table now. You won’t get another go at the end of your career. But because of what we have built here as an RIA with our lead generation strategy, our marketing strategy, going forward, not only will we support you with all your existing clients, we will funnel leads to you.”
Maybe they’re a part of a custodial referral program. There are some that have very good organic growth marketing strategies that bring in leads. And so part of their pitch is…. “Yes, take chips off the table now. But we will then help you grow so much faster than you would have otherwise grown on your own, and for the payout you will get here over the balance of your career as part of our firm…..in aggregate, taking the chips early and then getting paid a payout, albeit on (what they would argue) will be a much larger asset base over the balance of your career, in aggregate that compensation will work out better for you.”
That’s a value prop available in the marketplace as well.
Obviously some pros and cons with that. You are accepting the assumption that everything will play out like that. But there are some good firms that have a demonstrated track record of this, so it’s fair for them to position themselves as such.
So with all these flavors of RIAs to join, which one is the most popular?
Well, again, that’s going to come down to what is the most popular for you based on what your desires are. Not necessarily what any other advisor or team is seeking or desiring.
Now for some takeaways, determining factors as to which of these models might be best for you.
First, keep in mind the economics and flexibility of each of these models I just described is different.
The more independent you are (ex: 1099), the more flexibility you’re going to have to control your local expenses, to manage who you want on your team, those sorts of things.
There is a difference between the economics and the flexibility between them. That doesn’t necessarily mean one is better than the other. It’s what is most appealing to you at this point in your career. But absolutely, there’s a difference between them.
Another determining factor is what do you want to be responsible for?
I frequently mention in these episodes that there is generally much more flexibility, better economics in the RIA model versus a broker-dealer type model. But those advantages come with additional responsibilities as well.
You can mitigate some of that via some of the W2 models that I talked about. But either way, there’s generally going to be more responsibility. Part of your determining factor of, which of these models might be the best fit for me, is how much do you want to be responsible for yourself, or would you rather have someone else handle those things for you?
The wonderful thing is the RIA ecosystem has evolved to the point where you can be very independent, retain 100% ownership, be 1099, but it doesn’t mean you’re out on your own.
There are a lot of people that will try scare you away from this, because they’re trying to keep you from leaving, perhaps their wirehouse. They’ll say it’s the wild west, you don’t want to have to figure all that out.
Well, the RIA model has evolved to the point where you can essentially have your cake and eat it too. You can have independence. You can have ownership. You can have your own brand. But you’re not alone.
You say to yourself…. “Here’s what I like doing, here’s what I want to be responsible for, and here’s what I’d rather someone else do. I realize it must be done one way or the other, and if I don’t want to do it and there’s a way to outsource that, that’s the better path for me.”
So part of the soul searching as you consider which RIA model might be best, is what responsibility are you desiring to take on and to know what the trade-offs of either doing it yourself or not doing it are.
The next determining factor is to know the taxes are different.
If you are a 1099 advisor or a W2 advisor, how you are taxed is different. It’s not just a matter of filing a W2 income tax return versus a 1099 return. As a 1099 you often have much more flexibility to write off expenses or perhaps – I just did an episode on this – you plan to own your office, and can depreciate the office. There are all kinds of tax advantages in the 1099 model that vary from the W2 model.
Now, you generally wouldn’t want to let taxes be the tail that wags the dog. But it’s important to understand the different tax advantages between the different models.
The final determining factor I want to mention of which model is best for you, is whether succession needs to be part of your next path.
You can potentially still join a 1099 model, but if you’re only a few years from retirement, you would want to understand how they can help you solve for your eventual succession need.
How will they help you manage a succession? Will they perhaps be a buyer if you were interested in that? Will they help you find other advisors or teams with the same firm that would make for a seamless succession?
If succession is a relevant variable, it doesn’t close the door necessarily on any of these models. But if succession is important, some models are going to be more attractive than others. You want to factor in where are you in your career. How near or far is that succession need on the horizon?
I hope this has helped you to understand the different kinds of RIAs you could join. And as far as which one is most popular, again, with my audience, the people that are coming to me, they’re typically, at least initially, looking at the 1099 model.
But for all the reasons I’ve stated, you might end up finding yourself needing or wanting to look at some of the other approaches as well.
That is what I help advisors with. To know what the landscape is, to know what the flavors are. Where are you with your practice? What does your practice look like? What are we trying to accomplish here? And then how that might most closely match with the options in the marketplace.
With that said, as I said at the top, my name is Brad Wales with Transition To RIA. This is what I help advisors with. I’m happy to have that conversation with you as well.
First things first, head to TransitionToRIA.com where you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of things to help you better understand the model.
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.
With that, I hope you found value with today’s episode and I’ll see you on the next one.
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