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Also available as podcast (Episode #112)
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What motivates advisors to transition to the RIA model?
Transitioning your practice to the RIA model is a significant undertaking. It’s important to make sure you’ve done your research, understand the available options, know how to make the transition, etc. But one of the most important variables is what is motivating you to consider the model to begin with? And will an RIA path solve for whatever those motivations are?
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Full Transcript:
What motivates advisors to transition to the RIA model? That is today’s question on the Transition To RIA question and answer series. It is episode #112.
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 a subject that came to mind recently. I was thinking back to some of the classes I took in college. I ended up getting my MBA, this was a long time ago.
One of the MBA classes was a class called Organizational Behavior. The reason I remember that class all these years later is because that was the class I absolutely disliked. I dreaded going to it every time I had to walk in. I thought it was this touchy-feely topic about how people interact and how people work.
I was much more excited by the economics classes, the accounting classes, the finance classes. And here was this required Organizational Behavior class.
Perhaps like a lot of things in life though, as the years passed after I graduated and as I got older and wiser, it began to occur to me – this is why this has stayed with me all these years – is that class was arguably the most important class I had.
The reason is because at the end of the day it doesn’t matter what the finance people think, or the accounting people think, or economics people think. If you are trying to run a business, trying to run a practice, trying to run a family, whatever it is in life, everything comes back to what motivates people.
That’s what we’re going to talk about on today’s episode.
That Organizational Behavior class was structured around what motivates people to do things in life. Whether that’s your kids you’re hoping to motivate to make good decisions. Your team members, your staff, you hope to motivate to do certain things. Or what motivates you to do things in life, on a personal or professional level.
We’re going to talk about what motivates advisors to transition their practice to the RIA model.
When advisors or teams reach out to me – I encourage you to do the same – I typically start those calls/zooms by asking…. what has motivated someone like you to be reaching out to someone like me?
I love asking that question because I love hearing back from the advisors, the teams, what those motivations are. And no matter how it is articulated, and I’ve asked this question hundreds of times, the answers generally fall into two main buckets. That’s what we’re going to cover on this episode.
Those two buckets are a desire for more flexibility with the practice, and a desire to be able achieve the better economics that generally come with the model.
I’m going to give you some examples of both. These are not exhaustive lists of every imaginable item, but will give you an idea of some of the main motivations. Which you are probably going to relate to many, if not most of them.
We’ll start with flexibility, which coincidentally is usually what advisors lead with when I ask the motivation question. They don’t necessarily come out first with the economic piece. I don’t know if that’s because flexibility is a bigger driver or just no one wants to necessarily come out saying… I want to make more money. Either way, it typically is the flexibility piece that comes out first.
Investment solutions.
The first example on the flexibility front is to have greater control over the investment solutions you can offer your clients.
Depending on what type of firm you’re at, you are likely in a situation where your firm has gone out into the marketplace and decided what mutual funds you’re allowed to use, what money managers you’re allowed to use, etc. You have to work within that universe of solutions.
Now, to their credit, if you’re at a reputable firm, they’ve probably done some good due diligence and they feel that those are good solutions. So, it’s not that you have a bad set of solutions, but you almost assuredly don’t have as expansive as a set of solutions as is available in the overall marketplace because your firm has narrowed that field for you.
There are several reasons they’ve narrowed that field. It generally comes down to their ability to supervise your activities and feel comfortable with how you’re investing the client’s assets, and the economics involved for them.
To give you an example, I won’t name the firm, but it’s a very large, well-known firm, and I don’t believe they’ve changed this policy. But this goes back a couple years ago. They came out and said….hey advisors at our firm, you can no longer use Vanguard mutual funds.
Now to their credit they still allow Vanguard ETFs, but you can no longer use Vanguard mutual funds.
They came out with this word salad nonsense explanation about how “we looked at all the mutual funds in the marketplace, we help our advisors by narrowing that field down and here’s the subset of mutual funds they can use and Vanguard didn’t make the cut.”
That’s 100% crap, to put it bluntly. The reason they did it is because, if you’re not familiar – I’ve done episodes on the economics of how firms generate revenue – it is a typical arrangement with mutual funds, whether at a broker-dealer or custodian, there’s something called revenue share. Depending on how much of the mutual fund assets are invested at a firm, those mutual fund companies will pay “revenue share” back to the broker-dealer, the custodian.
There’s nothing shady about that. That’s how the industry operates. But, as an example, Vanguard is one of the few mutual fund companies that does not pay any revenue share back to firms.
So in this case, this large firm tried to come up with some nonsense explanation about why they were excluded, when in reality, they just wanted to make more revenue by forcing their advisors into mutual funds that pay them revenue share.
That’s a unique example, but it gives you a taste of where advisors say… “I don’t want to only be able to use what my firm allows me to use, I want to look at the entire universe of options.”
So, access to more expansive investment solutions is an example of flexibility.
Service offering.
The next example on a flexibility front is to be able to expand the services you can offer your clients.
As an example, and this may or may not apply to you, but some advisors want to be able to offer tax planning or tax returns in-house. Build out a team, offer value to clients, etc.
In most firms, particularly if you’re a large wireless firm, there’s no chance you can do that sort of thing. You certainly must give the byline “this is not tax advice,” even though you perhaps just explained some tax consequence to a client about their IRA account, and you certainly can’t do tax returns for someone.
Again, you might not have a desire to do tax planning. But the reason I point it out is, are there services that you would like to do for your clients, that you feel there’s demand from your clients for, that you feel would help you attract more clients, but you’re not able to do it now because your firm won’t allow you to?
The question then is, can you do that in the RIA space? And again, that’s a big part of the conversation I have with advisors. If you were to make that move, could you offer (as an example) tax services to clients?
In almost every instance, there will be more flexibility in the RIA model for the services you want to offer your clients.
Technology
The next example on a flexibility front is having access to more technology solutions.
The RIA ecosystem now has hundreds of technology vendors, supporting advisors with different tools and things you can use. If you’re at a large traditional broker-dealer firm, wirehouse type firm, you are not only provided with, you’re often required to only use the technology they provide for you.
Now, make no mistake, they invest a lot of money to try to make that good technology. But the world has evolved to the point where there are now hundreds of different technology solutions you could use. Yet, you likely don’t have access to even a fraction of those, depending on the type of firm you’re at currently.
An example, and it’s a simple example, but that I always like using this one, is something as simple as Calendly (or similar scheduling tools.)
Calendly is where you can send a client, or a prospective client, or your team member can send them, a link. Let’s say the client wants to have a meeting with you. Instead of going back and forth trying to schedule it, and all this nonsense, nowadays you can simply say…. “If it’s easier for you (client), let me send you a scheduling link. You click on it and you can instantly see times that are available. Pick one go ahead and sign up right then and there.” None of this back and forth by email, phone, etc.
That’s just routine technology nowadays. Yet many advisors still can’t use something as simple as that because their firm is not comfortable with the technology or having it integrated into their system. And that just blows my mind. You are at a competitive disadvantage when you cannot do even simple stuff like that, that makes things easier for you, your clients, and prospective clients. It’s something you need to be considering.
Pricing model
The next example of flexibility is regarding how you can charge for your services.
Most advisors charge an AUM style fee. However, there is an increase in utilization and interest by advisors in expanding how they charge clients.
I know an advisor who helps people going through a divorce. With all the extra work that can be involved (discovery, working with multiple parties, etc.) he charges a flat fee for the front-end piece. Then going forward, he charges an AUM fee for his ongoing services.
Other advisors use hourly fees, subscription fees, etc. That’s another motivation, advisors wants the flexibility with how they charge for their services.
Brand your practice
The next example, and this is a big one in my opinion, is how you can brand and market your practice.
When you go out in the marketplace, particularly if you’re trying to focus on a particular niche, how are you able to get that message out there? What brand are you able to build? What marketing approaches are you able to utilize?
Are you able to have a custom website that is branded with all your material? Are you able to have your own custom blog? Are you able to have a podcast, if that’s something you want to do? Are you able to make videos, like I do?
If you’re at a large broker-dealer, wirehouse type firm, you are generally going to have far more flexibility in the RIA model with how you can brand and market your services in the marketplace.
Compliance
Then the final example, again this is not an exhaustive list, is the reality that most advisors at large firms are managed to the lowest common denominator of compliance.
You’ve likely heard of this before. The idea being that if you’re at a firm with 10,000+ advisors, just to give an example, that firm has a responsibility to make sure those 10,000 advisors are following the rules and regulations of the industry.
Unfortunately, in any industry, in any sort of scenario, when you have 10,000 people together you are going to have some bad apples. So, the firms must put guardrails in place to manage those advisors because they don’t know ahead of time who the bad apples are.
Now, some firms, particularly independent broker/dealer firms, are arguably much better at doing this and allowing more independence and freedom by the advisor. But you absolutely see it at the large wirehouse firms of this managing to the lowest common denominator.
It doesn’t matter how many years you’ve been an advisor, how experienced you are, how clean your record is, you get managed to the lowest common denominator because of the knucklehead that they know is out there, they just don’t know who it is yet. They must put tighter guardrails on everyone, and you get caught up in that.
That’s another thing that advisors are motivated by is not wanting to be managed to the lowest common denominator. In the RIA space, you have much more flexibility on that front, not have as tight of guardrails as you likely have now.
Now for the economic motivations advisors have.
I’ve done several episodes on some of these topics, so I’m just going to note them here at a high level.
Higher income
The first example is a desire for higher income.
It depends on what kind of model you are at now, but part of the discovery process of looking into the RIA model is to consider, what do your economics look like now? What would they look like over here in the RIA space?
There are several ways to transition into the RIA model, which I talk about frequently on episodes. Once you’ve chosen a path, then how would the economics, how would the income compare to what you have now?
In most cases, it is almost always higher on the RIA side. For some of you, it will be meaningfully higher.
Now, I don’t want to oversell that, because as I talk about often, there are additional responsibilities that come with having that higher income, than you possibly have now if you’re at a W2 type arrangement. It’s not just all upside without some additional responsibilities to go with it. I don’t want to give that impression.
But part of this exercise is to consider, for the increase in income, which again for some of you could be substantial, are you willing to take on – and part of what I help advisors with is understanding what these are – the additional responsibilities you would have? For that, you will be compensated an additional X, which is likely more than you you’re making now, is that something you’re interested in exploring further?
Control over your local expenses
The next example on the economics front is advisors want more control over their so-called “local expenses.”
If you are your own RIA, or you’ve joined an RIA on a 1099 arrangement, you have much more control over your local expenses. That’s important, because that’s what will in large part drive your bottom line.
Depends on how extravagant of an office you want or not. Depends on how large or small of a staff you want. All the things that go into running a local footprint, how you’re positioning yourself in the marketplace, etc. In the RIA space, you have control over that. You only pay for things you desire and things you want to have.
If you’re at, again I keep harping on it, a large broker-dealer firm with a traditional W2 payout, you are paying for all these things via the inverse of your payout.
You’re paying for an office, you’re paying for team members, you’re paying for technology. But you don’t get an itemized bill to show you exactly what you’re paying for each of those, and you have no control over it.
Maybe you’re not utilizing the fancy office they’re giving you as much as needed. Maybe there’s a more convenient location for you and your clients elsewhere that would be cheaper than what you’re essentially de facto paying as part of the inverse of your payout now.
The more you can control your expenses, the more you can drive your income, because you can decide exactly what is important to you or not. You can consider what the different cost options are and choose what’s best for you. Be able to drive your P&L, drive your bottom line income.
Own the real estate you use for your office
The next example, I did an episode on this a couple episodes back. I encourage you to go look at it. I’m a big proponent of this. It’s not possible for all advisors perhaps because of the type of city you’re in. Or maybe it’s not feasible to do as part of the initial transition.
But to the degree you’re able to, being able to potentially own the building that your office is in is a huge advantage. It can be a substantial additional wealth builder over the balance of your career.
If you have, for example, 20 years left in your career, as opposed to essentially paying someone else in the W2 world…. as after all, you are paying for real estate now. You just don’t get an itemized bill for it. It’s part of the inverse of your payout.
In the RIA space, if you could own the building that you’re in, as you’re going to have a real estate expense no matter which path you go down – unless you’re doing it fully virtual, which is another flexibility option in the RIA space – but you might as well be acquiring an asset over those 20 years versus paying someone else.
Now again, there’s all kinds of nuances to that, easier said than done. But you don’t even have that option in the W2 broker-dealer space. You do in the RIA space. It can be a substantial wealth builder for some of you. It depends on your circumstances and your runway left in your career.
Better taxation
Next up, and we’re almost done here, an economic motivator for many advisors is the better taxation that comes with the model.
Fair or not, as an independent business owner, you have far more flexibility to manage your taxation. The tax benefits are substantially more in your favor than they are in the W2 world. Fair or not, it is what it is.
Perhaps right now you’re able to write off some expenses, or your branch allocates some money you could use (such as for marketing), but you’re likely spending your own resources on things. Whether it’s your cell phone bill, travel costs, marketing that your firm’s not reimbursing you for, etc.
Over in the RIA space, you can generally write most of that off, which saves you on taxes. That’s just one example on the tax front, but there is a substantial difference between W2 and business owner from a taxation standpoint.
Enterprise value
The final motivator on the economics front – I did an episode recently on this as well, so you check it out – is the higher enterprise valuations in the RIA space.
In almost every circumstance, the valuation you could get for your practice is higher than what you would get going through a wirehouse firm’s so-called sunset program.
Two main variables are going to be different.
First, the valuation you will get for your life’s work, for your practice, is higher in the RIA space in almost every instance, versus how your current firm will value it.
And second, is your taxation of the proceeds.
The taxation treatment you can apply when you sell your practice in the RIA space can be substantially more advantageous. Typically, you can get most, not necessarily all, but most of the proceeds as capital gains taxation. Typically, when you’re going through one of the sunset programs, it’s W2 personal income tax rates.
For some of you, taxation alone, even if the valuation was the same, which again it’s not, even if it was the same, the taxation alone could be potentially hundreds of thousands of dollars difference, if not even larger. It’s something to think about as well. That’s a big motivator.
This is your life’s work. You want to maximize the value you can get for it at the end of your career. Not only the top line value, but after taxes, how much stays in your pocket.
To wrap up, with the two motivators, flexibility and economics, typically advisors are seeking both. That’s what I help advisors with. Understand how all these variables work, what are your motivations, let’s make sure your motivations and what you believe will be doable in the RIA space are accurate. Let’s fact check that.
But at the end of the day, there generally is always going to be more flexibility, better economics, in the RIA space. But as I noted earlier, it’s often paired with more responsibilities as well.
You need to understand what those additional responsibilities are. Is that something you’re able and willing to take on? Do you feel the additional flexibility and economics you will get justify the additional responsibilities?
That is part of what I help advisors with. I don’t just paint a rosy picture and say, here’s all this great stuff. You need to understand it, but also the responsibilities. Make sure you’re comfortable with it.
Now, to not scare you with these responsibilities, there are several ways you can manage it.
You could potentially start your own RIA, and there are some wonderful solution providers to support you with managing everything.
There are also RIA platforms you can join that have recognized some advisors might not desire to manage it all themselves. They bundled those solutions up for you with best in breed solutions. They have more scale than you’ll have yourself. They provide all kinds of different value prop items. They’ve bundled it up, priced it out, and would love to have you come use their platform. At the same time, you still get the better economics, better taxation, etc.
My point is don’t fear the responsibilities. I will help you understand them, and then to the degree you still don’t want to be responsible for some of them, there are ways to outsource those to others.
With that, like I said at the top, my name is Brad Wales with Transition To RIA. This is the sort of conversation I have with advisors. Often discussing what is motivating them to consider the model. What the model look like. How it compares to what they have now. Does it make sense to explore it further. How to get from point A to point B.
I‘m happy to have that conversation with you as well.
First things first though, 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.
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. I’m happy to have that chat with you.
Again, TransitionToRIA.com.
With that, I hope you found value in today’s episode, and I’ll see you on the next one.
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