Q97 – What Type Of RIAs Should You NOT Join?

Also available as podcast (Episode #97)

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What Type Of RIAs Should You Not Join?

Deciding whether to start your own RIA, or join an existing RIA is an important decision.  If you go with the latter, an equally important decision is to join an RIA that is a good fit for your practice. With thousands of RIAs in existence it can be hard to identify the “best” RIA to join. It is not hard, however, to identify RIAs you should NOT join.

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Full Transcript:

What type of RIAs should you not join? That is today’s question on the Transition To RIA question and answer series. It is episode #97.

Hi, I’m Brad Wales with Transition To RIA where I hope you understand everything there is to know about why and how to transition to the RIA model.

If you’re not already there, head to TransitionToRIA.com, where’ll you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers, information on how to contact me. All types of resources to help you better understand the RIA model.

Again, TransitionToRIA.com.

On today’s episode, it is going to be almost the inverse of several episodes I’ve made. I’ve previously talked about why you might want to join an existing RIA versus starting your own. About how to evaluate RIAs to potentially join. I’ve talked about what the payout is typically with RIAs that you might join.

This episode is almost the inverse. It’s saying, “All that information was helpful, but what are specific types of RIAs you would not want to join?”

I want to go through a couple examples of the types and profiles of firms that I would heavily caution you to pause on before you might consider joining them and transitioning your practice to that solution.

These are in no particular order. This is not an exhaustive list, but I think these will be some helpful items.

First, and this is something that will not be of an issue to some of you, but will be something to be cautious about for others in part because this is one of the big misconceptions that I often hear from advisors. Unless you fit the profile of where this doesn’t apply, which I’ll give an example, you should heavily consider not joining an RIA firm that you have to sell your practice to as part of the joining process.

Now, to be clear, there are plenty of advisors where it makes sense to be selling your practice. Perhaps you’re towards the end of your career, and that is your succession plan. Or maybe you have found a solution that even if you’re more on the younger side, but a firm’s value proposition is so strong, so impressive, and they can help you grow, that you’re willing to take the chips off the table earlier in your career and make that move for the balance of the time under their RIA.

But I’ve had plenty of conversations where advisors – often at a wirehouse or broker-dealer type environment – that aren’t familiar with the RIA space who assume you must sell your practice if you’re going to join an RIA.

The point I’m trying to make is while that exists, there are some wonderful value propositions, wonderful solutions, that do not require that you sell your practice.

If you are in that situation that you’re not at the end of your career where you’re needing that long-term succession solution, or you’re not feeling you need a dance partner that will help you grow faster than you feel you could on your own, know that there are solutions that don’t require selling your practice.

I’m mostly referring to firms where you sell 100% of your practice, but there are some that require that you sell a minority position. That’s a whole different complication. Maybe I’ll do a separate episode on that and the pros and cons of that.

The next example, a little related to the first one, is you should not join, in most instances, a firm that requires you to sign some sort of non-solicit or non-compete agreement if you ever wanted to leave them at some point.

Now, the big exception to this, and I think this is quite fair, is back to my first example, if you do sell your practice to another RIA, it is fair for them to expect you to not leave them and try to take the clients with you that you have sold to them.

If you were the buyer, you would want the same kind of protection. So, in that circumstance, I think that is fair to be asked to sign that.

Where it’s not fair is if you are not selling your practice, you are joining a solution that you will remain 100% owner, you’ll be 1099, etc. if anyone is asking you to sign some sort of non-solicit or non-compete, do not join that firm.

If you are bringing your practice to them, if you are growing your practice while you are there, you should not get yourself in a situation where if the circumstance ever warrants that you wanted to leave and go in a different direction, that now you must worry about some non-solicit, non-compete. That is total wirehouse broker-dealer world with that nonsense.

A lot of you, unfortunately, are in that situation now. There’s a way to navigate away from it, but there’s a delicate dance you have to do to properly leave that type of situation. And so, I encourage anyone that is in that situation, never get yourself in that situation again.

If you make a move, go to a solution that says, “If circumstances ever change down the line, we are no longer the right partner for you…” – and again, this is assuming you haven’t sold your practice to them – “…as the RIA, we will say you are free to leave, you’re free to take your clients, we will not try to steal your clients from you, we will not have you with some non-solicit.”

There are plenty of great solutions that will commit to that. Do not get yourself in a situation where you’re forced to sign something that will limit your future optionality down the road.

The next example, is don’t join a firm that has an uncompetitive value proposition.

Over the past 20 years, even more so the last 10 years, some wonderful solutions have been purpose-built from the start to cater to advisors that say, “I want most all the benefits of the RIA model, but I don’t want to have to start and manage an RIA myself.”

There are purpose-built solutions that say, “We’ve built it. We selected best-in-breed solutions, we have enormous scale to get better pricing, and we were purpose-built to attract this advisor set.” When there are these good solutions, there’s no reason to join a firm with an uncompetitive value proposition.

I have advisors reach out to me that are already with an existing RIA, that are no longer happy with the firm. They’ll start to describe what they have now and it’s not at all competitive to what the marketplace has.

Maybe they’ve been there so long and the marketplace has evolved and their firm never made any changes. Or maybe it was uncompetitive to begin with. I sometime wonder how they ended up joining their firm in the first place.

It could be a couple things. Maybe the advisor had a local connection to the firm and just didn’t look at the marketplace to see what else is out there. You need to benchmark. I typically tell advisors to consider at least two or three solutions.

Some advisors never did that. They talked to an RIA, however they got connected to them. It sounded good. It was better than what they had before at a broker-dealer. But that doesn’t mean it’s competitive to what else is available.

Also keep in mind, the cheapest solution is often not the best solution.

A few months ago, an advisor reached out to me who was frustrated that his existing firm wasn’t providing him much value, much support, much resources. He was lamenting about this.

I asked how much he was paying them. Turns out, it was a ridiculously small number. I think it was six basis points. I asked him, “Well, what do you expect for six basis points?” Because for that six basis points, they were providing him some technology, they were providing compliance and regulatory responsibility, they were providing the E&O policy.

Quite frankly, I don’t know why this RIA themselves was doing what they were doing, for only six basis points on the advisor’s assets. They have expenses to cover, they have risk involved, and presumably, they’re doing this to make a profit. There’s just not enough revenue involved.

I had to explain to the advisor, “You get what you pay for, and you’re not paying much.”

He ended up exploring solutions that were two, three times the cost because he realized, “If I pay more but I get more value in return, and that’s less I have to procure on my own (for a cost), I will be better off.”

Be aware of the value propositions available, and benchmark that against whatever solutions you might be looking at.

Next example relates to the experience of the firm you might join. The RIA model has evolved to where there are some very sophisticated, very well-oiled solutions available to you.

I love a good startup story, I love a good entrepreneur story. The challenge I get all the time though, RIAs reach out to me hoping to make sure I’m aware of their solution. There are smaller firms out there, maybe a couple hundred million that are trying to get in the space of attracting advisors to their firm.

If you’re an advisor looking for a new firm, there are solutions that have been doing this for a long time, they’ve got the process dialed in, they have a good value proposition, they are competitive on their price.

If you’re an advisor, it’s hard to take a chance on a new firm (or at least new to trying to recruit advisors) where you might be the first advisor joining them under this new growth strategy they’re trying to implement.

It’s hard for me to give that example because, again, everyone must start somewhere. Even the big established solutions, whatever their origin story, at one point, they too were small. I get it, everyone must start somewhere.

But as that joining advisor yourself, this is your livelihood, your practice, your clients. If you want to join an upstart, it might work out for you. But you would want to do a significant amount of due diligence and reach a significant comfort level that that’s going to be the best path.

Compared to other solutions that have been doing this for a very long time, they’ve had countless advisors join before you, they’ve figured out most of the kinks and how best to do a transition, etc. So, just be careful.

Again, I don’t want to blatantly cross off upstarts because I love a good entrepreneurial story. It is something you just need to be careful about, knowing there are some great solutions that are already pretty dialed in on all these things, they’ve been doing it so long.

The next example, don’t join (in most instances) a firm that requires that you sign some sort of long-term commitment to that firm.

This is the classic joining a wirehouse scenario, where you’re selling your soul for 9, 10, 11, 12 years. I rant about this all the time, so I won’t get started here, but you’ve now committed yourself to possibly a decade-plus of changes that you have no idea what those changes will be.

Whether it’s managerial changes, compensation changes, policy changes. When you commit to a 10+ year agreement, you have no idea what those changes will be over the balance of that 10 years. Yet you have now signed on to that arrangement, which I think is ludicrous, knowing they could change your compensation on you at whatever point over that time period.

I won’t rant further on this episode, but just know you need to be very careful before you sign any some sort of long-term agreement with a firm.

In the RIA space, it’s typically not the case. But there could be a few instances where it could come up, that you’d want to be aware of.

When joining a firm, they are going to dedicate significant time, resources, and capital to help you with the transition. To make sure it’s successful, to make sure you’re able to move your clients, to get you trained, to get you up and going.

All the things that go into a successful transition, to their credit, that takes a lot of their resources. It is fair for them to expect you to stay at least some amount of time because they’ve made that investment in you.

And by the way, most firms don’t expect you to pay them some amount of money up front for providing all those initial resources.  They’re not charging you (for example) $100,000. They typically don’t do that. They don’t have you write a check for everything they’re going to provide you.

They provide it for you because they say, “We want this to be a long-term relationship. We want this to be a successful transition. But you can understand it takes time for us to recoup that investment.”

If you were to join them and six months later leave, they’re going to be upside down on that. Now, the reality is you shouldn’t be joining a firm anyways that you think you might leave in 1, 2, 3 years. If that is already your mindset going into it, then you’re already joining the wrong firm, or you’re going down the wrong path to begin with.

You should feel you’ll be comfortable with the firm at a minimum for at least a couple years, and ideally, the balance of your career.

So, if they come along and say, “We’re going to do all this for you to help make this a successful transition, we do expect you to sign at least a minimum of two or three-year type agreement,” you shouldn’t have an issue with that. That’s fair considering the resources they’re going to put into it.

The other time you might be asked to sign a longer term agreement (in the RIA model), is if an RIA offers some sort of upfront financial transition assistance. Now, such upfront checks in the RIA model are nowhere near the giant checks that wirehouses write. But keep in mind there is always a trade-off.

If it’s the wirehouse writing the check, or if it’s an RIA writing the check, they’re not doing that out of the kindness of their heart. That is an economic decision they have made to entice you to make the move, but they need to make their money back somehow. That is not a gift.

If you take the check, understandably, there is a requirement that you in turn must agree to stay at that firm for a period of time. That is an economic decision for them to determine how long it’s going to take for them to recuperate their investment.

When you see wirehouses offering absurd upfront checks and join bonuses, that’s why they’re doing these 9, 10, 11, 12-year deals because that’s what it takes for them to make their money back. It is not a free lunch. They’re giving you part of your future income upfront and in return putting you under onerous handcuffs over the balance of that 9, 10, 11, 12-year term. That’s what they must do to be able to get the money back that they fronted you.

Most RIAs don’t offer any sort of upfront bonus checks. There are some that do though, but their typical commitment requirement is nowhere near 9, 10, 11, 12 years. But to make their economics work, they typically require a certain amount of length of stay.

I have seen some firms that offer transition assistance, but they give two options.  Take the upfront check and have a lower payout.  Or forgo the upfront check and get a higher payout. The former typically requiring a commitment period as well.

Except for these two scenarios – providing a firm a chance to recoup the initial investment they made in helping you have a successful transition, and/or if they write you an upfront check – there’s no reason you should be joining a firm that requires you to commit to any sort of long-term commitment.

A firm doing so would be absurd. It generally doesn’t happen in the RIA space. By no means get yourself in that situation.

And keep in mind the benefit of joining a firm that does not require you to sign some sort of longer-term commitment. With such a firm, you and your fellow advisor peers at that firm are free agents.

If the value proposition of that RIA is, “Come join us. We’re not buying your practice. You retain 100% ownership. We’re not having you sign a non-solicit or non-compete. You can leave at some point in the future if you want.” If that is the value proposition, which is what most advisors should be looking for, keep in mind what that does. It requires that the RIA continuously provide a value proposition that will keep their advisors happy because they know the advisors are free agents. They know the advisors could just leave.

If many/all of their advisors are under long-term contracts (like with the wirehouses), that incentive results in them saying to themselves, “What are these advisors going to do? They want to leave, we’re going to go after them. We’ve got these non-solicits, these non-competes.”

They’re not incentivized to work as hard to keep you as the advisor happy and to make sure their value proposition is keeping up with the marketplace over time.

When you join a firm, you do not want to be signing some sort of long contract. And ideally, you don’t want any of their advisors signing long contracts. That type of firm culturally will not work as hard to keep you satisfied as a firm that knows all their advisors are free agents.

The latter works to keep their advisors wanting to stay, not because they’re required to stay, not because there’s some signed agreement, not because of non-solicits, because they want to stay.

I say this sarcastically, but what an amazing idea. What a great idea!

The wirehouses don’t believe in this approach. They feel they must be non-protocol, or have non-solicits or non-competes or long contracts. It begs the question, if you are providing such great value for the advisors that are with your solution, why would you need all of that? Why do you need those artificial handcuffs?

The great news is in the RIA space, there are wonderful solutions that don’t have any of that. They put all their effort into keeping you satisfied, not because of any artificial kind of handcuffs along the way.

The final example of a firm you shouldn’t join, is sort of a trick question.

Some advisors proactively tell me, “I do not want to join any firm that has private equity money backing it.” Which to be sure, there are several RIA solutions who part of their ownership structure includes private equity.

Advisors often dismiss PE ownership saying they don’t trust such firms, or they’re not going to be on the same page with them, or the PE firm is simply looking to grow the firm and then sell it.

I’m not a private equity guy, I’m not out here trying to defend private equity. But here’s the thing you must keep in mind, every firm is always for sale. Hard stop. Whether you want to believe it or not, that is reality. Whether it’s RIAs, broker-dealers, whatever, everything is always for sale.

For a long time, I worked at the corporate level at a large national broker-dealer firm.  When markets were tough, and employees were worried about the firm potentially being acquired (and them maybe losing their jobs as a result), the CEO reminded everyone, “This is a publicly-traded company. We are for sale every Monday through Friday from 9:30 a.m. to 4:00 p.m. Eastern. Anyone can start trying to acquire the company.”

Even with large established publicly traded firms, there’s no guarantee of what their future path will be because you don’t know for sure what the ownership structure will look like down the line.

Now, consider the RIA space. Some firms have private equity backing, some are completely in-house founder-backed, some are maybe a combination of that, or have taken capital from other sources.

All of that could change over time. You could join a firm, and it might be owned by (for example) four original founders, and they say, “We’re not publicly traded. We haven’t taken outside money. We haven’t taken private equity.”

But guess what? At some point, those individuals will want some amount of liquidity. Perhaps it will be some sort of internal succession and it stays “in the family,” if you will. But even then, at some point, ownership will want to sell.

So, don’t put too much thought on who the current owners are. Because the reality is, you don’t know what the future ownership could be. It might be five, 10, 15, 20 years out, but it can and will eventually change.

You should be aware of the current ownership and make sure you’re comfortable with who those partners are. But every firm, at the end of the day, is for sale in some capacity at some point in time.

The best way to protect yourself from the inevitable changing environment is to join a firm where you are that free agent. Where you are free to leave if you want, where you’re free to take your clients with you, where you haven’t signed a non-solicit, you haven’t signed some sort of long-term agreement.

If the ownership changes and the new owner(s) come in and start making changes that are no longer in your best interest or that you’re no longer satisfied with, well, guess what? You’re a free agent, you can always leave. And guess what? Your peers might leave too.

So, what does that do? The owners always have to be cognizant of, “What is best for the advisors because if we don’t continue to provide that, they will leave and this thing is going to have no value whatsoever.”

If you’ve instead joined a firm where you’ve essentially sold your soul and you’ve signed over all your rights to ever do anything ever again, you are at the mercy of what that ownership changes. Because if they make changes, you’re stuck at that point.

Again, there is a time at the end of your career where you potentially need to sell your practice and that will be part of the equation. And hopefully, you’ve done a lot of work and found the right dance partner, and you will now be under new ownership.

But earlier in your career, mid-career, as long as you’re not in a situation where you’re handcuffed, you shouldn’t worry as much about the current ownership structure because no matter what it is, it could change in the future. Make sure you’re comfortable with the value prop, the arrangement, the structure, all that sort of thing in the near term.

Related, I hear some advisors say, “I’m not going to join an RIA because I’m worried about the ownership structure,” which I just lamented about.

Even if you start your own RIA though, which is the path chosen by many advisors, keep in mind, every RIA, whether you start it and build it yourself or you’re joining another RIA, relies on different solution providers to support the practice.

For example, every RIA needs at least one custodian, maybe multiple custodians. You need a custodian to hold your client’s assets and to clear trades.

Even if you have your own RIA, things could still be outside of your control. Case in point, there are a lot of RIAs that signed on with TD as their custodian years and years ago. They really liked TD. Then Schwab came along and acquired TD.

For those advisors, even if they owned 100% of their RIA, the circumstances changed on them. There’s no foolproof path. Change can and will happen over time.

You want to position yourself as best as possible to manage those changes when they come. If you are the owner of your own RIA, change can still impact you, and you will have to adjust and potentially pivot your path going forward.

With that, like I said, my name is Brad Wales with Transition To RIA. This is the type of conversation I have with advisors all day long. Does it make sense to join an RIA? Should you start your own RIA? There are flavors in the middle to consider.

If joining an RIA makes sense, it’s important that you are aware of how the marketplace currently looks. What the value propositions are, why you might choose one over another, what you can expect from an RIA when you join them. That’s the kind of conversation I have with advisors. I’m happy to chat with you about that as well.

First things first, head to TransitionToRIA.com. You’ll find all the resources I make available. 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 set 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 in today’s episode, and I’ll see you on the next one.

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