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Also available as podcast (Episode #137)
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Why Do Advisors Leave The Wirehouse Model For The RIA Model?
TL;DR – The RIA model continues to be the fastest growing channel in the industry, in part due to the continued and increasing outflow of advisors from the wirehouse model to the RIA model. Such advisors typically are motivated to make the transition due to the the flexibility and economics they would gain. Examples of increased flexibility include access to more investment solutions to use with clients, better and more technology solutions to choose from, the ability to brand and market their services, etc. With respect to economics, motivations include a desire for higher income, increased enterprise value of their practice, better taxation, ability to control their local P&L, etc.
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.”
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Full Transcript:
Why do advisors leave the wirehouse model for the RIA model? That is today’s question on the Transition To RIA question and answer series. It is episode #137.
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 all the resources we make available from this entire series in video format, podcast format. There are articles, there are whitepapers. All kinds of resources to help you better understand the model.
Again, TransitionToRIA.com.
On today’s episode we’re going to talk about what motivates advisors to leave the wirehouse model and transition their practice to the RIA model.
There was a time this was not the trend. And spoiler, it is the trend now, and has been for several years now. If you look at industry stats of advisors changing affiliation options, that river only runs in one direction. It leads to more and more independence.
There are not advisors at RIAs that are going to the wirehouse world. It only goes in one direction. And you should ask yourself why that is. We’re going to talk about some of those motivations on this episode.
There was a time though that the movement to the RIA model from the wirehouse model was not a trend. And there were a few (now outdated) reasons for that.
First, there was a time where there was a lot of faith in the proverbial firm name on the side of the building. There was a belief that clients only wanted to work with a financial advisor that was at this big name wirehouse firm.
That has since shifted tremendously. In large part because of the damage that was done during the ‘07, ‘08, ‘09 crash where the reputation of some of these firms was heavily damaged.
No longer is there that ironclad reverence that went to those named firms, and for clients it is no longer essentially a must have. And it’s taken a while for advisors of all stripes to accept that fact, particularly some that have been around a very long time, that lived in the time where it did have much more credence to it. But those times have changed.
Another example is there was a time the wirehouses had better technology than the RIA model. That is now entirely opposite.
It costs money to create, maintain and update technology solutions. There was a time that the wirehouses had a bit of a monopoly, if you will, on a larger user base. A wirehouse firm typically had 10,000+ advisors to spread the cost of that technology across.
Whereas at the time, in the RIA space, any of the then tech providers supporting the RIA space had nowhere near that many users. Hence they couldn’t as easily reinvest back into their offering and be competitive. And so that was an advantage the wirehouses had.
That has now 100% flipped.
There are now tech tools supporting the RIA model that have far more advisor customers than any one wirehouse has advisors as customers. And so if anything, again, it’s 180 degrees different now.
There’s more reinvestment, there’s more resources, there’s more options. The technology is now superior in the RIA space over the wirehouse space.
Another example, there was a time when the investment solutions available to advisors was superior to what could be utilized in the RIA space. The idea being that only these large wirehouse firms had access to potentially certain alternatives, or certain managers, because they had this big scale to be able to source those solutions.
Like technology, that also has entirely flipped.
You’d be hard-pressed to find any sort of investment solution, whether it’s alternatives, money managers, etc. that is available in the wirehouse world that’s not available in the RIA space.
That’s provided you’re not using proprietary products of your firm, which arguably you shouldn’t be using anyways.
But of the solutions that your firm has access to, you’ll generally find all of them available in the RIA space. And if anything, the selection available to choose from is far superior in the RIA space.
That is because your firm (ex: wirehouse) might have the scale to access a similar amount of solutions, but that doesn’t mean they choose to make them all available to you to use. They make a much narrower subset of investment solutions available to you. So to suggest that wirehouses, in today’s times, have access to better investment solutions is 100% no longer the case.
The final example I’ll use as backstory, and there are still some people belaboring on with this tired, worn-out talking point, is that supposedly the RIA model is only for advisors that can’t cut it at the wirehouse firms. The advisors that can’t take the pressure. Can’t attract clients. Can’t grow their practice.
Perhaps there was a time there was a shred of truth to that. But that is absolutely no longer the case.
There are maybe some advisors that don’t work out a particular firm, and they choose a new path to pursue with their practice, and that happens to be the RIA model. But to suggest that advisors only go RIA because they can’t cut it at the wirehouse firms, that’s a tired old excuse that has no validity any longer.
So, that’s a little bit of backstory as to why the trend occurring today, wasn’t occurring 20 years ago. It was kind of a bit of a no-brainer 20 years ago that you would stay in the wirehouse world.
So, the question is, what is then driving advisors today to be making the move to the RIA model in the trend they are?
Motivations typically fall into one of two buckets, either the flexibility bucket or the economics bucket. I’m going to give you some of the items that fall within each one of those.
Typically when I’m speaking to wirehouse advisors, they first mention variables that fall into the flexibility bucket. Whether that’s the most pressing, or they just don’t want to come outright first and say they perhaps want a higher income, but it’s usually flexibility motivations that are mentioned first.
We’ll likewise start with some of the motivations that fall into the flexibility bucket.
Superior technology
First, the superior technology in the RIA model I mentioned prior.
There are literally hundreds of FinTech providers in the marketplace now. If you are in the RIA model, particularly if you have your own RIA, you can go to the marketplace and choose whichever solutions you want to work with. There is no gatekeeper.
Now, you want to make sure logistically it makes sense. You want to make sure from an economic perspective it makes sense. That adding a tool is going to add value to your team or your clients. So it’s not that there are no decisions involved.
But if there’s a tech tool you feel will improve your practice, improve your ability to compete in the marketplace, you can just start using it. You don’t have to ask someone’s permission.
In the wirehouse world, typically will you not only be told no, you won’t even be able to get the tool added to the firm’s roadmap.
All the while, your competition in the independent RIA space are already using such tools. You’re at a disadvantage.
So oftentimes advisors are seeking out the flexibility of better and more technology options.
Marketing/Branding
Another item in the flexibility bucket is the ability to better market and brand your practice.
If you’re at a wirehouse firm, your brand identity is typically at best a byline of the parent company. You might be the Wales Group of Wirehouse X. And your website is wirehousex.com, slash whatever region you’re in, slash maybe this quasi-branded group name you have.
Whereas your competition in the RIA space has a full-on brand, a full-on website that reflects only their brand. They are marketing their practices in all kinds of ways that wirehouse advisors typically cannot do, or cannot do easily.
Whether you want to have a podcast, or make videos, or have a blog, or be quoted in the media, there is much more flexibility to do those things in the RIA model.
Investment solutions
Next, and I already touched on it, is the increased flexibility with what investment solutions you can use with your clients.
If you’re at a captive W2 wirehouse type firm, you only can play in the sandbox of investment solutions that your firm allows you to play in. Whether that is money managers, alternatives, etc. There can even be guardrails on certain mutual funds or ETF products.
You don’t get the entire universe of options to choose from, you only get the narrower sandbox that your firm is allowing you to use. In the RIA space, you have those additional options available to you.
Now, you still need to perform due diligence and decide if those are good solutions to use with your clients. But there is no gatekeeper. When you have your own RIA, you decide whether you want to use additional investment solutions. You’re not limited to a subset of options dictated by someone else.
Service offering
Another driver on the flexibility front is wireless advisors typically want to be able to expand their service offering to clients.
This is particularly constructive in the world we’re living in where while we haven’t seen fee compression, which was predicted for a long time (that the proverbial 1% fee would decrease), there has been an expectation that the value provided for the fee has increased. That you need to provide more value to still justify that fee.
In the RIA space, you have much more flexibility with what services to offer your clients.
Now, some of you might not desire to do some of these things, but for those that do, you might want to offer (for example) tax planning expertise in-house, or estate planning, or assist with other facets of your client’s world that you’re not able to currently. Create an ensemble practice, as it’s often referred to nowadays.
Whereas typically when you’re at a wirehouse model, most of those auxiliary services you are not allowed to offer. But again, your competition in the independent RIA space has the flexibility to do so.
Business ownership
The final item on flexibility is there are wirehouse advisors that want to be true business owners.
At some W2 platforms they try telling you that you are a “business owner” with your practice, and they speak in those terms. But that’s not at all the case.
You are a practitioner. You’re a financial advisor. That’s very honorable. That’s something you should be very proud of. It can provide a very nice, comfortable, generous lifestyle and income. There’s nothing wrong with that. But you’re not a business owner in that capacity.
If you truly own a business, you’re the boss, you call the shots. You don’t ask permission for how to run your business. Whether it’s adding technology, how you market your services, brand your services, etc. If the local media wants to quote you, you just talk to them. You don’t have to ask permission, or see if it’s ok first, of if you must run it by compliance, etc.
Again, some folks are very content and happy just being that practitioner and that’s something to be very proud of. But to the degree you aspire to truly be a business owner, it is not possible in the wirehouse space. No matter how it’s presented or wordsmith, you need to be independent to get the benefits of being a business owner.
That then brings us to economics. Which a lot of the economic upsides are associated with being a business owner.
Higher income
First, generally speaking, there is higher income to be earned in the independent RIA space.
Because you have the flexibility we’ve talked about, you can (for example) build and manage your team how you want. That gives you the flexibility to drive your economics.
If you want a very extravagant office and a very large team, well, that’s going to lower your economics.
If you think you can be more lean or more efficient with technology, that would drive your economics higher.
A reasonably run, reasonably sized RIA would typically always net you, as the advisor, as the owner, as the team, a higher take home income than you can earn in the wirehouse space. Oftentimes meaningfully higher.
Now, that typically comes with more responsibilities.
You are a business owner, you are responsible for more things than you are solely as a practitioner. It’s not for everyone. No matter the higher economic upside, the higher income, you must weigh what those additional responsibilities are and decide if it is worth it for you.
There’s nothing wrong with saying… “I don’t want to do any of that. I accept I’m going to have less flexibility. I accept I’m going to make less income. But maybe I just want to be a practitioner. I just want to be an advisor. I’ll put up with the guardrails.”
That’s fine, there are a lot of advisors that will never make the move to independence. I don’t want to sound like I’m disparaging that. But to the degree you aspire to be a business owner, and reap the benefits, that’s available to you. Higher income is one of them.
Enterprise value
Another economic motivation is obtaining a higher enterprise value for your practice.
Yes, you can “retire” in the wirehouse model via what’s often referred to as a sunset program, retirement program, etc. Usually where you step away over a series of years and someone takes over your practice.
It is what it is though, when you look at the economics of exiting under that pathway in the wirehouse model, versus what the economics and opportunities are to exit in the RIA space, you will almost assuredly obtain a better enterprise value for your practice in the RIA space.
A full explanation for that is beyond the scope of this episode, but to give you a few examples….you have more buyers to potentially sell to, the taxation on your income that you receive from selling your practice is more advantageous in the RIA space, you have more flexibility with how to structure your eventual exit and how you hand it off and over what time period.
There is no debate, it can be generous to retire in the warehouse space, but there’s more flexibility and almost always better economics for it in the RIA space.
Taxes
The next economic item, which I just mentioned, is taxes. Both with the eventual sale of your practice, and the economics of running a business on a day-to-day basis. The ability to expense things you likely cannot expense currently in a W2 wirehouse type world.
Real estate
Related, and I’ve done episodes on this, is the ability and the advantages from an economic standpoint to control your local real estate footprint.
For some of you, depending on your geography, is to potentially (for example) own the office building that you use for your practice. Which if you have 5, 10, 15, 20 years left in your career, you’re not only building enterprise value in your practice, you are building equity value in an asset that when you go to retire, you can sell that property alongside it.
I’ve seen advisors where they’ve done this over a long period of time and at the end of the day when they went to sell their practice, the value of the property is worth essentially just as much as the practice itself. They’ve essentially doubled the value of their life’s work.
And that’s not even mentioning all the tax benefits associated with having real estate along the way as well.
There are a lot of economic advantages that the RIA model has over the wirehouse model.
I’ll wrap up with a few takeaways of what caused all this change, to the benefit of the RIA model.
I started this by talking about how the pendulum was once on the wirehouse side, but the pendulum has moved entirely in the other direction now. There are a couple of drivers that created that situation.
First, the ecosystem supporting the RIA model has evolved tremendously.
Over the last 5, 10, 15 years – when I talk about hundreds of FinTech providers, when I talk about your ability to access just as much, if not typically significantly more alternative investments, etc. – it’s because of the growth of solution providers supporting the RIA model. They simply weren’t there 20 years ago.
A wirehouse team that has ultra high net worth clients, or high net worth clients, or has clients with significant needs that they need to be able to provide for, there was a time servicing those clients was not realistically possible in the RIA model.
But again, that has fundamentally changed because of how much the RIA ecosystem has grown over the last 5, 10, 15 years.
If you’re not familiar with that growth, if you’ve been in the industry for a very long time and you haven’t taken the time to learn about it, you owe it to yourself to figure out how all that works. Don’t assume that what you have available to you now is somehow not going to be available to you in the RIA space. Like I’ve said, if anything, it’s not only available, it’s even better.
Next, there has been an evolution of what’s often referred to as “supported independence” offerings, or platforms.
There are many advisors that say… “I tend to be more heavily weighted towards just wanting to be a practitioner, versus business owner, but I’d like the better flexibility, the better economics.”
Well, guess what? There have been some wonderful supported independence platforms that have come along that say… “If you want most of these benefits, the economics, flexibility, but you’d rather not handle all the logistical pieces yourself, we’ve bundled a lot of that up for you and will be a single provider for ~80% of everything you’ll need. We handle a lot of the blocking and tackling pieces for you. The stuff you’re not passionate about doing yourself. The stuff that’s not client facing. We will take that off your plate. We will provide that for you”
Those types of offerings have evolved tremendously. There are several flavors of that to choose from. If you’re not familiar with them, I’m happy to discuss that with you.
But without the evolution of those offerings, there’s no doubt there’d be many teams and advisors that would not have made the move these past years. But these new solutions made it appealing and possible for them to make the transition.
And last, sometimes in life, we just need to be confident that something is possible.
There is the story of the guy that first broke the four minute mile. For those that don’t know the tale, it had never been done, and it was thought to be impossible. But finally, a guy did it. And then within a relatively short period of time after that, multiple other people broke the four minute mile as well.
This thing that was thought to be impossible, and not even worth trying to do, one person showed it was possible and then countless people followed. I think I saw the other day even high schoolers have been able to do it.
That same phenomenon occurred in the RIA space as well. There isn’t a single firm we can easily point back to as the main initial example, but billion dollar advisors and teams now routinely leave wirehouses for the RIA model.
Part of that was from the confidence of seeing others having done it. I can’t point back to one specific team that everyone would say broke the dam and was the first (for example) $2 billion team to leave a wirehouse and start their own RIA.
But that process started. It took a little time to build up. But now it is routine to see.
The trend has destroyed the old tired talking point about how the RIA model is only for advisors that can’t cut it at the wirehouse. Very large corner office teams, successful teams, are doing this research and are choosing to transition their practice to the RIA model.
If you think your practice is too big, or too sophisticated, or you have clients with too much high net worth needs, that somehow you cannot support them in the RIA model, rest assured you are not breaking new ground here. There are plenty of teams of your size or larger that have already made the move and are very satisfied they did so.
And likewise, I would challenge you to find any advisor – I don’t know of any – who made the move from a wirehouse to the RIA model, who subsequently down the line decided that the wirehouse model was actually better for them, and returned to it.
As I said at the top, that trend is telling, you need to take that to heart of why does the river only run in one direction?
With that, like I said, my name is Brad Wales with Transition To RIA. Helping you understand how the RIA model works, how it would look for your practice, what the advantages are, what the responsibilities are (and how you can manage those responsibilities – perhaps via a supported independence platform) is what I talk to advisors all day long about. I’m happy to have that conversation with you as well.
First things first though, head to TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. I even have a new vendor profile series.
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’re a wirehouse advisor and want to talk about today’s topic or anything else RIA related, I’m happy to have that conversation with you.
Again, head to 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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