Q77 – Why Don’t More Financial Advisors Transition To The RIA Model?

Also available as podcast (Episode #77)

Apple  |  Android  |  Spotify  |  Amazon  |  Stitcher  |  Audible

Why Don’t More Financial Advisors Transition To The RIA Model?

The RIA model continues to be the fastest growing channel in the industry. Advisors are attracted to the better economics, flexibility, and higher enterprise value provided by the model.  The exodus of advisors from traditional broker/dealer platforms who transition their practices to the greener pastures of the RIA model shows no signs of slowing.  However, even with such a trend, why aren’t even more advisors making the move?  This episode covers some of the variables preventing the migration from increasing even further.

Found This Video Helpful?

Want to learn even more by better understanding what a transition to the RIA model might look like for your own practice?  I encourage you to schedule a Discovery call, and I’d be happy to begin that conversation with you.

Full Transcript:

Why don’t more financial advisors transition to the RIA model? That is today’s question on the Transition To RIA Question and Answer series. It is episode #77.

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 are not already there, head to TransitionToRIA.com, to find all the free resources I make available to help you better understand the RIA model. I have this entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of resources to help you better understand the RIA model. Again, TransitionToRIA.com.

On today’s episode, we’re going to talk about why more financial advisors aren’t transitioning to the RIA model. I would start by pointing out that this is not to imply that there’s a lack of advisors making the transition. The question is, why aren’t there even more than are already doing it?

The RIA model for years now has been the fastest growing channel in the industry, and there’s no indication the trend is going to slow down anytime soon. There is a large wave of advisors every year making the move to the RIA model.

It is the fastest growing (channel), but why isn’t the wave even bigger? What would it take to make the wave even bigger? That’s what we’re going to talk about on today’s episode, some of the reasons why advisors still aren’t making the move.

They might eventually, and maybe these are things slowing them down in that process. And some might not ever. But I want to give a couple of examples of why not even more advisors, than already are, make the move to the RIA model.

First, there are a lot of misconceptions about the RIA model. There’s a lot of misunderstanding of what the options available in the marketplace are. So, part of the reason advisors don’t make the move is they simply don’t fully understand it, would it be a fit for their practice, what it would look like for them. No one is going to make a transition if they’re not sure if it is attractive for them or not.

There are several reasons for the misunderstanding, the misconceptions.

For starters, if you’ve operated your practice under a single affiliation model your entire career – perhaps that’s a wirehouse model, or maybe an independent broker-dealer model – if that’s all you’ve ever experienced your whole career, that has not exposed you to how a different model works.

You might be an expert on the pros and cons of the wirehouse model, and how one wirehouse firm compares to another wirehouse firm. But that has not prepared you to understand how an entirely different model works, the RIA model. It is very different.

That is the challenge. If you’ve never been exposed to it, how would you know? You might be a wonderful financial advisor, perhaps for decades now, but your knowledge base might be on just one particular business model, not necessarily another.

So, for starters, part of the lack of understanding is simply you haven’t been exposed to it to know how it differs, to know what the advantages might be.

Next, and this is closely aligned to the prior point, you have to be careful who you listen to as to how your current model compares to the RIA model. You are potentially hearing very biased voices.

The classic example, if you’re at a wirehouse, is the voice of your branch manager. Who by the way, themselves has maybe only ever been in the wirehouse model. They likely don’t know how the RIA model works either.

A branch manager has an incentive to keep you where you are. They do not want you to leave their branch, so they have an incentive to explain that their model is superior to any other model.

They try to plant horror stories about, “If you go to the RIA model, you’re going to spend all your time on compliance, the regulators will come in and haul you off to jail every year.” Again, they have an incentive to have you not look at different options because they want you to stay put.

You must keep that in mind, are your information sources biased? Now you could argue, “But Brad, you talk about how great the RIA model is, you must be biased towards the RIA model.”

I do believe in the model. It’s a great solution for a lot of advisors. But I have no problem saying, “Talk to your branch manager, talk to your firm, talk to your peers, make sure you fully understand your current model.” But also, take the time to understand the RIA model and how it differs from what you have now. Only then can you decide which approach is better for your practice.

When was the last time a branch manager said the same thing to you?  When did they suggest you research other options?

As an RIA advocate, I encourage you to fully understand your current arrangement.  But also, fully understand the RIA model. Often, advisors conclude the RIA model is superior. Hence why the branch managers of the world typically do not want you to do that exercise. So, it depends on who you’re listening to, could be some biases.

Also, keep in mind, some of the people you might talk to are in your same situation. Your fellow colleagues and peers in the branch, in your firm. By nature of you talking to them as a colleague at the firm, that means they have not made a move either.

So, guess what? They are probably in the same boat that they might not have a full understanding of how the model works and how it differs. And at the same time, they’re hearing those same voices that are espousing one solution over the other. The problem is, that puts you in an echo chamber of sorts.

I tried to think of an analogy for this because I like analogies. I don’t know if this is the perfect analogy, but an example would be if you lived in an apartment complex and you’ve only ever lived in an apartment complex your whole life. You’ve always been a renter, and so you’re surrounded by other people that are renters.

Now, there’s nothing wrong with renting. This is not to disparage that, but there is a difference between renting a residence and owning a residence.

If you’re in an apartment complex, and you’re surrounded by people that are only renters and maybe have only rented their entire life, which one of them is going to stand up and champion ownership?

Many have never owned a place before.  Many perhaps would prefer to, but due to their circumstances are not able to at the moment. To give themselves comfort with their situation, they might say, “This renting thing is not that bad. Yeah, I don’t really want that ownership thing. That’s a pain to have to manage all that stuff. This renting thing is really not that bad.” There’s an echo chamber there.

You might be surrounded by people in your branch and your firm that want to make a move to another affiliation model, but for some of the reasons we’re discussing in this episode, haven’t so far been able to.

They too might reinforce their current situation by saying, “Yeah, you don’t want to do that RIA model. You only want to stay put.” That creates an echo chamber. So, be careful who you’re getting your information from.

To remedy this, take the time to understand how a different model works. Is the grass greener on the other side of the fence for you? Maybe it is, maybe it isn’t. Until you take the time to look over the fence, learn more about it, how would you know?

I help advisors understand the RIA model. Understand what it would look like for their practice. What the advantages are, what the economics are, what the flexibility is, and most importantly, how does it compare to what you have now?

There’s nothing wrong with running that exercise. It’s a healthy exercise. You arguably should run it every couple of years anyways. You should be asking yourself, “What do I have now? What is available in the marketplace? Does it make sense for me to be considering that?” But you must take the time to understand it better.

One of the main reasons advisors don’t move to the RIA model, is they simply don’t fully understand how it compares to what they have now. Don’t fall trap to that. At least educate yourself.

If you’re fully educated, you fully understand, and you decide your current affiliation approach is indeed best for you, that’s fine. But at least you’ll know you’re making a formally informed decision about the path for your practice.

The next topic to discuss is the fear advisors have of making a transition.

Now, it’s easy for me to sit here and say, “Yeah, go through a transition.” I’m not naïve to how big of a process that is. In fact, that’s part of what I help advisors understand is what that process is.

It is not fun to go through a transition. If anyone tries to sugarcoat it or make it seem like it’s super easy, that’s not the case. It is a lot of work and it is a lot of work for many months. Both leading up to a transition, doing all your homework, understanding your options, through the actual transition itself, to the time it takes for the dust to settle and you’re able to get back to a normal working environment. It’s months of hard work. Don’t let anyone sugarcoat it.

This is what holds up a lot of advisors. They don’t necessarily fear that they can’t do it and that it won’t be successful. It’s just much easier to kick the can, and stay the status quo. You can’t fall prey to that.

An analogy I often use is refinancing a mortgage. It’s not as timely of an analogy with interest rates having gone up, but the underlying point is still valid.

Back in the day you likely could lower the interest rate on your existing mortgage and hence achieve a lower payment every month.

Refinancing a mortgage is a pain though. It’s a lot of paperwork. There’s costs involved, there’s a lot of time involved. Things inevitably get lost in the process. But the reason you go through the headache is because when you come out on the other side with the lower interest rate and lower payment, it makes it all worthwhile. And the further past you are from the transaction, the less the pain even stays in your memory.

I’ve never talked to anyone that has refinanced a mortgage, got a lower rate, they’re now over the hump, the pain is behind them, and they looked back and wished they had never done it.

It’s not fun while you do it. But once you get on the other side, once the dust settles, it’s worthwhile.  That’s the same thing with transitioning your practice. The process will not be fun. However, assuming you did your homework and making a transition is the right move for you….once you’re on the other side, once the dust has settled, it makes sense to have gone through the process. But you must have the stomach, you must have the tolerance to go through it.

Now, if you are only two years left in your career, you’re on the tail end of your career – which some would argue you should still consider the RIA model because you’ll get a higher enterprise value for your practice – you might think, “Going through a transition, that’s a lot of work. I only have two years left in my career. Maybe I’m just going to ride this out.”

But if you’re someone that has 5, 10, 15, 20-plus years left in your career, it is very different. To make a decision based on not wanting to go through some hard work, which is measured in months, for a career that still has years if not decades to go, I would challenge you to not make a short-term decision over what is going to be a long-term benefit.

Again, refinancing a mortgage is a pain. But it’s a short-term process that pays off for years to come. Going through a transition, it’s the same thing. It’s a lot of work for a number of months for something that will pay off for a number of years if not decades to come.

I often joke, if I had some way to provide a service where I could magically snap my fingers and transport an advisor and their clients from where they are now to instantly in the RIA model, I could print money. I could charge an exorbitant amount of money for that service if that was possible. Which of course it’s not. That’s hypothetical. You must go through the trenches. You must go through the hard steps to get there.

My point though is, I talk to a lot of advisors that take the time to understand the RIA model, and agree they would be much better off under it.  They want to move to it.  But they get held by the thought of a transition.

That’s why I say if I had some way to magically solve that one piece for them, I could snap my fingers and move them from point A to point B, I could charge hundreds of thousands of dollars every time I snap my fingers and people would pay me. The transition is often the thing holding advisors up.

Again, I’m not minimizing it. I’m not saying it’s an easy process. It’s not. I would challenge you though, do you have the tolerance to go through months – not years – of hard work to be better off for years and decades to come into the future?

Finally, I am also a believer that some advisors will never be a fit for the RIA model. I’m not sitting here during all these episodes under an impression that every advisor should go to the RIA model. That is not the case.

There are a number of scenarios where it might not make sense for an advisor due to their particular circumstances, what they’re looking to accomplish with their practice. It is not for everyone.

However, I do think everyone should at least understand it and understand how it compares to what they have now so that they can make that fully informed decision. But, at the end of the day, it is not for everyone.

I’ll give you an example. There are advisors where the wirehouse model is going to remain the best path for them. For that reason, I think the wirehouse advisor model will always survive. It will continue to bleed advisors to the RIA model each year, and they will have to find some way to replace those advisors. But there will be enough that remain that the wirehouse model will always exist.

There are wirehouse advisors that take the time to understand the RIA model.  They understand the economics would be better for them, the flexibility would be better, the enterprise value of their practice would be better.

They check all those boxes, but there are a subset of advisors, and I respect this, that say, “I understand how it compares. However, when I reflect on my practice, the reality is I make good money and I don’t have as much responsibility over here. I realize I’m giving up a lot, and sometimes it is frustrating because of all the guardrails I shouldn’t have to deal with. But I make enough money and I’m satisfied enough.”

This is okay. There are many advisors who will always choose that path, and I respect that. The W2 environment, where everything’s essentially provided for you, will continue. Again, I think it will continue to bleed advisors to the RIA model each year, that they’ll have to find some way to replace. But there still will be enough advisors that those models remain viable.

That’s different though from the independent broker-dealer model. I’ve talked about this in articles I’ve written. I think that model is to the point of, will it survive?

If you’re an advisor at an independent broker-dealer model, you have already shown your willingness and ability to handle the additional responsibilities of running your local P&L, running your local expenses, having your own employees, maybe a lease or whatever the case is for your office. You’ve already demonstrated your willingness and ability to do that.

If your practice is becoming increasingly more and more fee-based – quick sidebar, I’ve done several episodes on how you do not have to be 100% fee-based to move into the RIA model. There are hybrid solutions, ways to accommodate it. I’ve done episodes on it, you can check it out.

As independent broker-dealer advisors become increasingly more fee-based, and they’re already willing to be a small business owner, they are asking themselves, “Why shouldn’t I just take this final step and go full RIA and get all the additional benefits of the RIA path?” Whether that’s owning their own RIA or joining an existing firm.

As a result, the independent broker-dealer model is going to continue to get squeezed over the coming years because those advisors are not in the same boat as the W2 wirehouse advisors, where everything is provided for them and they’re content with that.

The main takeaway from this latter macro point is just to point out I’m not naïve. Not every advisor is a fit for the RIA model. There are advisors where it makes sense for them not to make the move.

Beyond that subset, why aren’t more making the move than already are? We will continue to see that wave grow, it’s the limitations I spoken about in this episode that slows the growth down.

Hopefully, if you are in that situation, this episode will motivate you to not get held up on not fully understanding the model, not get held up on what a transition would entail. Take a look at the model and see if it’s a fit for you.

To wrap up, a couple reminders about this trend, this wave to the RIA model.

First, the RIA model for years now has been the fastest-growing channel in the industry. Consider why that is, why it continues to be the fastest growing channel year after year. There must be a reason, it must be attractive. Advisors are making the move. So, keep that in mind. There’s a reason for that.

Also, the river only runs in one direction. When you hear announcements in the industry press about advisors leaving from one firm to another, that river only runs in one direction.

There are lateral moves. Sometimes an advisor or team might move from one wirehouse firm to another. But when they are changing affiliation models, that river only runs in the direction towards more independence. Have you ever seen an article talking about an RIA that decided to close and go join a wirehouse firm? It doesn’t happen.

In my 20+ years, I’ve only heard of a single instance of an RIA practice that ended up going to a W2 wirehouse type model. It was for a succession plan. That was the only reason it happened. It wasn’t because the grass was greener or the benefits were better, it was solely a succession.

So, again, ask yourself, why does the river only run in one direction? Why are people not going back the other way? There’s a reason for that.

Finally, ask any advisor that has made the move to the RIA model what their number one piece of advice is about it, you will always hear, “I wish I would’ve done it sooner.”

There’s a reason they’re saying that. Yes, it wasn’t fun for them to go through the transition process, but once on the other side, advisor after advisor is not only happy with their decision, they just wish they would have done it even sooner.

The wave to the RIA model continues, and keeps picking up speed. In today’s episode, we talked about some of the reasons that hold advisors back. And again, for some of you listening, you might not ever make the move because it’s not a good fit for you. However, every advisor should at least take the time to understand it to be able to make that fully informed decision.

With that, like I said, my name is Brad Wales with Transition To RIA. This is the sort of conversation I have every day with advisors. Helping you understand the model, understand the different pathways into it. Should you start your own RIA, join an existing RIA, or use one of the pathways in the middle?

There is no golden goose. Every approach has pros and cons, including your current model or firm. Take the time to understand the RIA model, and how it compares to what you have now. And if the RIA model is a possible fit, understand how to go from point A to point B. What the transition process is.

This is what I help advisors with. I’m happy to have that conversation with you as well.

To get started, go to TransitionToRIA.com. You’ll find this entire episode series in video format, podcast format, I have articles, whitepapers.

Then the most effective thing to do is at the top of every page is a contact link. Click on that and you can instantly and easily schedule a one-on-one conversation with me to talk about today’s topic or anything else RIA-related you would like to discuss. 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.

Want To Learn More?

Schedule a Discovery call and lets begin a conversation.

Share this post

Read my free whitepaper!

Get instant access to my free whitepaper on "11 Ways The Economics Of The RIA Model Are Superior To Other Advisor Affiliation Options".
FREE WHITEPAPER:  “Steps To Take Now If You Anticipate Transitioning Your Practice To The RIA Model Anytime Within The Next 10 Years.”