Q95 – Why Is It Harder To Pick An RIA To Join Than A Broker-Dealer To Join?

Also available as podcast (Episode #95)

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Why Is It Harder To Pick An RIA To Join Than A Broker-Dealer To Join?

Broker-dealers have much less variability in their value propositions than RIAs do. There is typically little variance in how broker-dealers approach technology, how they custody their client assets, what their payouts are, etc. To the contrary, RIAs typically have a wide range of differing variables between them. That variability makes it possible for an advisor/team to find a solution that is more closely aligned to their specific needs. However, the process of discovering and performing due diligence on RIA firms to choose from involves a more time consuming process.

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Full Transcript:

Why is it harder to pick an RIA to join than a broker-dealer to join? That is today’s question on the Transition To RIA question and answer series. It is episode #95.

Hi, I’m Brad Wales from Transition to RIA where I help 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 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 RIA model.

Again, TransitionToRIA.com.

On today’s episode, we’re going to talk about if you are inclined to leave your firm and join another firm – I’ve done several episodes on whether you should start your own RIA or join an RIA – why does it tend to be harder to pick an RIA to join versus a broker dealer to join?

Now, harder does not necessarily mean that the result is not better, as you’ll see as we go through this. But the due diligence process of joining an RIA can often be harder.

What prompted me to make this episode is I was talking to an advisor who had recently been speaking with some sort of industry recruiter. In that conversation, the industry recruiter mentioned that the last 100 or so advisors that they extracted or pulled out of a broker dealer, the overwhelming majority of those advisors, with that recruiter’s help, went to another broker-dealer, not the RIA model.

I guess the recruiter was implying that that was the superior path. I think there’s a couple of variables in play that are skewing those results for the recruiter. One of those, and it’s what got me now doing this episode, is part of the challenge of evaluating RIAs to join or broker-dealers to join is that it is more complicated to understand the options in the RIA model than the broker-dealer model.

So, my guess is, in part, the reason this recruiter was experiencing those results is because they themselves are either not as experienced with, or not as comfortable discussing, the RIA model versus the broker-dealer model. So hence, guess what option they explain most to the advisors they’re talking to?

Likewise, if most of their conversations are about broker-dealers, and they end up helping those advisors make a move, guess where most of the advisors end up?

So that conversation prompted me to make this episode, to explain how understanding RIA options is different than broker/dealer options. And how you want to be careful who you are getting your information from because there could be a bias towards what someone knows better or is more comfortable talking about it.

Now, maybe a particular path they’re telling you about is ultimately best for you, but make sure it’s not because they’re not familiar with how other pathways might work.

I spent many years working at the corporate level of a multi-channel firm. They have an employee model, an independent broker-dealer model, an RIA custodial channel model.

I saw all this firsthand. Not just the different channels, but how they operate, how they differentiate, who their competitors are, how they position themselves against competitors.

And I’d see firsthand internally, even people that had been at that firm for a very long time that were perhaps in the W-2 broker-dealer channel that did not understand how other channels worked. And that’s understandable because if their entire career was in one channel, there was nothing that necessarily motivated or prompted them to learn how something different works. They never took the time to do it. There was a lack of understanding, or sometimes confusion on even basic elements of perhaps (as an example) the RIA model.

So again, make sure you are comfortable with who you’re talking to and what their own understanding is about different options. I saw it firsthand by working at one of those firms.

No matter what kind of firm you might want to join, a broker-dealer, an RIA, the main question is what is their value proposition? Why might you join their firm versus some other firm, versus some other model?

I’ve done several episodes on joining an existing RIA: what typical payouts are, how to evaluate joining an existing RIA, etc. On this episode, I’m going to discuss the main differences between why it’s easier to explain the broker-dealer model to people than it is the RIA model.

We’ll start with broker-dealers.

If you’re at a broker-dealer now and you’re inclined to join another broker-dealer, or at least that’s what you think your path should be, and that’s what you’re exploring or someone’s trying to explain to you, there are a couple things that make it much simpler to discuss than talking about the RIA model.

First example, pretty much all large broker-dealers use their own proprietary technology.

There are some mid-sized, small-sized firms that are maybe using more third-party tools, but most of the large firms, the wirehouse firms, the large independent broker-dealer firms, they’re all using their own proprietary built technology.

So, guess how easy that is to explain if you’re trying to tell someone, “Here’s how to evaluate broker-dealers you might want to join.” It’s simple. What is the technology? It’s the technology they built themselves.

Now, whether that’s good technology, bad technology, one might have one feature versus another. There are some differentiators there. But as far as understanding how it works at a macro level or someone trying to explain to you, it’s very simple. They all use their own proprietary technology. That’s a simple story to tell.

Next, affiliation models.

It’s very simple. It’s pretty much either W-2, you’re an employee of the broker-dealer, or you’re 1099 of an independent broker-dealer.

It’s very simple. So you say, what broker-dealers might I look at? It’s either, do you want to look at the W-2 employee models, or do you want to look at the 1099 independent contractor models? Very easy to communicate.

And then within those, a W-2, is a W-2, is a W-2. There’s no variability. Same thing on the 1099 side. You only have two choices to be aware of.

Next up on the broker-dealer front, the payouts are all roughly the same.

Now, obviously, there’s a difference between a W-2 payout and a 1099 payout. But on the (for example) W-2 side, the proverbial wirehouse type model, there’s only slight differences in payout and grid rates, and all the little kickers they add in. If you’ve listened to my episodes or read my articles, you know I rant about this all the time, how convoluted these payout plans are.

But at the end of the day, they’re all generally about the same payout because they have to be to be competitive with these other firms that look very similar to them. There’s not one that has a far superior payout compared to another. It’s just some slight tweaks.

Same thing in the 1099 space. The payout and how it’s structured is generally all relatively the same from one firm to the other with only some slight differences. For the most part, they’re all centered around the same percentages. And so again, that’s easier to explain to someone.

Another example where it’s very simple to be able to explain the broker-dealer options is all large firms are self-clearing. There aren’t multiple custodians to potentially talk about.

By the way, we’ll get to it in a second, there’s an advantage to have multiple custodial options. But in the broker-dealer world, that’s one less variable you need to understand, or be able to explain to someone. All the large firms, self clear. End of story, no variability there.

The last example, and this is not an exhaustive list, but they all, of course, say they have a great culture. Which of course is laughable, particularly with wirehouse firms that are constantly tweaking the compensation of their advisors or further restricting things. But they all at least message that they have this wonderful culture.

They pay their execs a lot of money to sit on camera and say that with a straight face, that they are always thinking about their advisors first. That’s where their decision-making comes from, the advisor first, client first culture.

We all know that’s not what’s happening behind the scenes, but they all say it. So there’s no differentiator there. The actual culture behind the scenes is almost identical from one firm to the next, particularly with the very large wirehouse firms. We know what they’re looking out for first and foremost. So there’s no variability there either for the most part. So again, that’s easier to explain.

This has not been an exhaustive list, but the point I’m trying to make on the broker-dealer front is if someone says, “You should just look at these other broker-dealer options,” it’s much simpler for them to explain broker-dealer options because 90% of what the firms do is all the same. They’re all identical looking and the differences are very marginal.

That’s easier to understand, if you’re going to make your decision based on what the easiest thing to understand is. And again, for whoever might be trying to explain it to you, that’s always going to be easier for them to understand. They’re going to be more comfortable talking about that.

Now, let’s look at how this differs when you’re evaluating potential RIAs to join. This is where it can get much more complicated.

There’s good and bad news with the value propositions in the RIA space. The good news is there are a lot of different value propositions. The uniformity that I just described with broker-dealers is not at all the case in the RIA space. The value propositions vary much more from one firm to another.

So the good news is that there’s a lot of value propositions. The bad news is equally that there’s a lot of value propositions. You have to do more work to find the one that’s the best fit.

The more options you have, the better the alignment you’ll achieve if you take the time to find the right firm. You’re not just going with the cookie-cutter everyone-looks-the-same approach that you hope to align with as best as possible.

In the RIA space, there’s many different value propositions. If you take the time, you can find one that is very closely aligned with you. And by the way, there’ll be others that are not at all aligned with you. And that’s fine because they align with some other advisor or team that wants to potentially join them.

So the good and bad news in the RIA space is that there are so many value propositions. I spend considerable time as part of what I do for advisors is being aware of who these players are, who these RIA firms are, what their value propositions are, how they differ. I’m going to give you some examples of those variables, but this takes considerable amount of my time because they are so different. It’s not just six broker-dealer firms and they’re all roughly the same, and an easy story to tell.

I get pitched all the time. RIAs in the marketplace learn what I do, that I’m helping advisors consider their options, and they call me up and want to tell me how great their RIA is. I spend considerable time hearing those messages because I want to know what the best options are and how one option might appeal to one advisor, another option to another advisor. I hear all kinds of different value propositions.

As I said, this takes a lot of my time. But that’s also a lot of my value proposition, is to be able to share that knowledge with my advisor clients.

The first example of where that variability comes in is with the technology stack.

Unlike the broker-dealers that use their own proprietary technology, in the RIA model, almost all RIAs put together third-party technology tools, a so-called technology stack. This is where they go out in the fintech marketplace and select from the hundreds of different options. They’re picking what they feel are the best vendor solutions for each of the pieces that they need to put together.

Well, guess what? That means that each RIA could have a different approach to technology, a different technology stack. So again, that’s more for someone like me or a recruiter or whoever you might be talking to, needs to understand if they’re going to say, “This firm might be fit for you, and here’s how they approach technology, does that work for you?”

That is much harder to get your hands around in the RIA space where they’re all different. I have to take extensive notes of these things when I have conversations of how one firm is approaching it, because I can’t just assume that, “Oh, the answer is X.” Where in the broker-dealer model you can typically assume the answer is proprietary technology. It’s very simple.

So, technology is an example of one differentiator. Another variable that has a wide spectrum is how the payout works, how firms price the economics for the advisor.

This is all over the map. There is no simple, “Everyone’s got the same payout grid, plus or minus two, three percentage points, and it’s all roughly the same.”

There are some firms that have very high payouts, and there are other firms with much lower payouts, but they provide a lot more for you. Further, other firms don’t express it as a payout. They express it as the inverse and basis points, and there’s a range between what basis points they charge. The more you pay, the more you get.

A higher cost is not necessarily a bad thing, but the question is, what do you get for that cost? And is that what you need as an advisor to run an efficient practice, and be able to grow as fast as you’d like to be able to?

It’s much more time consuming to understand, “Why should I look at one firm that charges 10 basis points and another firm that charges 30 basis points?” You must understand why there’s that variability.

You potentially must talk to both to understand, “What’s your value proposition? What of your resources will I use?” And then you do the same thing with the 30 basis point firm. Then you can decide, which one is more advantageous for you based on your circumstances.

Again, that’s much more complicated, much more time consuming to get your hands around than just the simple (broker-dealer) payout grid that’s all within two, three percentage points of each other, no matter which firm you look at.

The next example, which I alluded to earlier, is that most large RIAs are multi-custodial. They don’t just have one custodial option. They typically have two, maybe three, sometimes even more custodial options.

That is to your benefit, to your client’s benefit. So you can say, “I have these different options for you to choose. I’m agnostic as the advisor. You tell me which one you would like to use. It doesn’t make any difference to me as the advisor. I’m not paid more or less either way, but I want to be able to give you a choice of which custodian you would like to use with your assets.”

It is different by each RIA, which custodians they’re using. Now, of course, there are the big three custodians, so there’s a lot of overlap on which custodians each RIA is using, but it’s not uniform. They don’t all use the exact same two custodians or the exact same three custodians. There’s variability.

So again, it’s more you need to understand, but then also more options for you. If you’re willing to take the time to find the one with the best fit, it is there for the taking, but it takes more time to figure that out.

The next example compares to what I discussed how in the broker-dealer world, it’s very simple, you’re either a W-2 employee model or you’re 1099.

In the RIA space, potentially joining an RIA, there are W-2 models, there are 1099 models, there are partnership models, there are models you can sell your practice to. There’s several models available out there.

That’s more challenging because you must sort through it, but it’s better for you as the advisor because you can find the model that aligns best with where you are in your career and what you hope to do with your practice going forward. It will be different from one advisor team to the next. You want that optionality.

In the broker-dealer space, it’s pretty much, “Here it is. Take it or leave it.” All the broker-dealers are roughly the same, how they approach it. In the RIA space, you have all kinds of options for how you are affiliated with them.

The final example – again, not an exhaustive list – is if you go to the RIA model, you do not have to be 100% fee-based. Or at that point, you’d be fee only.

Many advisors choose to be 100% fee-only, but it is quite normal and possible to accommodate some existing, often referred to as “legacy” commission business you still have. You might be in a situation where you say, “I’m moving increasingly more to the fee-based world. That’s where the overwhelming bulk of my client assets are. But I have these legacy commission assets. It makes sense for the clients to stay in those positions. I need some way to accommodate that.”

That’s entirely doable in the RIA model. I’ve done episodes on how to accommodate commission assets. But each of the RIAs in the marketplace that you could join potentially have a different solution for how they handle those commission assets, what vendors or solution providers they make available for you to use.

So again, that’s more variability that you must understand across the spectrum of RIA options you could look at joining.

The main takeaway here is not to imply that RIA is better than broker-dealer or broker-dealer is better than RIA. You must dig into it to decide what’s best for you.

The RIA model is best for most advisors, but not all advisors. I’m not sitting here implying that all advisors should go to the RIA space. But I concede, if you are inclined to join a firm, join a broker-dealer or join an RIA, the process of evaluating broker-dealers is easier than RIAs. How the options work, who the firms are to choose from, how they are different, what their value propositions are, etc.

I would challenge you, though, don’t make a possible lifetime career decision, hopefully the last change you make with your practice, based on what is the simpler due diligence process.

It is better to spend the time on the front end to look through all the options, to fully understand it, to find the better fit. But it will take more time to sort through that in the RIA space.

It is self-serving for me to point out, but this is all I do. I spend my days paying attention to all these variables and how the firms are different from one another and why you might choose one path over the other. Even for someone like me that this is all I focus on, it takes me considerable time to stay on top of.

If you’re considering the RIA model, you need to talk to a specialist, not a generalist. With the latter, it’s not possible to invest enough time to do the deep dive if you’re trying to be an expert in all things. I know firsthand how much time is needed just for the RIA model to stay on top of it.

If this is something you want to learn more about, “Brad, if I want to maybe move into the RIA model, how does it work? What might that look like?” That is what I help advisors with. I’m happy to have that conversation with you as well if you would like to explore options, better understand options, know what’s in the marketplace.

With that, like I said at the top, my name is Brad Wales with Transition To RIA. As I just noted, I’m happy to have this sort of conversation with you as well.

As a starting point, head to TransitionToRIA.com where you’ll find all the resources I make available. This entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of things to help you better understand the RIA 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 in today’s episode and I’ll see you on the next one.

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