Q18 – Will I keep 100% of my clients if I start my own RIA?

Also available as podcast (Episode #18)

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Will I keep 100% of my clients if I start my own RIA?

The intent with starting your own Registered Investment Advisor (“RIA”) and transitioning your clients to it is surely to move as many of your clients as possible.  However, it is not realistic (nor should it necessarily be a goal) to believe that you will be able to move every single client, and every single account.  There are perhaps reasons you yourself decide not to bring certain clients, or perhaps logistical reasons prevent an account from being moved.  Instead, it is better to consider how many of your clients you can expect to move….of the clients you want to move, and who are logistically able to move.

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Full Transcript:

Will I keep 100% of my clients if I start my own RIA? That is today’s question on the Transition To RIA video series. It is question #18.

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

In today’s question, “Will I keep 100% of my clients if I do leave my current situation and transition to the RIA model?” I’ll be honest, this was not a specific question I got from an advisor. I’m basing this more off of an advertisement I saw recently that was actually put out by a custodian and it quoted an advisor. I don’t doubt that that advisor actually exists and did make a transition. But the quote that was used was the advisor said, “I kept 100% of my clients when I made the move to my own RIA.”

For someone like myself that’s a believer in the RIA model, that sounds great. Let’s promote that. Let’s put that out there. But to be honest, I think that’s disingenuous. The reality is, to move 100% of your clients is just not going to happen. I don’t think anyone that says they moved 100% of their clients is being truthful. Maybe in their mind, how they’re framing it, they’re being truthful about it, but I think it’s a bit disingenuous.

What I mean by that is there is a difference between saying….”I moved 100% of my clients,” that’s option one. Or option two….”I moved 100% of my clients of the clients I wanted to move and I was able to move because of their account types.” Under that second scenario, that perhaps is doable. It’s still a lot of work, but that perhaps is doable. But to say….“I moved every last account” is just not realistic. I’ve never come across a circumstance where that’s happened to that degree.

I’ll give you some examples of what I mean by this. Reasons you probably will not move 100% of your clients. Hard stop, if that’s how you frame it as, a couple of things, there’s probably some clients or accounts that you don’t desire to move at this point. Maybe you’ve had them for a long time, and then because you’ve been fortunate to build your practice, you have higher minimums now that you really want to work with. So there’s some older legacy clients that have very small accounts that maybe you don’t even provide much service for anymore because they don’t need it and it’s just a small account and you might use that as a chance to say….”Okay, I’m refining my practice when I make this move and so, I’m going to leave that behind.”

You might also have some clients you desire to no longer work with for whatever reason. You could use this as an opportunity to simply not invite them to come join you at your new firm.

Then the last scenario is…and this is not much of an issue, but there can be some specific nuances that maybe you have a client and they have an account and it’s a 529 and a very state-specific account. For whatever the circumstances, that account can’t be moved to the custodian. There’s some technical or logistical reason. That could hold it up as well too. Now I would say, that is more on the fringe. Most instances you’ll be able to move your clients’ accounts, but just know there are some logistical or technical things that might prevent certain accounts from moving over.

To indicate or to give the impression that I moved “100% of my clients” and accounts, and that somehow you didn’t choose to purposely leave some clients behind because they were too small; or you didn’t purposely leave some behind because you chose not to work with them anymore; or because there were no technical challenges….that’s really threading the needle to bat 1,000 on that and move all of them.

I think the advertisement was well-intended because it is true that, generally speaking, as long as you have good relationships with your clients, you absolutely can anticipate moving the bulk of your clients. They will follow you. If you have a good relationship, they will follow you. That is what the marketplace has shown occurs.

But to think that you’re going to…and to say you got 100%, I think it’s disingenuous. I always try to be very transparent in these videos and everything I do when I help advisors. You can’t just paint just the pros. I think it’s fair to show both sides of the coin, the pros and the cons. I’m not going to sit here and say….“you’ll move 100% of your clients” because I don’t think that’s being honest. It’s about being forthright and giving you all the information you need to be able to make a decision. Which obviously is going to be a very important decision for you.

Then with that, I want to leave you with some math to consider. I’m a numbers guy, so this is how I think things through. When you start putting numbers to making a transition, you realize you generally don’t need to be too worried about….will I lose this account, and I don’t want this account, and maybe I can’t move this account. Because the difference in payout and take-home compensation from what you’re probably getting now to what you could get as your own RIA, that gap makes up so much more revenue. It really drives the point home that you don’t have to move 100% of your clients.

I want to give you some specific numbers here. I did do a separate video. If you haven’t watched, I encourage you to go look at it about what kind of bottom line income, the proverbial “payout” can I expect to earn as an RIA? I encourage you to go watch that video because I walk through why it could be one thing versus another. Generally speaking though, we see reasonably run, reasonably sized RIAs can generally expect to kind of net to the owners 60% to 70% of that top-line gross revenue numbers.

For the sake of this math exercise, let’s take the middle, 65%. Let’s say you’ve set up an RIA and you’ve structured it from a cost structure, that you’re now going to net 65% on that revenue. Let’s say you’re at a traditional brokerage firm now, and let’s say you are getting a 45% payout. I would tell you, and I did a video on this as well, if your grid says 45%, I guarantee you, you’re probably not receiving 45%. There’s a whole bunch of ways that your comp plan is chipping away at that, as you probably realize. Your true take-home is probably something perhaps even meaningfully less than that.

For the example’s sake though, I’m going to say you’re getting 45%. So, 45% under your current situation, 65% as your own RIA.

Some simple math here, simple examples. Let’s say you have 100 accounts. Again, we’re going to keep it simple. Each of those accounts generates $5,000. I know this is a hypothetical, every account is different, different size. And at that math, you wouldn’t be in the 45% grid payout. But for the sake of the example….you have 100 accounts, you’re getting that 45% grid payout. So, 100 accounts, they each generate you $5,000 in revenue gross. If you’re getting a 45% payout, that nets you $225,000 as the advisor.

If you take that same scenario but as an RIA….for apples to apples, $5,000 per account. But now, my payout, for easy terms, is now 65%. That’s what goes in my pocket after expenses. At 65%, when you do that math, you actually only have to move roughly 70 of the 100 accounts to the RIA to still net roughly that same $225,000, because of that difference between 45% and 65%.

The reason I point this out, roughly in this example, a 30% drop off that you, in theory, could lose 30% of your clients under this example and still net the same amount as your own RIA. Yet have all this additional flexibility and freedom and control of your practice.

Most advisors that go through this whole transition process, of course, want to make more money in the process and generally do. My point is you could lose 30%, in this example, and still be making the same amount you are now.

I would challenge you to consider….even with the examples I gave of the client that’s too small, you don’t want to take them; the client you no longer like, you don’t want to take them; and then that unique circumstance, with some account you can’t take, even if you’d like to….as an aside, if you think you can only bring 70% of your clients with you, that you will lose 30%, you perhaps shouldn’t even make the transition. Most advisors have a far higher success rate as far as moving clients over.

Now maybe your practice is so big that you have identified 30% that you are willing to lop off and it still makes it all the worthwhile to bring this remaining 70%. So, in theory, it’s possible, but my point is if you’re worried about….“oh I’m going to lose some clients, lose some accounts, maybe some they choose not to follow me”……again, because of that higher compensation, you can lose a substantial amount and still come out ahead in the RIA model. That’s the power of that higher top-line gross that comes in, your ability to manage your expenses, and then the higher net as well.

So, something to keep in mind. You’re not going to keep 100% of your clients. It’s just not going to happen for all the reasons we talked about. However, you don’t have to have 100% of it to still make this, from an economic standpoint, significantly improve your situation on the upside from a financial standpoint. That’s the sort of thing I help advisors think through all this math. I’d be happy to have that conversation with you.

With that, like I said, my name is Brad Wales. I’m with Transition To RIA where I help advisors, just like you understand everything there is to know about why and how to transition to the RIA model. Today’s question is a perfect example….how much of my clients can I expect to move? How will that impact my economics? What might that look like on the other side when I come out of it? That’s the type of thing I help advisors with all day long. I would be happy to help you think that through as well.

If you’re not already there, if you jump on over to TransitionToRIA.com, I have lots of other videos posted. I have whitepapers. Then the easiest thing to do is right at the top is the contact link. Click on that, you can instantly and easily schedule a specific date and time for us to have a conversation just like this. I can walk you through anything and everything you want to know about the RIA model and how it would look for your specific practice and circumstances. What it might look like if you were to transition into the model. I’d be more than happy to have that conversation with you.

I hope you found value in today’s video, and I’ll see you on the next one.

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