Ask Brad: Do I Have to be 100% Fee-based to Start My Own RIA?

However, there is nothing stopping you from starting an RIA for your fee-based assets, and alongside the RIA utilizing one of the available solutions to be able to offer commissionable products and/or simply retain and service existing legacy commission business (usually trail revenue of some sort).

You can benefit from the advantages of the RIA model for your advisory assets (100% payout, more flexibility, etc.), yet still accommodate your commissionable business.

There are several options available for the commission component.

Utilize the services of a third-party broker/dealer

There are specialty “RIA-friendly” broker/dealers whose business model is to partner in this exact capacity. You start your own RIA and put your advisory assets underneath it. You then put your commissionable assets with the broker/dealer for a (typically independent B/D level payout).

Sell your commissionable assets

There are firms willing to purchase your commissionable assets (generally trail-paying assets) for a multiple of the annual revenue. These firms specifically commit to you to service the asset and to never solicit any remaining part of the client relationship that might otherwise be held by you.

Convert

There are an increasing number of solutions available to facilitate the conversion of existing commissionable assets into a more advisory friendly solution. An example would be converting a commissionable variable annuity into a fee-based annuity solution. (Any conversion should be considered only if it is foremost in the client’s best interest.)

Walk away

This is generally the least appealing option, but an option nonetheless. You do have the ability to walk away from your commission assets, though you would generally want to make sure they at least land with a friendly source (read: an advisor who won’t compete against you). While this may seem highly unlikely, especially given the available solutions I noted above, I know an advisor who walked away from ~$200k in annual trail revenue. She wanted to be 100% fee-only, with no ties to a broker/dealer solution of any flavor.

There is no proverbial free lunch. Each of the available solutions above add their own complexities. Examples include additional possible disclosures in your RIA’s form ADV and different custodians holding your fee-based versus commissionable assets.

But the positives are appealing: the opportunity to receive a 100% payout on the advisory portion of your assets and a still competitive payout on your commission business.

As with any independent setup, you still need to cover the expenses of running your own firm. With the higher top-line payouts, though, the economics of such arrangements are generally favorable to many of the legacy alternatives.

Last, is there any minimum fee versus commission percentage breakdown that makes this all worthwhile?

Certainly, if you are 100% fee-based, you already fit the RIA model profile. Therefore, the question is, how much less than 100% does it make sense to consider the above possible solutions?

There are two ways to look at this.

You want to consider using a third-party RIA-friendly broker/dealer, most all the available offerings require a minimum level of assets/production. If you are 98% fee-based and only 2% commission……unless that 2% represents a large amount of assets, you are most likely better off considering one of the other solutions noted (selling, walking away, etc.) If you are going to retain commission business, it must at least have some meaningful level to it.

Second, while it is technically possible to have, say 25% fee-based under your own RIA and 75% commission using an RIA-friendly B/D solution, at some point, you must consider if such an arrangement is worth the extra complexity. Or would you perhaps be better off under an independent broker/dealer type arrangement?

Having helped advisors along all ranges of this percentage spectrum consider their options, I would tell you there are no set rules regarding this issue. Every scenario is unique and needs to be considered individually.

The most important thing to remember is you do not need to be 100% fee-based to start your own RIA. You do not need to be 100% fee-based to start your own RIA. You do not need to be 100% fee-based to start your own RIA….

Brad Wales is the founder of Transition To RIA, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about WHY and HOW to transition their practice to the RIA model. Brad utilizes his nearly 20 years of industry experience, including direct RIA related roles in compliance, finance and business development to provide independent advice regarding how advisors can benefit from the advantages of the RIA model.

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