Ask Brad: How Do I Start My Own RIA?

Consider the analogy of an advisor who utilizes mutual funds as an investment solution with clients. The first step in an engagement with a new client is not to immediately consider which asset classes to be investing in, which fund families to use in those asset classes, which individual funds within those families to use, which share classes of those funds to use, etc.

The first step is understanding what the client is hoping to accomplish within their financial lives. Until you can understand and solve that, all the detailed specifics of fund families, share classes, etc., are all moot.

It is the same thing in the RIA model.

Set aside the hundreds of configurable options, value propositions, integrations, etc. Instead, start by asking yourself, “what is the best approach to transitioning my practice to the model in the first place?” Solve for that, and everything else falls into place.

As I explain to advisors, you can simplify the process by first considering three main approaches to transitioning your practice to the model. Each of these three approaches appeals to advisors in different ways. Each has its pros and cons. There is no “golden goose” solution. Anyone who tells you otherwise either has an agenda behind their recommendation or does not know what they are talking about.

I have spoken to plenty of advisors passionately interested in one of the three approaches, and other advisors who feel the opposite and prefer one of the other two available options. The path that is best for you is based on your circumstances.

With some slight additional optionality to the third approach (explained later), all three of these approaches offer:

• 100% book ownership;
• Ability to brand under your own name;
• Higher enterprise valuation than the broker/dealer model;
• Tax advantages of having an independent practice; and
• Better economics and flexibility than non-RIA models.

What are these three approaches?

Option 1 – This is the approach most often thought of with the RIA model. You start your own RIA and build out a service provider network to support the firm’s operations. This includes everything from custodian selection (yes, they are a service provider, in this case providing custody and clearing for your client’s assets), tech stack, compliance, TAMPs, billing, etc.

This option provides for the most flexibility (you are choosing from hundreds of available options), and likewise, because you are building it all out yourself, the highest compensation level. But you are responsible for vendor selection, initial and ongoing integrations, compliance, etc. Remember, there are pros and cons to each of the available options.

For reasons that will be apparent in a moment, we’ll jump to option 3, which is on the other end of the spectrum from option 1.

Option 3 – In this approach, you want all the benefits noted above (e.g., 100% book ownership, etc.) but would rather not be responsible yourself for building out all the needed service providers, nor be responsible for the regulatory and compliance aspect of running your own RIA.

In this option, you join an existing RIA platform. I called it a “platform,” which is a more fitting descriptor for this option. Technically, you are joining an existing RIA as an Investment Advisor Representative (IAR) of that firm. These are not your proverbial grandfather’s RIAs, though, where someone has an empty office in the corner and wants you to come fill it.

These are B2B RIAs built from the start to cater directly to advisors attracted to the above profile. These RIAs rarely interact directly with investor clients of their own. Their “clients” are the advisors utilizing their platforms. In a nutshell, their value proposition is…. come join our platform, get instant access to our fully vetted technology and service stack already built out (and which benefits from our scale), and gain all the advantages of having your own firm without the operational and regulatory responsibilities of doing it yourself.

Understandably, this is an appealing option for some advisors. The pro is a much easier pathway into the model and the ongoing aspects of running an advisory firm, including not having compliance/regulatory responsibility yourself. The trade-off is a bit less flexibility (e.g., they’ve built out a tech stack for you).

There are extensions to option 3. There are RIAs you can join, each with different value propositions and requirements. These firms might have you fold under their RIA name, perhaps becoming W2 employees of their firm, etc. These options can be attractive to certain advisor profiles. However, as each firm will have differing value propositions, I reference their existence but don’t include it in my simplified “three models” approach explained herein.)

Option 2 – Last, is an approach that falls between options 1 & 3.

This model is attractive to advisors who still want to own their own RIA (à la option 1) but do not have the desire, scale, or experience to build their own stack of solution providers fully. Instead, there are “middle office” platforms that cater to this profile.

You own your own RIA, but in one swoop outsource a lot of the operational aspects of running your own firm to the middle-office provider. Custodial relationships, tech stacks, fee billing, TAMP solutions, etc., generally all are done for you. Yes, you must pay these middle-office firms for providing such a platform, but most of that cost structure involves expenses you would need to pay for anyway if you were building out a stack of service providers on your own (option 1).

The pros to this option are having your own RIA, the ability to outsource a lot of the non-client-facing aspects of running an advisory firm, all while benefiting from the scale advantages such providers have themselves that you might never be able to achieve on your own. The trade-off is less flexibility and compensation than option 1, and you’d still retain ultimate compliance/regulatory responsibility as it remains your own RIA firm.

Again, pros/cons to everything.

Which option is best? There is no correct answer. For example, I have worked with advisors who are adamant about wanting to build out their own tech stack (option 1), whereas other advisors want nothing to do with having to piece that together (options 2 and 3).

There are many considerations that will draw some advisors to certain options.

Once you’ve determined which of these three models is the best fit for your circumstances, only then can you consider filling in details such as the providers to use, how to address custodian selection, technology, compliance, etc. Depending on which path you choose, several decisions will already be made for you.

There is no need to be overwhelmed by the hundreds of different options and configurations available to you in the RIA marketplace. Start with this three-model approach, and the complex becomes manageable.

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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