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A common question I am asked by advisors who want to learn more about the RIA model is how do the payouts work? Is it really 100%?
I generally answer the question by saying, “Yes, it is 100%. And guess what, you have a 100% payout at your current firm as well.”
Considering I am often speaking to traditional wirehouse-type advisors and/or independent broker/dealer advisors, that response causes bewilderment.
Broker/dealers have payout grids. I am not naïve. Nor am I unaware that most firm compensation plans run 20+ pages on average, as they are loaded with all kinds of hurdles meant to reduce what flows into your pocket. But, alas, that is a topic for another day.
Why do I say that a broker/dealer advisor has a 100% payout?
To understand, let's first look at how “payouts” work in the RIA model.
If you start your own RIA, you keep 100% of the advisory fees you charge your clients. This is logistically handled by your custodian(s) debiting your clients’ fees from their accounts at the agreed-upon intervals and fee levels. Those fees are remitted to you, as the RIA.
While often called a “100% payout,” it is not a payout at all.
A custodian debiting fees and remitting them on to you is a courtesy the custodian pays to you. In theory, you could have your clients instead send you a hard-copy check each quarter. For convenience to the client and RIA, though, that is generally not how it is done. Debiting accounts is the most prevalent way AUM fees are paid, and the custodian facilitates that process.
Those fees are never run “through” the custodian. They are not considered revenue to the custodian; they do not impact a custodian’s P/L, etc. Custodians debit client accounts on your behalf and remit the fees on to you as the RIA. Hence, the custodians are not giving you a 100% “payout;” they are simply giving you your fees.
From your 100% in fees, you then need to cover the expenses of running your RIA. This includes expenses like office space, support staff, technology, compliance, etc.
This brings us back to my declaration you are already receiving a 100% payout at your current firm.
You are the one generating the fees and commissions that make up your “production” (a.k.a., historical gross revenues) that runs through the payout grid. Without you, that revenue does not come into the firm.
As this revenue is 100% due to your efforts and contribution, you should mentally think of 100% being paid to you.
However, your current firm is providing you with value and support, which enables you to generate that revenue. They perhaps provide you with office space, a sales associate, employee benefits, technology tools, compliance, etc.
You are paying for this support via your payout.
Let’s look at an example.
You are producing $2 million per year in production. For that, your firm is perhaps giving you a payout of 45% ($900,000/year). (Again, you’re most likely not receiving the full 45%, but for simplicity’s sake, I will assume you are.)
If you’re in the independent broker/dealer model, you can run this same exercise, but you must adjust for payouts and what is being provided to you.
Per our example, if you are receiving a 45% payout on $2 million in production, that means your firm is retaining 55 ($1,100,000).
I challenge you to view this differently. Assume you are paid out 100% on your fees and commissions. Then, at the end of the year, you have to take out your checkbook and write a check to your firm for $1,100,000. This is to pay for the support services they have provided you during the year.
The $2,000,000 goes into your pocket. You then pay your firm $1,100,000 for the services they have provided you with. This is what you are doing via the payout grid.
Therefore, the question is, could you replicate on your own the same suite of support services your firm is currently providing to you (office space, technology, benefits, etc.) for less than $1,100,000 per year?
Or, better yet, could you not only replicate it for less money but build it better yourself? Perhaps office space that is more convenient to you and your clients? A compliance program more flexible to your unique needs? Technology solutions from the industry’s best providers?
Could you do that, in our example, for less than $1,100,000?
Perhaps your current firm is providing you with amazing value and worth every cent of the $1,100,000 per year.
If you don’t feel that way, though, remember that the savings from building it yourself flow directly to your own pocket.
This is the difference between “payouts” in places like the wirehouse and the RIA worlds.
Stop thinking of your “payout” as which portion of your production you retain. Instead, think of it as what you are paying to your current firm for the services and value it is providing to you.
Does that “payout” match what you are receiving from it in return?
If not, it’s time to better understand how you can build out your own value proposition.
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.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
