This is the latest installment of a regular column to answer questions from advisors who are considering transitioning to an RIA model. To see Brad’s previous articles, click here. To submit your question, please email Brad here.
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Let’s address the pros and cons of joining an existing RIA.
As background, I help advisors understand the pathway to the RIA model.
For some advisors that will be starting their own RIA. For others, it will be joining an existing RIA. Some will utilize the services of a so-called “middle office” provider to support their startup.
There are many reasons one advisor might choose one path over another. There is no perfect solution. Every option and affiliation model has pros/cons. It’s a matter of determining which path is the most advantageous for you.
I will start with a rant.
I am not a fan of when some folks broadly decree to certain advisors: “You are not big enough to start your own RIA. You should only join an existing one.”
You can start an RIA with $0 AUM. Some RIAs never have AUM, as they don’t formally manage any assets and only provide fee-for-service advice.
There are economics to consider, as there are scale advantages with being a larger RIA. But it is short-sighted to use AUM size as the sole/leading determinant of whether to start your own or join an existing one.
Advisors/teams of all sizes routinely decide that joining an existing RIA is the best path. That includes sub-$100 million advisors on one end of the spectrum, and $1 billion+ on the other end.
Why might an advisor join an existing firm versus starting their own?
When you start your own, you build out a set of solution providers to support the needs of running an RIA. This includes custodial services, technology solutions, compliance consultants, etc.
The pro of building this yourself is you have the entire RIA ecosystem of providers from which to choose. When you consider the growing number of solutions in the marketplace, particularly with technology vendors, there are hundreds of different options.
A further benefit of piecing this together yourself is that you are not paying anyone to do it for you; your bottom line economics will generally be more favorable.
However, the pro of this additional flexibility can be a con. You are the one responsible for sorting through the hundreds of options. You must negotiate pricing and review contracts. You make sure the solutions, particularly the technology, are integrated and remain as such.
However, everything I describe above is doable. This is how I routinely help advisors.
Some advisors even enjoy it. I’ve worked with very tech-savvy advisors who love sourcing the exact technology solutions they want for their practice. They are not at all daunted by having to sort through the available options.
But other advisors want absolutely nothing to do with having to set up and integrate various unrelated technology providers.
Again, pros/cons to everything.
What does an existing RIA bring to the table that makes it enticing for advisors to want to join them, versus starting their own RIA?
There are multiple flavors of RIAs you can join, so it is hard to generalize. However, some high-level aspects apply in most offerings.
There are certain services that practically every RIA needs: custodian(s), technology, compliance, fee billing, maybe TAMP solutions, etc.
An existing RIA’s “pitch” is essentially… “You are going to need all of those things regardless, and you are going to have to pay for them. Instead of piecing it together yourself, we’ve built out a best-in-breed platform with better pricing and more scale than you can achieve on your own. Join our turn-key solution and spend your time on client-facing activities instead.”
Each such firm looks to uniquely position its offering to appeal to advisors in different ways, but the above is the foundation of what they offer. It’s a fair argument for them to make.
Because of their size, they can generally get better pricing on technology or TAMP solutions. They have broader custodial relationships, and they can provide in-house resources (e.g., marketing support) that you perhaps cannot justify hiring individually on your own, etc.
And using hypothetical numbers… “You can build everything out on your own for 20 cents on the dollar, or pay us 25 cents and we do it all for you.” These solutions must be paid for under either approach. It’s a matter of how you want to pay for them.
What’s the catch?
If you join an existing firm, you need to be satisfied with the value proposition it has built out for you to utilize. For example, the advisors that love building out their own “tech stack” do not find a pre-built stack appealing. Advisors that want nothing to do with API integrations, contract negotiations, etc., will gladly outsource that to an existing firm.
If you join such a firm, you give up some degree of flexibility and economic benefits, but you are provided a more turn-key solution than building it out yourself.
Consider your options. Advisors who contact me often initially think they would only consider starting their own RIA. For many, that is the best path for them and what they ultimately pursue.
When the above option is brought into the conversation, many advisors decide that joining an existing firm is the better path for their circumstances.
The number of variables involved in making such a decision goes well beyond what I can capture here in a single article. Plus, if you do join an existing firm, there are numerous flavors of firms to choose from.
Never assume this decision should be based on your AUM alone. You owe it to yourself to fully explore all options and variables that might cause you to choose one path versus another.
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.
Read more articles by Brad Wales
This is the latest installment of a regular column to answer questions from advisors who are considering transitioning to an RIA model. To see Brad’s previous articles, click here. To submit your question, please email Brad here.
