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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If you transition your practice to the RIA model, it is not a matter of whether you will outsource, but how much.
At its most basic form, transitioning your practice to the RIA model is an exercise in identifying the services provided to you by your broker-dealer affiliation and determining how best to replicate them on your own – ideally, at a lower cost and with more flexibility.
Those services might include office space, technology, E&O insurance, etc.
If you are at a traditional broker/dealer, you are outsourcing those functions. Your firm provides them to you, albeit with an expensive price tag and limited flexibility.
In the RIA model, you will need most of the same support services. It’s a matter of how and where you will delegate those services.
There are three main approaches to transitioning your practice to the RIA model, each with their own degree of outsourcing. I call them: no outsource, partial outsource, full outsource.
No outsource is not a perfect descriptor, as it still involves outsourcing at a micro level, which I will explain. This approach involves starting your own RIA and building out a network of solution providers around you.
These providers include technology, compliance guidance, custodial services, etc. Each by themselves is an outsourced solution. For example, you might utilize a technology solution to “outsource” the processing of your client fees.
What I mean by the aggregate “no outsource” notation is that you take on the responsibility (and potential advantages) of piecing each solution together. You are not “outsourcing” the macro responsibility to someone else, as you might do with your current broker/dealer firm.
For many transitioning advisors, this is the path ultimately chosen, in part because it provides the most flexibility regarding which solution providers to utilize. Likewise, it comes with the most initial and ongoing responsibility to maintain such coordinated efforts.
At the other end of the spectrum is the “full outsource” pathway. This is where you join an existing RIA firm due to desire or necessity. You fully outsource to them the responsibility to build and maintain a competitive tech stack, to run the compliance and regulatory requirements of the firm, to source and provide custodial solutions that take advantage of the firm’s size and scale, etc.
As opposed to the “no outsource” route, you are relying on a partner to bundle most of the non-client-facing functions of an RIA practice and provide them to you under a single chassis. This enables you to focus more of your time on client-facing functions and growing your practice while outsourcing most administrative aspects of running an advisory firm to someone else.
Finally, in the middle of the outsourcing spectrum is the “partial outsource” solution.
Some advisors appreciate the simplicity and advantages of a fully outsourced solution while still desiring to have their own RIA regardless. For those advisors, the “partial outsource” option exists.
This is where you start your own RIA and thus have the advantages and responsibilities of doing so, yet still access many of the needed solution providers via a single outsourced offering.
Such “middle office” firms often proclaim to be the best of both worlds. Have your own RIA without having to piece and maintain everything together yourself.
Which is the better path?
The answer varies from one advisor/team to another.
I have spoken to advisors who love exploring the fintech universe to source and integrate a bespoke tech stack for their practice. Other advisors want nothing to do with having to source such individual pieces. Instead, they limit their due diligence to a partial/full outsourcing partner’s offering.
Each advisor/team is different, and thus each will approach this decision differently.
Fortunately, this range of options exists, both in structure and by firms to choose from.
There are pros and cons to each approach. If someone tells you they provide the perfect solution for your practice in every way imaginable, they are naïve or not forthcoming. Every option has tradeoffs. It’s a matter of determining which option is the best fit for you.
Advisors usually have the “no outsource” approach in mind initially. For many, that is the path they ultimately travel down. Others, upon fully understanding the benefits of a partial or fully outsourced solution, pivot and pursue such an approach.
Start with an open mind as you explore a possible transition of your practice to the RIA model. An extensive ecosystem of providers supports the RIA marketplace. Find your right fit, and the rewards will be tremendous.
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.
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.
