Ask Brad: The Two Big Hurdles to Starting an RIA

Some advisors don’t have the skill or desire to manage those responsibilities, regardless of the rewards to those that do. I respect that.

The profile of your practice, services provided to clients, etc., might make for a poor fit in the RIA model.

For those who are a good fit and who aspire to transition their practice, some variables could prevent you from doing so. The impact can be severe, applicable to only a small percentage of the advisor population.

While there are dozens of variables and decisions that go into transitioning to the RIA model, two of the more meaningful hurdles are registering your RIA and getting a clearing agreement with a custodian.

For most advisors, solving for those hurdles are more a “how” than an “if.”

A typical example of the latter is if an advisor has either 1) a challenging CRD record and/or 2) is considering the RIA model because they were terminated by their firm.

A tenured wirehouse advisor with a large practice contacted me, expressing his desire to transition to the RIA model. From the questions he asked, it was clear he had been thinking about this for a long time.

But what triggered him to take more concrete steps towards such a path was being terminated from his broker/dealer. His termination was for significant circumstances.

He contacted me with a distaste for the broker/dealer model (which had just fired him), with the belief that, albeit under a hastier timeline than he preferred, he could simply move to his own RIA and never have to be at the mercy of someone firing him again.

It is rare in my profession that good bedside manner is in order, but this was the case. Here was an advisor who had his career upended and his family income abruptly halted, facing stress and uncertainty.

There, face-to-face on a Zoom, I had to break the news to him that the lifeboat he thought he had was perhaps out of reach. I explained it was not a guarantee that the SEC would “grant” his RIA registration (the SEC does not technically “approve” registrations).

It had not occurred to the advisor that such a likelihood was even possible.

The regulators (SEC or state) will consider, among other things, who are the main owners/principals of the RIA. If they have concerns with those individuals, such as significant CRD disclosures, they may decline the registration request.

Various regulatory bodies have taken heat over the past few years for not communicating with each other. A broker booted from the securities industry would quickly reestablish themselves as an insurance salesman under the separate insurance-regulatory authorities. Dots were not being connected between regulators.

In the advisor’s case, the SEC would consider his abrupt and challenging reason for being terminated from a broker/dealer. At a minimum, it could significantly slow the registration process. Time was not on the advisor’s side as he sat on the sidelines waiting to service his clients.

Worse case, the SEC declines the registration altogether.

If the advisor could overcome the registration hurdle, my next dose of bad news was he might not find a custodian that would work with him.

If, as an RIA, you intend to manage client assets as part of your value proposition, you will need at least one custodian to hold your clients’ assets.

A necessary step for advisors considering the RIA model is to conduct due diligence on custodians. Custodians have different value propositions, asset minimums, technology interfaces, pricing schedules, etc.

As you conduct due diligence, a custodian will ensure they are comfortable working with you. A custodian might not be willing to accommodate your business for several reasons.

One variable is your record in the industry. In the advisor’s case, his termination would undoubtedly be considered. Once again, this likely would either significantly slow the custodial-approval process and/or result in the custodian being unwilling to contract with the advisor’s RIA.

This potential outcome was news I also had to break to the advisor.

By this point, the Zoom had taken an understandable turn. The advisor went from pondering how quickly he could do this and what the best solutions providers were to an existential question of whether the RIA path was even an option for him.

The emotions the advisor already had coming into the Zoom were unfortunately compounded.

I share this story as a reminder that multiple factors go into determining whether the RIA model is a fit for your practice. It is important to understand how the model works, the options available to you, and the steps involved in a transition.

Most advisors will not encounter insurmountable hurdles like those described here. Knowing what the hurdles are to begin with, though, is part of the process.

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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