3 Signs It’s Time to Become an Independent RIA
As we kick off a new year, many financial advisors take this time to consider if their current platform model and provider are the right fit for their future. FAM’s November article broke down the forces that push and/or pull an advisor from a broker-dealer or wirehouse model to the fully independent RIA space. It answered the question “Is the RIA model right for me?” and covered the motivations behind what would drive an advisor to make a change. This month, we will continue the topic with a focus on more tangible aspects of deciding when to become an independent RIA, and answer the question “When is the move to an RIA right for me?”
The decision is highly personal, and as an advisor you need to focus on the specifics of your situation. While there are many factors to consider, three key indicators are worth examining that will give you a sense of if or when you may be ready to take the leap to independence.
1. EXAMINE YOUR BOOK
There are two aspects of your book to consider when weighing a move to the independent RIA space: your overall assets under management and the split between your fee-based advisory business and your commission business.
One of the biggest misconceptions about going the independent RIA route is that you need at least $100M in AUM in order to do so. That is patently false. The truth is that there is no minimum asset requirement to become an independent RIA. You can start with $0, and plenty of advisors do.
Rather than strictly examining AUM, a better number to analyze is how much revenue you would need to run your business and maintain a certain lifestyle. If you use the industry standard of 1% AUM advisory fee as a guide, you can calculate your revenue as 1% of your potential AUM and begin to get a feel for the revenue you will generate. From there, you will be able to figure out if that revenue is enough to run your business and support yourself. It should be noted that there are lending opportunities that can be leveraged to help with start-up and ongoing costs of the business. For advisors who find this type of business mindset may be too much for them, it may also make sense to explore joining an established RIA.
When examining your ratio of fee-based vs commission business, the first threshold to cross is at least 50% fee-based. Until you cross the 50% mark, a move to the independent RIA model might result in sacrificing more than you stand to gain. The broker-dealer model was created to cater to commission business, and if that figure makes up over half of your book, it mostly likely means that you are in the best model for your business.
If your business is between 50-80% of fee-based business, the first model you may want to explore is the hybrid RIA model. This option gives you more freedom and flexibility to run your practice and allows you to retain your commission business. The potential drawback to the hybrid model is that, to maintain commission business, you must maintain a broker-dealer relationship and, therefore, continue to subject yourself to FINRA regulations.
The next magic number starts at around 80% fee-based; at this point the fully independent RIA model may be your ideal solution. Many independent RIAs will have an RIA friendly broker-dealer option where you may be able to maintain existing business. By leveraging the freedom and flexibility to grow and expand your business more rapidly, most advisors in this option find their business growth quickly alleviates any concern over discontinuing commission-based business.
2. EXAMINE YOUR CONTRACT
Before making a move to become an independent RIA, it is critical to understand your contract and any obligations you may have to your current firm. There are two common obstacles that an advisor making a move faces at this point. The first is “ownership” of the client relationship. Although a person or entity can not actually own a human relationship, what they can lay claim to is your ability to communicate with and solicit clients once you’ve left a firm. Unfortunately, many advisors do not realize, until it is too late, that the firm “owns” their relationships—not them.
There are regulations in place to protect advisors moving firms, namely the Broker Protocol. The Broker Protocol allows exiting advisors to take, at a minimum, 5 critical pieces of client information: client name, client address, client phone number, client email address, and account title of the clients that they serviced while at the firm. While this may not sound like a lot of information, together they can amount to significant data points that, when properly organized, can go a long way in creating a smooth and efficient transition. Not all firms are part of the Broker Protocol, but you can always check your firm’s status on the Broker Protocol directory. Regardless of your firm’s enrollment in the Protocol, it is best practice to consult with an attorney before making a transition to navigate a smooth exit and avoid common missteps.
The next piece to consider concerns any financial obligations or agreements that you may have outstanding with your firm. This can be deferred compensation owe to you, forgivable loans, notes with an outstanding balance, or pending incentives that may result in a significant sacrifice on your end. Any of these obligations may or may not be a deal breaker, but they can affect the math on the timeline or flexibility of your move.
3. EXAMINE YOUR GOALS
Long- and short-term goals are different for everyone, but the simplest place to start is by asking yourself “Is this firm where I want to be for the rest of my career?” If the answer is no, then it is imperative to start exploring other options immediately. Even if you don’t plan to move for another 3-5 years, the more time you spend on educating yourself on your options in this ever-changing marketplace, the more prepared you will be to make an informed decision when the time comes. Furthermore, the more time you spend bringing clients onto a platform you don’t intend to stay on, the more work you are creating down the road when the time comes to transition.
This is especially true in the broker-dealer world. Whether it is through deferred compensation or contractual obligations, broker-dealers do their best to tie your practice to their firm. Having a plan in place can prevent these hooks from setting in too deep and becoming a deterrent to making a move even when you are unhappy.
The reasons advisors decide to change platforms can be organic (driven by their own desire for a different type of business model) or inorganic (driven by changes made by their broker-dealer that make cost and ease of doing business intolerable). When this happens, advisors are left scrambling to find a solution and may end up making a decision that they regret. The best way to avoid this scenario is to stay aware of your options and have a plan in place that will allow you to be proactive rather than reactive. For advisors who plan to “one day” make the move to the RIA model (you know who you are), your work and hurdles are compounded when the due diligence process is put off until these arbitrary benchmarks are met:
“Once I hit $100M AUM…”
“Once my note is paid off…”
“Once I have 10 years of experience…”
This results in staying too long in a sub-optimal environment and missing out on potential growth. Only by taking time to understand the options available and understanding where you fit into the broader environment will you have ability to make the decision that is best for you and your clients.
To learn more about the power of partnering with Fountainhead Asset Management, visit our website at fountainheadam.com. Enhance Your Story With Us.
IMPORTANT DISCLOSURE: The information contained in this report is informational and intended solely to provide educational content that we find relevant and interesting to clients of Fountainhead. All shared thought represents our opinions and is based on sources we believe to be reliable at the time of publication. While we continue to make these reports available, we do not update past reports in light of subsequent events. Nothing in this letter should be construed as investment advice; we provide advice on an individualized basis only after understanding your own circumstances and needs.