For advisors managing assets around $250mm who are looking to break free of the limitations on their ability to grow and serve clients, the independent space offers several viable options.
Part two of a multi-part series featuring options for financial advisors in an expanding industry landscape. See part one: Emerging Enterprises: Independent Paths for Advisors Managing $100mm or Less
Financial advisors frequently talk about how hitting different “plateaus” can impact their options when considering change. For example, advisors managing assets around $100mm will have different options from those with $250mm or $1B AUM.
Regardless of these plateaus, the desire to make a change is often motivated by stalls in quarter-over-quarter growth and missed asset projections—and “big picture goals” for the future, while still achievable, seem to be a steeper hill than ever before.
It’s also a point where advisor bandwidth becomes strained. Time once spent on business development and relationship management is replaced with an hour-long phone call with compliance and operations, and the technology solutions that were once suitable for 50 households now seem manual and archaic at 100 households.
Exploring the Options
Optionality for advisors with $250mm AUM has never been better. Having met or surpassed the minimum AUM requirements for most major firms, these larger advisors have an expanded menu of choices including boutique broker dealers, all the major custodians, and service providers that allow advisors to launch and own an RIA but take care of the nuances of the back- and middle-office—all of which serve to alleviate regulatory headaches, provide more business flexibility and autonomy, and offer best-in-class technology.
Here are 5 options for advisors considering independence in the $250mm AUM range:
1. “In-House” Independence
Some “traditional” firms today offer an avenue for their W-2 advisors to transition “in-house” to independent contractor (1099) status—including Raymond James, Wells Fargo and Ameriprise, along with many others.
These in-house options allow advisors to remain with their current firm, without the disruption of repapering, while gaining a better payout, more autonomy and business ownership. An advisor is likely to see the benefits of the new economics almost immediately—the change from a roughly 45% payout (at a traditional employee firm) to an 85-90% payout (as a 1099 affiliate of a traditional broker dealer) will be significant even with the incursion of business costs (staffing, affiliation fees, benefits, office expenses, etc.).
But while firms have a vested interest in keeping the client base under their umbrella, on a micro-level the W-2 channel tends to be significantly more profitable for the firm and managers are financially invested in advisors remaining part of their branch. Because of these factors, some advisors report running into “layers of red tape” when deciding to look at changing channels in-house.
Also, many times this does not solve for problems an advisor is facing with their firm. For example, the compliance oversight falls under the same umbrella as the employee channel. If an advisor’s friction with their firm is in this department, an in-house move would do little to alleviate it. Further, advisors making this move are still captive to the platform and beholden to the technology, products and services already offered. In addition, advisors who opt to pursue this route will not be able to monetize their practice via a lucrative transition deal.
2. Affiliating with an Independent Broker Dealer
If an in-house transition is not an option or will not bring about the change an advisor needs, they can choose to affiliate with an independent broker dealer. This option can provide everything an advisor needs to operate their business including compliance services, a turnkey technology stack and practice management consulting.
When affiliating with a broker dealer, an advisor will be able to seize the opportunity of a potentially lucrative transition deal—typically between 30-to-50% of the previous year’s revenue (with certain platforms offering in excess of 100%). And at the $250mm AUM mark, an advisor will be an attractive recruit to any broker dealer on the Street.
Client data and business ownership are other advantages of the broker dealer world. When independent as a 1099 contractor with a broker dealer, advisors generally have legal ownership over their client data and book of business. This allows not only for easier transitions should they desire to make a change, but also more lucrative valuations than a “sunset program” because a sale will be at long-term capital gains and an advisor can seek multiple bids which ultimately drives price.
Although those who affiliate with a broker dealer do own their practice, they are also “captive” to the broker dealer they choose—meaning captive to the technology, custodial and vendor offerings that are approved or provided by the broker dealer. They do not have the option to shop “the Street” or access to whole of market.
3. Supported Independence – Joining an Established RIA
Some advisors run heavily fee-based practices and want the transparency of pricing and the optionality that the RIA space offers but see themselves as financial advisors and future CEOs—and not necessarily operations or compliance professionals. That’s when many choose to join or affiliate with an already established RIA, a firm with a similar mindset and vision. Advisors can choose to affiliate directly with an RIA as a 1099 independent contractor, continue to leverage an associated broker dealer if needed, and take advantage of the tried-and-true mechanisms of an established business including technology, compliance and staff.
Advisors looking in this category will find that the suite of options has expanded exponentially in the RIA world. Many firms that were once not available to those at a lower asset threshold have now become potential partners. More sophisticated RIA solutions offer services such as on-staff tax professionals, legal support and financial planners that can help advisors scale their practice toward high net worth clients. For higher net worth focused advisors, they may find the investment platform of an RIA to be more bespoke given access to direct private deals, managers not looking to “pay for shelf space” at a major brokerage firm, and technology that enables advisors to advise and report on assets held away.
Though these strategic partners will come with a heavier price tag, many are built by ex-wirehouse leadership to solve the exact problems advisors may be experiencing. Things like “common sense” compliance, and a cultural fit of sophisticated advisors, along with the elimination of production goals and the pressure of “selling” products, can help advisors resolve their former employee channel issues without the risk of feeling “alone.”
If launching an RIA is an eventual goal, these RIA platforms give advisors the ability to be multi-custodial with the option to leave assets at the current custodian in the event of a future move. But for those advisors looking to monetize their practice via a transition deal or be made whole on their deferred compensation, this is likely not the best option.
4. Supported Independence – Launching an RIA (with a service provider)
Advisors or advisory teams who have reached the $250mm asset level are now within the range of a popular option called “supported independence.”
Like joining an RIA, advisors who opt for supported independence are leveraging an organization that has a vested interest in their success—from assisting with the initial regulatory responsibilities to the implementation of a tech stack, investment solutions and marketing plans. However, the primary difference is that in this model of independence, advisors own their businesses and have their own ADV registered with the SEC or state.
What does that mean? Unlike joining an RIA where you are insulated beneath the RIA’s ADV, in this model you are ultimately responsible for your practice and compliance. Your name is on the door and you are choosing to “hire” a service provider so you can outsource business functions you would prefer not to do in-house.
It’s an option for advisors who are looking to maximize their business flexibility and control—in which advisors answer to only their clients and the SEC, yet still have the support of a sophisticated platform provider.
While the supported independence model continues to thrive, an important consideration is cost. Joining an IBD or RIA can allow an advisor to monetize their practice via a transition deal. However, leveraging a service provider for supported independence requires an initial capital investment, as well as the ongoing basis point charge to cover the costs of the services at the advisor’s disposal. It is because of these costs that the economics of supported independence only begin to make sense for the advisor at the $250mm AUM level and above.
5. Launching an RIA firm (directly with a custodian)
Those who are hyper-entrepreneurial and motivated by the prospect of running a business, building enterprise value and having full control of their balance sheet often go fully independent and launch their own RIA firm. At this asset threshold, every major custodian should show an interest and advisors may even consider leveraging multiple custodians.
While in many broker dealer relationships there are incurred fees and haircuts associated with an advisor’s affiliation with the firm, as RIA costs are fixed and completely controlled by the advisor. Initially, an advisor starts with a 100% payout and then pays their associated costs. While some costs are commonplace (compliance, E&O insurance, technology, etc.), the ultimate control of the balance sheet means the advisor-business owner can choose how to allocate their resources. With the expanded RIA ecosystem, the advisor can outsource what they would like (compliance, money management, planning, taxes, etc.) and focus on where they see their time best spent.
An important consideration for these hyper-entrepreneurial individuals is capacity and responsibility. While launching an RIA truly allows the advisor to build an empire – free from the constraints of a broker dealer – they are also ultimately responsible for every aspect of the business.
The simple truth is that there are more options for financial advisors than ever before—and the advisor is in the driver’s seat. Regardless, the decision to evaluate change should always be met with a thorough assessment of what the advisor is trying to solve for, plus in-depth research and due diligence.
For those advisors who have identified slower growth or an increasingly uphill climb to meet their goals with their broker dealer, the independent channel offers many viable paths.