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Exploring the RIA Space

Exploring the RIA Space

Exploring the RIA Space

Posted by Louis Diamond

By Louis Diamond

Why so many wirehouse and regional firm advisors are attracted to this flavor of independence

R-I-A: These three letters are dotted across industry publications and conference agendas, and on the minds of most advisors (especially post-DOL ruling), but why all the hype? And, why are we watching so many long tenured top advisors and teams moving in that direction?

By definition, an RIA – short for Registered Investment Advisor – is a fee-based, fiduciary advisor or firm regulated by the SEC. It’s an option for entrepreneurial-minded advisors who are looking for maximum freedom, flexibility and control along with the ability to build equity, create a legacy and build something in their own image. Today there are many versions of independence to choose from—from independent broker-dealer to quasi-independent models like HighTower Advisors and Steward Partners, to RIA hybrid options. But for those folks chafing at the limitations, bureaucracy and lack of creativity that working as an employee might mean, the RIA or RIA hybrid space may indeed become the favored option.

Looking at the RIA world through the eyes of a wirehouse advisor

Linda was starting to feel that where she was no longer served her or her clients best. A 22-year veteran of a major brokerage firm, she built an 85% fee-based, financial planning-centric business managing $300mm for high net worth families. While she credits her early success to her firm’s training program, sterling brand and robust resources, more recently she was feeling limited in how she was able to serve clients and grow her business. Outdated technology, an overly vigilant compliance culture, proprietary products and relatively low payout overshadowed what she once felt was “good” about the firm.

When she saw a top “corner office” team depart her branch to start a hybrid RIA she began to more seriously consider the RIA space. Familiar with the space only through news headlines, she wondered what the draw really was. Why would they leave behind the comfort and ease of being an employee at a leading financial institution? Why didn’t the team go to another well-known financial institution? Could there be a better opportunity to build her business and serve her clients elsewhere?

So she embarked upon a due diligence journey and here is what she found:

  • Open Architecture: While it is true that wirehouses offer advisors access to countless managers, funds and products, typically a platform is limited to the providers who “pay to play”. Additionally, advisors are often incentivized to sell proprietary products, which runs contra to being a true fiduciary. In the RIA space, advisors are held to a fiduciary standard and have the freedom to work with any product provider and can turn to any financial institution for their clients’ banking, lending and other complex financial needs.
  • Control Expenses: Regardless of how “lean” a business an employee advisor runs, their take-home pay is determined by two factors: production and length of service. An RIA principal, however, only pays for the essential goods and services, and are compensated from the free cash flow of their business. They have full discretion over this metric by finding synergies in areas such as staffing, vendor selection and technology. Additionally, RIAs drive “operating leverage” through economies of scale, which is realized when fixed costs stay consistent, but each incremental dollar of revenue eventually flows to the bottom-line. Thus, an average net payout in this space tends to be around 65-70%.
  • Business Customization: While an RIA is responsible for its own compliance, oversight and technology decisions, it is able to build a bespoke firm that best fits the specific business. As long as a firm remains in compliance with applicable laws, it has free rein to service clients, market their services (including social media), and maintain outside business activities as it sees fit. Additionally, RIAs can charge consulting fees and truly customize the client experience—especially important for advisors working with high net worth/ultra high net worth families. An RIA can also turn to the most innovative and efficient technologies on the market (i.e., CRM, reporting, trading) instead of relying on a clunky and proprietary technology stack.
  • Acquisition/Recruitment: The wealth management industry is undergoing a massive consolidation as baby boomers approach retirement. While employee advisors can inherit books of business from retiring advisors, they are limited to those within their branch and there is always intense competition. An RIA, on the other hand, can recruit advisors from any firm and customize their value proposition, economic package and organizational structure to meet an advisor’s needs. Additionally, the notion of acquiring or merging with significant organizations is only possible in the independent space.

While Linda ultimately found the RIA space as the best home for her business, many of her colleagues (even the fee-based ones) will decide to stay put as they value the perceived stability, turnkey nature and backstop of a major firm. No matter which direction an advisor takes, they must be completely clear with themselves on their short- and long-term goals.

While independence may be attractive to some, the decision to go that route typically lies within just how entrepreneurial they want to be. Should one choose to head in that direction, the good news about the RIA space is that much of the heavy lifting that comes with a transition can be outsourced to service providers, consultants and attorneys, giving advisors the freedom, flexibility and control they’re looking for, along with the ability to focus on building the next phase of their business.

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About Louis Diamond

President – Someone who “looks at every angle from a strategic perspective.” Sophisticated advisors and business owners alike learn quickly that they’ve found the right person in Louis when seeking counsel and clarity on growth, career management and the ever-changing industry landscape. Learn more...

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