This story is the first in a series Financial Planning Chief Correspondent Tobias Salinger is writing on how to build a successful RIA. Check back weekly for the next story, or find it by following Salinger on LinkedIn.
Despite the consolidation among registered investment advisory firms and the costs and tasks involved with operating them, the volume of RIAs keeps growing every year.
The question of whether and when financial advisors should launch an independent RIA represents one of the profession’s most important dilemmas — and one experts say should take into consideration an advisor’s business goals, client base, skills and existing scale. Any advisor may see the pros and cons differently at one time or another, depending on the stage of their career, size of their business and ultimate aspirations.
Some say the expenses and duties tied to running a business on top of trying to manage and expand a base of wealth management clients loom too large for the vast majority of advisors. To others, hanging the shingle of a new RIA gives advisors with a client base of any size a means of building a business based on their own principles, free of any other bosses but themselves.
That appeal has helped drive the number of RIAs registered with the Securities and Exchange Commission to record levels for a dozen consecutive years, according to the annual snapshot compiled by compliance firm COMPLY and the Investment Adviser Association, a trade group.
9i Capital Group
“I’m glad I took this step when I did — I just wish I had taken it sooner,” Kevin Thompson, CEO of Fort Worth, Texas-based RIA firm 9i Capital Group, said of the January 2023 opening of his company. “This has been the best thing I could have done in this business, but I was not ready to do it earlier, and I had to make sure I was prepared for what was coming.”
READ MORE: RIAs are growing rapidly but not equally. Here’s why
Break out the CBA
Thompson recommended that advisors conduct a careful, emotion-free analysis of the costs and benefits, including peer discussions with planners who have created their own RIAs and a calculation of the date that they will recapture the lost profit or wages from leaving any prior firms.
When they crunch those numbers, the challenges and accompanying costs will likely outweigh the advantages, said Jason Smith, CEO of Westlake, Ohio-based advisory practice JL Smith, RIA firm Prosperity Capital Advisors and training and consulting company Clarity 2 Prosperity Enterprises. Last month, Greenleaf Book Group released Smith’s latest book, “The Rainmaker Multiplier: How to Create a Self-Sustaining, Scalable Financial Planning Business.”
Unless advisors aim to run “more of a lifestyle practice and not actively try to do marketing and business development,” they should amass at least $1 billion in client assets in their current roles before they consider launching their own RIA, Smith said. By that calculation, more than 69% of RIAs in last year’s snapshot are too small to manage areas like technology, payroll and investment management on their own.
To Smith’s point, the other 31% of the firms in the channel manage more than 97% of RIA assets. Prosperity Capital didn’t reach real profitability until its network of teams reached $3 billion in client assets, he said.
“I would just caution anyone about getting into the business of technology, compliance, supervision, operations, trading, billing and investment management,” he said, noting the availability of RIA platforms and third-party managers to handle many of the responsibilities. “I feel like it gave us the ability to gather assets, instead of having to focus on managing the assets.”
READ MORE: Solo advisors can thrive in a consolidating industry. Here’s how
What’s your biggest priority?
To be sure, large wealth management firms press their economies of scale in the marketplace, and they have a business interest in convincing advisors to give up the idea of owning an RIA. But they’re adapting toward working with advisors through any type of brokerage or RIA affiliation or vendor service of their choosing.
The requisite size of client assets for launching an independent RIA amounts to about $250 million or $500 million, according to Jodie Papike, CEO of independent advisor recruiting and executive placement firm Cross-Search. That number used to fall somewhere closer to $100 million, in her estimation.
Once advisors “really peel back the expenses of running an RIA” versus using an outside platform, brokerage or other service provider, the numbers often favor the latter, she noted. Those circumstances could shift, though, if an advisor feels passionately about using a particular custodian or another aspect of the business.
“They want to take that on, and that’s their top priority and they’re willing to look past the other factors to have that control,” she said. “It typically is pretty close economically, until you get up into the really large range.”
READ MORE: Independence? It depends
Are you an entrepreneur, an advisor or both?
Papike and Cameo Roberson, CEO of advisor coaching and consulting firm Atlas Park Consulting, mentioned the importance of advisors homing in on their particular answers to the question of “why” and their definition of the word “independence.” Earlier this year, Roberson and a dozen participating co-authors released a new book called, “Beyond the Broker: Navigating Financial Advisory Independence.” In its pages, Roberson discusses the distinction between “entrepreneurship” and “intrapreneurship,” she noted in an email.
“Working at an RIA and building one are two different skill sets. At a high level, if you don’t want to build an RIA from scratch, take on all the risks, or if you don’t consider yourself an entrepreneur, then you’re likely not a good fit to launch your own RIA,” Roberson said. “In the former, you take on all the risks (and rewards). In the latter, ‘tucking’ into a corporate RIA can give you some freedoms on both sides of the coin. Risks and rewards are distributed accordingly. Working in the RIA space is not ‘one-and-done,’ and advisors should evaluate all options to see which one makes the most sense.”
Prosperity Capital Advisors
That thoughtful consideration brings, on one side, the liability for trading errors and the status of a “small fish” that won’t be able to tap into “benefits that a larger RIA gets from custodians, from money managers,” Smith noted. However, those “fiercely independent” advisors who are OK with paying to outsource some compliance duties may still find value in going it alone, he said.
“You’re just more trying to service your existing client base — you and a small team,” he said. “If you don’t want that Big Brother saying, ‘Yes,’ or, ‘No, you can’t do that,’ then maybe you should have your own RIA.”
READ MORE: How AI reduced the need for a virtual assistant: Show Me Your Stack
Finding the essentials
That control of technology and the ability to provide full-bore planning without any mandates from a corporate office constitute some of Thompson’s favorite parts of owning his own firm, he said. After years of being told that tax and estate planning were out of bounds for client services, Thompson has become an enrolled agent.
As far as technology goes, he always advises fellow planners to “keep it lean and mean” and not to “go for the shiny objects.” Launching an RIA means “you can truly be who you want to be,” he said.
“If you want to have a good client relationship, it has to be more than just an investment portfolio,” he added. “When a client comes to us, they know they’re getting taken care of, and that’s what I live by.”
Every aspect of those deliberations will play out in divergent ways across an industry spanning about 300,000 advisors. For one advisor, a feeling of disconnection with their RIA’s leadership made an independent business more attractive, Roberson noted. Others are working in a different channel of the industry in another phase of their careers.
Atlas Park Consulting
“Small teams or solos should tap into their network and talk with peers who’ve made the leap and industry consultants to give perspective of the road ahead,” she said. “The starting point can be layered, if you’re leaving a wirehouse or launching as a career changer versus those who are already working for an RIA and aren’t happy where they’re at. The launch plan will look different, so understanding this will help you focus on what you uniquely need.”
