The Road to Independence 

The Steps To Starting Your Own RIA

      In the wealth management industry, the term “Independence” gets thrown around a lot.  For the vast majority of independent advisors, it just means they have switched from a W2 to a 1099 with the firm they are affiliated with. While in those situations the advisors do “own” the client relationships and the clients would likely follow them if they switched firms, they are not the owners of their business.  For those that want to truly own their businesses as well as own their client relationships, the only option is to create a Registered Investment Advisory (an “RIA”)firm.  However, such step is not for every advisor and there are significant pros and cons to creating your own RIA and becoming truly independent.   

Start With Your "Why"

      The first, and most important question, an advisor needs to ask themselves when considering creating their own RIA is simple, Why?  The answer cannot simply be “to make more money” because if structured incorrectly, that can very quickly not be the case.  If instead your “Why” is that you wish to own and define every single aspect of your advisory business, Market to your clients exactly how you wish, create a system of rules and procedures that are tailored to your business and create a business that could live on after you, then creating your RIA may be the decision for you. 

      Many advisors feel pushed to creating an RIA to be able to market themselves to attract new clients in ways their current firms do not allow. While creating your own RIA does allow you to do that, you still must have a sufficient compliance system to track and archive what you do. 

Your Business Plan – If You Don’t Have One, Don’t Do It 

      Most advisors in the financial services industry have grown their practice by matching clients to investment products that help clients grow their assets.  If the advisor has been in the business long enough, they typically have matched a very diverse group of clients to a very diverse group of products. While there is nothing wrong with this practice, if your practice is focused on matching clients to products, the compliance burden of accounting for the such new products would likely be a compelling reason not to start your own RIA.  This is the case regardless of whether your receive fees or commissions for placement of such products as almost all products are available as fee based products. However, if your focus is on the products, the compliance burden for creating your compliance system around such products will be overwhelming. 

      If your business plan is to create an “advice” focused practice where your advice and service are the product, an RIA may be the best option for your business.  To decide if this is the best fit for you, your business plan should focus on: 

• Choice of Custodian 
• Performance Reporting System
• Billing System
• Portfolio Management Platform
• Marketing and Branding
• Ensemble or Enterprise Firm Focus

      From my experience and learning my lesson the hard way, the most important first decision you want to make is whether you are building an Ensemble or an Enterprise.

Ensemble of Enterprise

      The choice of whether you want to bring together a group of advisors which have their own brands and run their own firms under one back office system (an “Ensemble”) versus bringing advisors into the firm that you create and build to be part of your firm (an “Enterprise”) is a critical decision to make.  The compliance burden for each if very different.  If you are interested in creating an ensemble Click Here (Matt Sweeney’s Podcast) for a great example of creating one.  If you are interested in the enterprise model, Click here (Jay Pelham’s Podcast) for a great example of creating one. 

The Investment Platform- Build It or Bundle It

      If you are working at an Independent Broker Dealer and are utilizing the investment platform they are offering and are happy with it, that is a very good reason not to go RIA.  Once you’ve made the decision that creating your RIA is the way to go, You are going to have to build your investment platform.  The pieces that you need are Custodian, Trading, Billing and Reporting.  If you build the platform from scratch, the start up costs can be considerable.  You will have to spend considerable time learning all the systems and getting yourself or your staff trained.  If anything goes wrong, you have to fix it. Here is the list of Alternative Custodians.

You Must "Know Your Numbers" 

      One of the main things advisor focus on is the haircut they get at a broker-dealer as the main reason why they want to create their own RIA.  The first step in understanding your numbers is to take a deep dive into what do you get for that haircut?  The main item you get is compliance assistance.  At an IBD, their compliance systems are set up to account for hundreds of different business models and thousands of different products.  If this fits your business plan, there likely is a lot of value.  After compliance, the next most important items is investment platform. 

      If you are fully committed to your IBD’s investment platform, the platform fees and enhanced payouts likely make it financially in your best interest to stay with your IBD even when you’re getting the haircut.  If you use an outside Investment Platform (Click here for Review of TAMPs), it will almost never make financial sense to stay with your IBD. 

Compliance- Keep It Simple

      When you own your RIA, you must “Own your ADV”. What that means is simple,  single thing you say that you do or do not do in your ADV you must DO OR NOT DO.  Many advisors think it’s as simple as getting a template of forms from a large compliance company, changing the name of the firm and you are off and running.   

      One of the best exercises I recommend is to go and read the ADV for the firm you are currently at.  If you are at an independent broker dealer, the ADV will usually be over 100 pages. The reason for that is that they must go through and explain all the products and services offered by ALL the advisors in their firm. 

      If you want to focus on financial planning only and wish to bill in different ways or present your planning advice and recommendations in a different way, creating your own RIA would allow you to do that.  When audited by the State or SEC officials, the focus is on investment management regarding your trading and fees associated with the trading. For Financial planning, you can be very flexible in how you execute (only thing is don’t take fees 6 months in advance of providing the service.) 

Click here for a great article on the initial steps to consider when deciding where to file to create your RIA.