When It Make Sense To Tuck In Your RIA
By Mark Contey
July 25, 2022
https://www.fa-mag.com/news/when-it-make-sense-to-tuck-in-your-ria-68943.html?section=40
Owning your own RIA means full control and independence—it’s one of the top reasons financial advisors choose to leave the stability of the employee channel. The idea of making your own decisions on how to build and grow your business is alluring.
Of course, there are challenges and issues that should not be overlooked. Independence and full control can also mean the burdens and risks of operating the business falls squarely on the shoulders of the owner. Real estate decisions, human resource responsibilities, staffing needs, managing day-to-day regulatory compliance and more, compete for an advisor’s attention, taking time away from fostering client relationships, prospecting and portfolio management.
Timing Is Everything
Successful independent advisors often come to a point where they are willing to consider giving up some control over their business in return for the support a larger firm can bring.
There is no litmus test to determine when an independent office should roll-up as an independent advisor representative (IAR) under a larger RIA. Each situation merits its own evaluation, but there are some general circumstances to consider. Advisors need to answer what is most important to their businesses: managing every detail of the operations or focusing more of their valuable time on their clients.
The Covid-19 pandemic’s lockdowns, social distancing and remote interactions affected everything from the way we worked to how we socialized. For many, it also had a profound impact on their priorities and how they view quality of life issues. More independent RIAs are taking a hard look at what they want out of their businesses.
Cerulli Associates reports that over one third of advisors are planning to retire in the next 10 years. As they near the end of their careers, many may be evaluating how they want to spend their waning workdays. Monetizing their practices and spending less time on back-office operations could be extremely attractive to this group.
The growing complexities and costs of running an independent RIA are making it increasingly difficult for advisors who want to work in their business vs. constantly working on their business. Giving up their own RIA can make the difference in allowing them more time to pursue their passion of working with clients and building relationships.
Size, And Strategy, Matters
If you are one of the many financial advisors who are thinking about what to do with their RIA, there are a number of factors to consider before making a change.
Firms with $125 to $150 million AUM may want to roll-up under another RIA if they are not on a growth trajectory to $200, $300 or $500 million. Many of these smaller firms may consist of the advisor and one assistant, which can be difficult to achieve operational efficiencies.
Small independent RIAs that work with large custodians may find themselves in the crosshairs of cost-cutting measures. Firms with $125 to $150 million in assets can be easy targets for custodians that may not see a strong ROI in providing comprehensive support services, especially if those RIAs are not exhibiting growth. These smaller RIAs could be asked to find another custodian, which causes business disruptions.
It’s important to note that not every RIA within this AUM range should give up its independence. The real test is whether managing daily operations is hampering the advisor’s ability to growth. If the firm has the motivation and ability to conceive and execute such a strategy, then they may want to stay completely independent.
Drowning In Detail
Daily business operations are not the only challenge facing small independent RIAs. The fast pace of evolving technology and regulations can also hamper an RIA’s ability to focus on managing relationships and growth. Many of these firms make up for their lack of scale by outsourcing everything from portfolio management to regulatory compliance. This strategy comes with its own complications, including choosing the right systems, managing third-party vendors and integrating tools into existing platforms.
Consider Joining A Larger RIA
Being an independent RIA has been a great business model for advisors yearning for complete decision-making control. Many successful practices have been built over the years by entrepreneurs who have built their reputations by focusing on serving the financial needs of their clients with distinction. But the current competitive landscape and the changing market, technology and regulatory environment are making it harder for smaller firms to thrive.
Firms with between $125 to $150 million AUM and no clear path toward growth, might be better served becoming an IAR under a larger RIA. We often hear from advisors that giving up their RIA and transition to a larger firm gives them the piece-of-mind to know that others will manage their operations and compliance so they can focus on what they enjoy most—managing relationships.
Mark Contey is senior vice president and head of business development at Chicago-based LaSalle St., an independent wealth management firm with over $12 billion in assets and 300 financial advisors.
