Becoming an Independent RIA: Navigating the Options

These days, more and more advisors are thinking about becoming independent RIAs so they can retain more of what they earn, gain greater control over the products they offer, and build equity into their own business, not someone else’s. But many advisors mistakenly believe that, in order to reap the benefits, they have to start a firm from scratch, according to Chris Winn, managing principal at AdvisorAssist, a service that helps advisors go independent. In fact, nothing could be further from the truth.

Today, more than ever advisors have myriad choices; and which path you choose depends largely on your personal goals and business needs. “It’s helpful to evaluate all the options and understand them so you can make the best decision” said John J. Furey, principal of Advisor Growth Strategies LLC in Phoenix, Ariz., which helps advisors determine which model is right for them. Read on to get a flavor for a few of the top ways advisors are making the RIA model work for them.

Going solo [Do it yourself]
If you have a strong entrepreneurial spirit, like the idea of owning your own business, and want to have the highest level of independence, flexibility, and control, starting your own RIA could be for you.

If starting a firm is an option you’re considering, you’ll need to do a lot of advance planning with respect to operational support, technology requirements, staffing, office space, compliance, marketing, and more. Keep in mind that you don’t have to do it alone. There are ample resources including consultants, attorneys and custodians to help in your transition. What’s more, there are many outsourcing providers that can perform the tasks you don’t want to do.

Of course, there are trade-offs. The added time necessary to focus on the business detracts from a focus on client service. What’s more, there are added costs associated with owning your own firm, as well as greater liability and regulatory burden. That said, with the right plan and resources in place, you can overcome these obstacles.

The plug-in model [Outsource your back office]
Some advisors simply want to focus on clients, but they also want the benefits of independence. These advisors might consider linking up with an established RIA firm that offer advisors the ability to plug into their customer relationship platform, technology, compliance and support services in exchange for a portion of revenue. Advisors who choose this model can typically market themselves under a brand of their own choosing.

Concert Wealth Management, San Jose, Calif., is one firm that offers this model. In exchange for the services it offers, advisors pay Concert a fee that runs anywhere from 5 to 30 percent of management fees, depending on the advisors’ level of production. Advisors also must pay their own rent, furniture, and for staffing-related compensation and benefits. Concert provides marketing support, but advisors pay for their own materials.

“From a profitability standpoint, I can make the case that we could make an advisor 8 to 10 percent more profitable by not having to recreate the operations functions, the compliance functions, and the technology infrastructure,” says Felipe Luna, chief executive of Concert.

Some innovative firms, such as Dynamic Wealth Advisors in Scottsdale, Ariz., will allow you to pick and choose the services you want. Another firm, Cooper McManus, Irvine, Calif., will handle all of your regulatory and compliance functions in exchange for 10 percent of your revenue.

Joining an existing firm as a partner, employee or an independent contractor [Trade in your old boss for a new one]
By joining an existing firm as a partner, employee, or independent contractor, you’ll get the benefits that independence offers, meaning better economics and greater product access. This could be a good option for smaller and less experienced advisors. Of course, the trade-off is that you won’t get to call all the shots, promote your own brand, or keep as much of the payout; for some people, though, that’s perfectly fine and a great way to get started in the independent RIA channel.

OJM Group, based in Cincinnati, is one firm that’s in the process of actively recruiting advisors. Advisors can join OJM Group as an employee or independent contractor (depending on which tax model they want). They can choose to locate in an existing facility or start their own practice under the OJM name.

One benefit of being an employee is that you don’t have to worry about (or pay for) many of the things you would if you were on your own. When you are on your own “there are a lot of things you get bogged down in other than meeting with clients,” says Jason O’Dell, a principal of the firm.

Cooper McManus also lets advisors who are willing to make a three-year-commitment to the firm take a test drive in the RIA world on a supported advisor platform. All expenses are paid for in exchange for a lower payout than for someone who is completely independent, but higher than that of a wirehouse rep. At the end of three years, advisors can retain the status quo, or they can choose to market under their own brand, start paying their own expenses, and in return, receive a higher payout. “After three years, the fear of the unknown often dissipates,” says Arthur Cooper, the firm’s managing partner.

Learning the ropes is why Nicole Hanson, an advisor at Personal Financial Consultants Inc., a state-registered RIA in Emeryville, Calif., joined the firm as an employee in 2007. She didn’t have much experience and, as a result, found it helpful to be part of a team environment. One day she’d like to have an ownership stake, but for now she’s content to learn more about the business. “I’m a team player. I like working alongside other professionals,” she says.

The holding company or roll-up model [Refinance your practice]
For advisors looking for an eventual exit strategy, entering into a strategic relationship with a holding company or roll-up firm such as HighTower, United Capital, United Advisors or Focus Financial might be a viable option. While they have different models, all these firms provide access to upfront capital, infrastructure, operations, compliance, and more, to varying degrees. Affiliating with a holding company might also be appropriate for wirehouse advisors who need the upfront money to repay debts still owed to the firm they are leaving.

The flip side, however, is that it depends on what you are looking for, says Winn of AdvisorAssist. Some models allow for the firm to continue with its proprietary philosophy and investment process while others consolidate the options. The other con is that as part of a holding company you have to share a piece of your ongoing revenue with the firm. You lose a level of autonomy because someone’s looking at your numbers, your metrics and has a vested interest in your business.

“You won’t have complete control, but you’ll have varying levels depending on the firm,” Winn says.

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