Is RIA Worth It?

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McAttack77's picture
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Joined: 2010-05-10

Hello All,I am thinking about getting started as a self RIA and thought I might get some good input from this forum.  Before I go any further, I want to know if its possible to make it in this industry by focusing on lower net worth clients.  I know lots of people that come to me for investment adivce and the like but aren't wealthy by any means.  Is it possible to be profitable by taking on a higher number of clients with lower net worth? I am looking for a custodian that would cater to this style of managment.  That being said, I obviously wouldn't turn down high net worth individuals, but starting out I would most likely have middle to lower net worth clients.  Thoughts? Thank you.

B24's picture
B24
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Joined: 2008-07-08

Mac,Hopefully when you say "lower net worth", you are not just referring to people funding a Roth IRA each year.  You have to look at the numbers....let's just say for simplicity that you charge a 1% fee (after some fees and stuff).  Having $10mm (that means millions ) in assets under management (AUM) would give you $100,000 in revenue.  That's before ANY overhead.  You will have to pay rent (unless you use your house), technology charges, some various custodian fees, compliance costs, and various other expenses.  If you did it out of your house, I am guessing you could do it for $25K on total expenses.  That would give you net of $75K. However, if you are going to truly focus on lower net-worth folks, that $10mm might take you years to accumulate.  If you were aggressive and found 4 or 5 new clients per month, you would have, lets call it 50 new clients per year.  After 5 years, that's 250 clients.  You would need to have an average balance in the accounts of $40,000 to meet your $10mm.  And that's assuming you found 50 new clients every year, and they each had 40K or more.  In the indy/RIA world, that's too many clients, and not enough assets.  So you need to really find fewer clients with more assets.  Do you have a plan to get there?Bottom line, if you have a spouse (or other income or assets) that can support you during the ramp-up phase (call it 4 or 5 years), or your income needs are REALLY low, it could be a great way to go.  But all of those things need to fall into place to make it happen.

B24's picture
B24
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Joined: 2008-07-08

Oh, and a few custodians will allow small balances - Trade-PMR comes to mind.

loneMADman's picture
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Joined: 2010-05-10

Mac,I agree with B24's comments generally.  You might be able to help yourself by structuring your service and fee schedule for smaller accounts.  You could charge more than 1% for starters as well as have a lower tier of account where some services, for example, a personalized comprehensive financial plan, are available for an additional fee (e.g., a few hundred dollars ).  In addition to TradePMR, check out Scottrade. I am just getting started myself, with a similar philosophy to yours. 
For me, this is about making a "decent" living, doing what I enjoy,
while giving something back.  I've seen too many people with limited
investable assets, including friends and family, get screwed by
so-called professionals (brokers, banks) giving bad advice.  Everyone
deserves better than that.  This is a mid-career change for me and I
have already made some money as a corporate finance executive.  But I
still need to pay bills and accumulate a little wealth, so I will
attempt to balance the "social" with the "economic" motivations.Good luck.

matt1957's picture
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Joined: 2008-08-25

Indy RIA1% on AUM + hourly fees + fixed retainer = play golf 2 days a week.

squash2's picture
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Joined: 2010-03-09

matt1957 wrote:Indy RIA1% on AUM + hourly fees + fixed retainer = play golf 2 days a week.What?

Milyunair's picture
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Joined: 2009-09-25

Any opinions on how much AUM you need to be a viable stand-alone RIA? It used to be 50m, is it more like 100m now?

FVDA_Trade-PMR's picture
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Joined: 2008-09-24

Thanks everyone for making mention of Trade-PMR in the posts.  Yes, focussing on "middle-America" is certainly possible and viable.  It partly depends on your geography.  I know of several RIAs located in rural low cost of living places managing $15 million and they have a great lifestyle.  Bigger does not always mean best; sometimes other factors come into play.Building an RIA firm; like any other business takes time though.  The early years will be tough; you'll knock your head against the wall at least a dozen times but before you know it; your doing great.Be tenacious; enthusiastic and client-centric and you'll do fine.  Best of luck to you!Fred

aeromaks's picture
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Joined: 2007-01-13

Humn... what is your experience level and what exactly is your target market?  how much in assets? Also, do you want to manage just investments or going to be doing financial planning and insurance as well? 

AdvisorControl.com's picture
Joined: 2009-05-29

Milyunair wrote:Any opinions on how much AUM you need to be a viable stand-alone RIA? It used to be 50m, is it more like 100m now?I'm not sure when $50MM was required to be viable.  For me, once $20MM was hit life got pretty easy.  Once you pass $50MM you can pretty much coast - outsource a lot of stuff, hire a couple good employees, and have plenty left to live very well.

Magician's picture
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Joined: 2008-05-19

$50 or $100 million to be a viable RIA?  Sounds like wirehouse and Jones propaganda.

Milyunair's picture
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Joined: 2009-09-25

Sorry, I don't get it. Last I checked, for a one person office, the numbers didn't really make sense under 50m. I think 25m  was the minimum for Fidelity, but with an independent RR payout, 50m looked more reasonable. I'm also asking, how much AUM are firms like Fidelity or TD looking for these days, for a solo office guy to move from RR to RIA?

Magician's picture
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Joined: 2008-05-19

I know RIAs with $5 million under management.  They do fine.  I think Fidelity is asking $15 million, TDA doesn't care, as long as you have a viable business plan.Not to mention, they don't even check to see how many assets you are currently managing. You just tell them, and they take your work for it.

Milyunair's picture
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Joined: 2009-09-25

I wonder about the regulatory environment for small RIAs. It looked scary a couple of years ago. Wonder if it will get harder, or more expensive. I wonder if registering with the feds would be better, or keeping it under 25m and just going with the state. I guess everything could change over night, just commenting, I'm sure it would be best just to do a little research if I was serious right now.

matt1957's picture
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Joined: 2008-08-25

Depends on how you want to live.I'm a small RIA that has little overhead and I do just fine.  You need to look at it and run it as a business.  I'm an expense / overhead hawk.  Very little in my model.  No physical office. Leverage technology as much as possible provided a decent ROI.15 AUM @ 1% = 150k fee income$125/hr * avg. 10 hr/week * 50 weeks = 62.5kTotal Revenue = $212,500ExpensesRunning the biz 10% of revenue = 21kOther Expenses 5% of revenue = 10kTotal Expenses = 31k Net = 181KAdd in some creative tax accounting / bene's pushed through the biz and your after tax return isn't too bad.

B24's picture
B24
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Joined: 2008-07-08

One of the things I can never understand is who would do business with a financial advisor that has no office?  I have a buddy that went indy a year or so ago, and the only biz he gets is little crap stuff.  I don't think he's even over $5mm after 4 years at Jones and 1 year indy.  Part of it is his work ethic, but that's another story.

B24's picture
B24
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Joined: 2008-07-08

Oh, and Matt, I was not criticizing, 180K net is damn good for 15mm AUM.  I just wonder how you get business without an office.

Milyunair's picture
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Joined: 2009-09-25

Yep, I get the last part. Is your hourly for new business, or do you charge everyone a minimum - do you do an annual financial planning deliverable, or what?Where do you meet with clients, I imagine mostly over the phone after everything is set up. Looks like you're in the sweet spot. Smart. Thanks for the view.

Spaceman Spiff's picture
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Joined: 2006-08-08

Perhaps it's because I'm not overly familiar with the RIA billing model, but do I understand correctly that you're charging your clients 1% on their money, plus $125 an hour for other work?  Are you charging them for both money management AND planning?  Or are you charging the $125/hr if you're just setting up a financial plan for them and not actually managing their money? 

matt1957's picture
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Joined: 2008-08-25

I separate the two.  Managing money is managing money.  Planning is planning.  They are two different "products" that I offer and thus charge separately.  One caveat, I do provide a "base" plan with the money management piece.  One offs and other meetings I charge for.None of my prospects/clients have ever mentioned concern about a lack of office.  My job is to service them and as such I meet them where it is convenient to them.  Their time is my money.  I don't waste it by having them come to "my office".Besides - it is alot easier to meet more potential prospects by being introduced while at their place of employment.

Milyunair's picture
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Joined: 2009-09-25

Sweet.

Cowboy93's picture
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Joined: 2005-05-10

B24--I think many people who operate without an office "get" business because they already had longstanding relationships.  Plenty of people with money may be turned off by this, but as you know any one of us only needs a hundred (or two) good relationships to make a nice living.The flip side of your question is:  "who would do business with someone just because they occupy one of a bazillion outlets of retail giant vs. being a self-employe professional?"

B24's picture
B24
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Joined: 2008-07-08

Cowboy93 wrote:B24--I think many people who operate without an office "get" business because they already had longstanding relationships.  Plenty of people with money may be turned off by this, but as you know any one of us only needs a hundred (or two) good relationships to make a nice living.The flip side of your question is:  "who would do business with someone just because they occupy one of a bazillion outlets of retail giant vs. being a self-employe professional?"Cowboy, I don't disagree with you.  I loyal trusting client won't leave you if you move to a home office.  I never thought that.  I guess I am coming from the perspective of someone that, if I were to be an indy/RIA, I would have to grow my business quite a bit from where it is, and would FEEL like it would be tough to attract new clients with a home-based office.I also work for Jones but have a REALLY nice office.  Even simply telling people where my office is elicits positive responses.  I have class-A office space in the same building as a specialty doctor, engineering firm, and a major wirehouse.  And I could go fishing in the river, right next to the marina, from my office windows.  I woudl have stayed in my house before moving in next to the local Subway.

Milyunair's picture
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Joined: 2009-09-25

This is an example of why I think smaller RIAs look scary. For one thing, it is no fun sitting in your office alone or with a part-time compliance person, dealing with the government. I'm sure this is good for clients to prevent another Madoff, but it demonstrates the increasing role of regulation on advisor practices. http://www.financial-planning.com/fp_issues/2010_6/going-for-custody-2667034-1.html

Cowboy93's picture
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Joined: 2005-05-10

Ironically, Madoff types LOOK like they are legit because they have to...you can't appeal to greed like he did without having the nice digs, being a member of the "elite" in Boca, etc.  That image is expensive.  I guess it takes money to scam money.I hear you B24...I think some people can do a great spin/marketing job when trying to add clients while working at home.  I know 3rd or 4th hand of someone who sells the idea that they keep costs low by not having any overhead and in at least that case I don't think it is not BS.  She has a MAX annual fee, no matter the size of the account.  You can play the "I don't need the business" card and sometimes that plays well.

Milyunair's picture
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Joined: 2009-09-25

Great article:http://www.riabiz.com/a/524004I guess a fiduciary standard would just drive RIAs - looks like RIA is the future.

Milyunair's picture
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Joined: 2009-09-25
loneMADman's picture
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Joined: 2010-05-10

Thanks Milyunair.  Both links are excellent.  The first leads to a thread of articles that are pretty interesting.  I recommend chasing a few down if you are interested in the industry trends. 

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