I did a lot of research on going from broker dealer to RIA.The numbers look very attractive.

The liability looks very scary. I get the impression that being affiliated with a broker dealer provides a very costly, but extra layer of protection from the public. At least in my state, the cost-benefit looks questionable.

Also, advisors have been going from b/d to RIA in record #s. I don't get the sense that the b/d industry will take this lying down (powerful interests).

Now it appears there are some serious regulations in the works to crank up scrutiny over the myriad of smaller RIAs in the states. Schwab says you should have at least 50m under management to go RIA, but who knows, they appear to be a bit of a bully in the industry.

Fidelity will take a lot less. You get a "kit" by hiring from amongst a few lawyers that specialize - but you take the hit if there are problems.

A lot have been going RIA, and the last five or so years have been pretty good in the markets. Might want to be careful about leaving the "protection" of a b/d, if there is still an economic cycle, beyond soft landings (there is). What say you about potential liability?

When I interviewed the other BD’s that also offered an RIA component,

they said this…



"We look at this as a partnership. If you get sued, we’ll back you up, but

the responsibility will be shared depending on the situation. If you were

at fault, it’s your responsibility."



I don’t look at the BD/RIA or the straight RIA as really any different. The

responsibility is squarely on your shoulders. If there are settlements, it

will come out of your pocket no matter which direction you go. Errors

and Omissions insurance will cover you based on the advice you provide.

Deductible is $10,000 to $20,000 with a per incident total coverage of

$1,000,000. So, you get sued, the insurance company has a duty to

defend you and your situation (there are different types of insurance

BTW). I don’t see it as any more risky than being an advisor at a

wirehouse. Got an order error? You pay it. Got a judgement against you?

You will have some responsbility to pay… sometimes with your job or

even your career.



As for the regulatory environment on smaller RIAs - I know that most

people do say that you shoudln’t go the RIA route alone unless you have

$50 million AUM. I agree with that. Solo operations are finding that they

NEED to outsource compliance issues, since they really don’t have the

time or ability to be their own CCO (chief compliance officer). The SEC is

looking harder at solo practices that serve as their own compliance dept.,

and the suggestion is that it should be delegated to a third party.



If there are problems in your transition, yes, it’s your responsibility. But

again, the road to gaining independence through another independent BD

will still be expensive, since they rarely share in the full defense and

payoff to the contra firm. It’s a liability, no doubt… but, definately worth

the risk.



A note on doing business in a litigious environment - Discretionary

portfolio management, proper risk assessment, and performance

reporting can assist greatly in running your practice. Most advisors have

WAAAYYYYY too many positions to monitor effectively, and as a result

open themselves up to significant liability. How can you monitor 500

different positions? No way. Build portfolios that can be monitored

easily, are well researched, and fit the appropriate risk classification of

your client. E/O coverage will take care of the large bumps if your advice

wasn’t negligent. Have a process, follow that process, and be true to your

risk classifications. The risks can be mitigated quite a bit by limiting the

number of holdings for your clients and the type of clients you advise.

There have been lawsuits against advisors who didn’t monitor the client

portfolios… too many positions, and not enough time lead to disasters in

client portfolios and lawsuits.



Limit the number of positions, build model portfolios, and take care of

the client… you should be fine without the prying eyes, and expensive

relationship known as the BD/RIA. They are very, very expensive.



C

Good stuff Captain.  Good stuff!

Captain, not clear. If you affiliate with b/d for part of book, rest of book with RIA you are on your own for liability.

If I currently affiliate with large, branded b/d, their reputation is on line alone with me (newspapers). If I'm compliant with b/d, they have an incentive to protect their own internal process.

Fidelity RIA rep says a lot of small RIA are not even picking up E&O due to cost.

Guess we agree, 50m is a minimum. Even then, I think the environment will get tougher. But the more the AUM, the better the economies.

TenthTee -



1.) Yes, you are correct. If you own your OWN RIA, and also have an

affiliation with a BD, the liability is determined to be separate and

definable assuming you get sued. You get sued by one of your BD

clients, the BD’s E/O insurance will kick in. You get sued by an RIA client,

your E/O insurance carried through your RIA will kick in. Neither will

cover both types of business if you maintain that business at separate

firms (i.e. Fidelity for your RIA, and Purshe Kaplan for your BD).



2.) Yes, they have an incentive to keep your noses clean. Nothing wrong

with that. However, my partner popped into my office today and said ‘it’s

just like [prior firm]’ - My comment? They are the BD, and it’s their ass on

the line. I typically find that BD’s have to regulate based on a lowest

common denometer… meaning, they have silly rules that they want

enforced no matter what your capabilities, experience, or clean record.



3.) I agree - Smaller RIAs aren’t doing the E/O insurance due to cost. Not

sure which way to comment on this, but it really depends on your

practice. We are with Fidelity and have really put that question through

the wringer and finally decided that we will get the coverage. Our

business isn’t generally a ‘high risk’ practice, however, strange things can

happen. So, that being the case, we erred on the side of caution, and

bought the coverage.



4.) Minimum asset levels. $50 million is a good number. If you are

managing $40 million at a 1% fee, you’ll still have a great shot at having a

great little practice. But, economies of scale known, it is better to have

partners to share in not only the expenses, upfront, but the time element

required to carry out the tasks which exist, regardless of practice size, in

order to function as an RIA. Solo practices are harder to run, since you

get to do everything. Add 2 partners, and an additional $75 million in

AUM, and the numbers look a whole lot better.



Just my $.02



C

Great, that validates and clarifies a lot. To the next level. Appreciate your generosity and thoughtfulness. tenth.

[quote=EDJ to RIA]

.... since my fees are tax-deductible while commissions are not. [/quote]

Exactly wrong. Investment advisory fees are a tax deduction only to the degree that they exceed 2% of AGI.

Commissions are FULLY tax deductible.

[quote=san fran broker][quote=EDJ to RIA]

.... since my fees are tax-deductible while commissions are not. [/quote]

Exactly wrong. Investment advisory fees are a tax deduction only to the degree that they exceed 2% of AGI.

Commissions are FULLY tax deductible.

JoeDaCPA...very good.  I would call buy commissions a deferred deduction and sell commissions and immediate reduction in capital gain or increase to capital losses.

Commissions in qualified accounts are not deductible per se, although they do ultimately reduce the amount of taxable income one has to withdraw from the account.  IRA fees are deductible subject to the 2% of AGI limitation and ability to itemize.

There...have we parsed this enough now?!!

I'm violating my rule of not posting during business hours, but this topic is a good one....

Actually, the best part is having your client remit the advisory fees INTO their IRA as a tax deductible item.  You can do the same for a Roth IRA.  Imagine having a client 1.) make an $8,000 remittance into their Roth as an advisory fee, and 2.) then having them deduct it on their tax return.

I'm not sure, actually, whether or not the Roth IRA fee remittance would be a deduction, since the fees apply to a tax-free account, basically.  I know that fees paid for advice concerning the management of a municipal bond portfolio are NOT a deduction.

Can't do that with commissions.

C

I’m not sure about the deduction on a Roth fee either, but it sounds plausible.  I have certainly advised AGAINST re-depositing traditional IRA fees into the IRA, as a fee deducted inside an IRA is like a tax-free withdrawal.  The Roth is a whole different story though and will probably start hitting some radar screens as the balances inside of Roth IRAs grow to sufficient levels to raise the question.

[quote=Indyone]I’m not sure about the deduction on a Roth fee either, but it sounds plausible.  I have certainly advised AGAINST re-depositing traditional IRA fees into the IRA, as a fee deducted inside an IRA is like a tax-free withdrawal.  The Roth is a whole different story though and will probably start hitting some radar screens as the balances inside of Roth IRAs grow to sufficient levels to raise the question.[/quote]

If you were to invoice them and they paid the fees OUTSIDE the tax sheltered account, it would not likely be deductible.  However, there would still be a tax advantage in that you’re paying the investment expenses OUTSIDE the account and thus maximizing the invested assets that remain WITHIN the tax sheltered account.

[quote=joedabrkr] [quote=Indyone]I'm not sure about the deduction on a Roth fee either, but it sounds plausible.  I have certainly advised AGAINST re-depositing traditional IRA fees into the IRA, as a fee deducted inside an IRA is like a tax-free withdrawal.  The Roth is a whole different story though and will probably start hitting some radar screens as the balances inside of Roth IRAs grow to sufficient levels to raise the question.[/quote]

If you were to invoice them and they paid the fees OUTSIDE the tax sheltered account, it would not likely be deductible.  However, there would still be a tax advantage in that you're paying the investment expenses OUTSIDE the account and thus maximizing the invested assets that remain WITHIN the tax sheltered account.
[/quote]

Joe, that's a good counterpoint, but it just proves that there's not a clearcut answer there.  What you've said makes sense in the accumulation phase, but for my $5 million dollar client who is 78 years old, in a tall tax bracket, and absolutely needs to start shrinking her IRA due to the potential estate tax mess that's looming, I'll stand by my recommendation to deduct her fees from the IRA balance.

[quote=Indyone]

[quote=joedabrkr] [quote=Indyone]I’m not sure about the deduction on a Roth fee either, but it sounds plausible.  I have certainly advised AGAINST re-depositing traditional IRA fees into the IRA, as a fee deducted inside an IRA is like a tax-free withdrawal.  The Roth is a whole different story though and will probably start hitting some radar screens as the balances inside of Roth IRAs grow to sufficient levels to raise the question.[/quote]

If you were to invoice them and they paid the fees OUTSIDE the tax sheltered account, it would not likely be deductible.  However, there would still be a tax advantage in that you’re paying the investment expenses OUTSIDE the account and thus maximizing the invested assets that remain WITHIN the tax sheltered account.
[/quote]

Joe, that's a good counterpoint, but it just proves that there's not a clearcut answer there.  What you've said makes sense in the accumulation phase, but for my $5 million dollar client who is 78 years old, in a tall tax bracket, and absolutely needs to start shrinking her IRA due to the potential estate tax mess that's looming, I'll stand by my recommendation to deduct her fees from the IRA balance.

Captain wrote:

"I know that most
people do say that you shoudln't go the RIA route alone unless you have
$50 million AUM. I agree with that."

I think differently about this. I started my RIA with less than $5 million AUM. The way I cover cash flow is to charge $150/hr. I'm getting up to 10 billable hours a week x 4 weeks = $6000 per month in consulting fees. There's no transaction fee to me (my firm) and it's immediate, not billed in arrears each quarter. I then can be selective about who I recommend for ongoing management. I'm trying to maintain a per-household minimum of $500,000. At $500,000 I charge .70% of AUM, whether it's held with me or somewhere else. When I get to $25 million AUM, that's $175,000 gross asset-fee plus any Life or LTC plus the hourly fees. Plenty for my lifestyle and needs. Average of 50 clients will allow me to stay in constant contact, which is the key for retention.

I think Captain's business model is terrific, but it's not the only way to go...

[quote=EDJ to RIA]

Captain wrote:

"I know that most
people do say that you shoudln't go the RIA route alone unless you have
$50 million AUM. I agree with that."

I think differently about this. I started my RIA with less than $5 million AUM. The way I cover cash flow is to charge $150/hr. I'm getting up to 10 billable hours a week x 4 weeks = $6000 per month in consulting fees. There's no transaction fee to me (my firm) and it's immediate, not billed in arrears each quarter. I then can be selective about who I recommend for ongoing management. I'm trying to maintain a per-household minimum of $500,000. At $500,000 I charge .70% of AUM, whether it's held with me or somewhere else. When I get to $25 million AUM, that's $175,000 gross asset-fee plus any Life or LTC plus the hourly fees. Plenty for my lifestyle and needs. Average of 50 clients will allow me to stay in constant contact, which is the key for retention.

I think Captain's business model is terrific, but it's not the only way to go...

[/quote]

Please elaborate on this for me....I'm quite intrigued.  What are your expenses and income?  It looks like you are charging about 1.4% of assets, but in 'billable hours'?  Thank you for your input.

Oops…my math was off because I didn’t quite understand your model.  I think I get it now.  Still, please elaborate.

I set up a meet and greet and tell them to bring their tax return and a list of assets (I have a letter that spells this out like a checklist). We talk about their situation, what their biggest concerns are, goals, etc. I then ask them about their assets: what is it, how much, how long, expenses, etc. They never know off hand, so they hand over the folder of stuff. I start drawing a flow-chart of all their accounts, like "Bank IRA CD", "Bank #2 IRA CD", "401k", "EDJ Joint", "Scottrade single", "LTC from XYZ Co.", "Life Ins.". Usually it ends up with a half-dozen or more different accounts. I've had as many as 15 accounts between a husband and wife.

I then can ask questions like "How have you coordinated these accounts?" or "What is the total of all the fees and expenses you pay accross all these accounts?" They never know for sure, so I say "Don't you think it's important to know?" They all say yes. I then tell them I need to do some research and put together some recommendations on how to reduce their expenses, save taxes, etc. I say "It'll take me two hours to do this work for you, so if you think $300 is reasonable, let's get back together next week and I'll show you how to improve on what you're doing." We set the appt.

This gives me the opportunity to get paid for my time and also to help me determine if they're a good candidate for ongoing advisory services. If I think they'd be a good client, I present my recommendation that by transferring their accounts and consolidating they'll have a much simpler and coherent plan. If they aren't a good candidate (little assets or personality conflict) I'll give them my recommendations and tell them that if they need further help, they can contact me quarterly and we can do another review for an hourly charge.

I'm trying to limit my households to $500,000 minimum. My fees start at 1% but I often reduce them to .55% to win ALL their business. I use Vanguard funds and ETFs, and also some Ishares, so they're total is often less to me than what their MFD management fee was before.

Sorry I've been so long-winded, but I wanted to make sure I was clear.  

Sorry, forgot to mention my expenses.

My one-room office is $400/mo including utilities. Clearwire internet and vonage phones are $125/mo. I use SSG as custodian, no quarterly charge, but $60/yr per account for IRR performance reports, avg $250 transaction fees to implement plan. SSG provides me NetExchange Pro for free. E & O for year is $850, biz ins runs $257/yr, office supplies maybe $50/mo. Health Savings Plan for family is $350/mo. Dental out of pocket.

That's all I can think of right now...

Thanks…very helpful.