If you are thinking about starting your own RIA firm, you are probably in the process of doing your research and weighing the pros and cons of going independent. Afterall, building a company from the ground up is no small task. But, for the right advisors the rewards of striking out on their own are ripe for the picking.
The following article outlines the upsides of starting an RIA firm and poses some questions you will want to answer before you plan your next move. If you have specific questions about starting your RIA firm, please check out our Frequently Asked Questions section for more information.
The Rise of the RIA Firm
The financial services industry is undergoing a period of considerable disruption. Investment advisors who traditionally went to work for broker-dealers are now opting to start their own Registered Investment Advisor firm at an increasing rate.
According to the 2019 RIA Marketplace Report published by Cerulli Associates, the independent and hybrid RIA channel has grown 21% over the last five year. Further industry research supports that the RIA channel has experienced steady growth since 2006, even though the overall number of financial advisors has declined during that same time period.
In the wake of this growth, custodians, technology providers and consulting firms have expanded their services to cater to the growing demand from RIA firms. The result of these enhancements makes it easier for Advisors to leave their broker-dealer and start their own RIA.
The Benefits of Starting an RIA Firm
As interest in the RIA model continues to grow, and support for starting and managing a firm becomes more available, many advisors are upbeat about the possibilities of working directly for their clients as a fiduciary. Much of this enthusiasm stems from understanding the true benefits of starting an RIA firm, which include:
Autonomy: According to the 2019 Breakaway to Independence Survey conducted by TD Ameritrade, the number one answer advisors gave for moving to the independent RIA model was, “more control” (34%). The fact is, when you start an RIA you have complete control over every decision related to your business. So, if you are someone who values autonomy, starting an RIA could be the right move for you.
Income Potential: As an RIA, you determine how much revenue your firm can keep – up to 100% as indicated in the chart below. With this flexibility, you have complete control over your fees and expenses so you can choose how to best operate your business to maximize revenue. Also, if you decide to start your own RIA you can build equity in your business for a higher long-term payout should you choose to monetize or sell the firm in the future.
Typical Advisor Payouts by Channel
Flexibility to Keep Your Commission-Based Business
In addition to greater income potential, RIAs with successful brokerage businesses can choose a hybrid model that allows them to maintain their commission-based business through a third-party IBD.
Greater Access to the Right Tools
As an RIA, you can choose the technology and tools that best suit your needs. This allows RIAs to find new ways to enhance their client relationships, streamline workflows, and discover new ways to access and analyze crucial information.
Stronger Client Relationships
More traditional investment firm models often confine advisors to offering a limited number of products or services that may or may not meet their clients’ ideal investment strategy. As an RIA, you are a fiduciary that is legally and ethically required to serve the best interests of your clients. While working from the same side of the table with your clients you will able to nurture strong, long-lasting relationships while providing them with the products they need for long-term success.
Is starting an RIA firm right for you?
The process of creating, registering and operating an investment advisory firm isn’t for everyone. As you consider starting, or even joining an RIA firm as an IAR, you should first ask yourself the following questions:
- Will I be better suited to serve the needs of my clients if I start, or join, an RIA firm?
- Will your current clients support your move and make the transition over to your new firm?
- Will you be able to attract new clients and grow your business faster at an RIA firm?
Most advisors who ultimately start their own RIA firm answer “yes” to all three of the above questions. Not surprisingly, this same group of advisors who go on to declare their independence also possess similar characteristics. These traits include:
An Entrepreneurial Spirit: Many Advisors who go independent share an entrepreneurial mindset. Those who start their own RIA firms are self-starters who are well-organized and see challenges as opportunities. They have a vision for their future and are not afraid to sacrifice short-term “wins” for long-term success.
An Ability to Develop and Maintain Strong Networks: Whether it’s engaging new clients, strengthening existing relationships, or attracting new investment advisor representatives (IARs) to join their firm, advisors who start their own RIA have a natural ability grown and nurture relationships.
A Desire to Put Their Clients First: For advisors, acting in their clients’ best interests is a key principle. In short, they want the freedom to make decisions and offer products that help their clients achieve their goals.
A Passion for Financial Planning and Wealth Management: Let us face it, any investment advisor worth their salt has a passion for investing. By their nature they are naturally curious and deeply analytical. They know their clients rely on them to navigate the market, so they work tirelessly to make sure they “get it right.”
As you consider whether you should start your own RIA or not, the questions and characteristics outlined above only paint part of the picture. As noted earlier, there is a lot of groundwork you will want to factor into your decision. [Before you take your next step, we would encourage you to check out “The 7 Steps to Launching Your RIA Firm”]