The Registered Investment Adviser model continues to be an increasingly attractive option for independent advisers in today's marketplace. Cerulli predicts the appeal of the RIA and dually registered models to the industry's largest and most successful advisers will push the channel's growth to a projected 28 percent asset market share by 2018.
The RIA boom has caused many advisers to reassess their affiliations in an effort to determine where their client would be best served. Every day we talk with advisers trying to decide if they should go independent. Based on the buzz surrounding RIAs, the topic always comes up.
Obviously, there is much to consider before making this type of business decision. Here are some things to think about when searching for the right business model for your practice.
Look at the Numbers
When helping you decide if you should go the RIA route, we start by looking at your book of business. Are you doing a lot of commission business or advisory business? This ration is the first indicator in determining whether or not you should consider some type of RIA platform.
We're seeing a major trend in today's marketplace where the majority of advisers are doing more and more advisory business. The RIA route usually becomes an option when the adviser's book of business is at least 50 percent advisory assets. We generally recommend the hybrid model if your book is between 50 and 80 percent advisory and the RIA-only model once advisory assets represent 80 percent or more of your business.
Your assets under management should be considered as well. From our perspective, the magical number to go full RIA is right around $100 million in AUM. There is wiggle room depending on where you are in the lifecycle of your business and whether or not you will be able to bring your business up to that level in a relatively short time period.
If the adviser has $50 million in AUM or less, we recommend going the hybrid route and operating under a firm's corporate RIA to mitigate the fees associated with going it alone.
What are the Motivating Factors?
To find the right model for your practice, you also need to focus on what is motivating you – from both a business and personal standpoint. Why are you interested in taking on the added responsibility, work and complexity inherent with running an RIA practice?
Our suggestion: start with where you want to be in five years. Are you happy where you are now or do you want to grow your business? If you are currently at 50 percent advisory, do you want to increase that number or do you want to keep a good portion of your commission business?
A lot of advisers are motivated to go RIA because they want more independence and want to take their business to the next level. Many advisers want to create a larger firm and want to aggressively recruit additional reps under their umbrella. A little-known secret in our industry is that custodians price advisory business based on the aggregate asset level of the RIA, where the broker-dealer tends to price assets at the individual client and rep level. Taking advantage of that pricing is a big deal for many advisers. Building a bigger umbrella and leveraging the collective assets of the advisory business to get better pricing makes your firm more competitive in recruiting other advisers.
Many advisers focusing a majority of their business in a specific area, such as advisory, often outgrow the support and resources that their broker-dealer is capable of delivering. These advisers tend to put a strain on the broker-dealer's RIA capabilities. If advisory assets represent 60-70 percent of your business, you may get to the point where it makes more sense to customize your offering by creating your own RIA or hybrid.
Remember, this is a very personal choice. Ideally, you are making this move because you want to be able to run a select practice that is good for your existing clients and those you want to work with going forward. I know plenty of advisers who are perfectly happy with the full-service model because they don't want any more responsibility other than running their business. RIAs and hybrids are very select practices and they are certainly not for everybody.
You Have to Graduate
The largest number of advisers going pure RIA or going hybrid are coming from the independent channel, not the wirehouse space. The independent broker-dealer model is fueling the continued transition toward greater independence and increased flexibility. Regulated by the SEC or state registrations instead of FINRA, the RIA-only model gives the adviser the most independence.
The majority of wirehouse advisers who are looking to break away still rely heavily on their commission business. The move to the independent arena is a large move in and of itself. Dropping one segment of the business at the same time is often too much of a change. Many advisers also have an emotional connection to their clients and the revenue they have generated. They simply aren't ready to make a full leap.
As a wirehouse rep who is looking to go independent, your hands are full establishing a brand, finding office space, setting up computers, phones and internet, managing compliance and addressing a number of other things you've never had to worry about to this point. Moving to a broker-dealer RIA corporate model is often less disruptive.
It's the independent adviser who is seeking even greater independence who is really fueling the move to the RIA-only or hybrid RIA model. As their businesses continue to grow and evolve, the corporate broker-dealer or RIA isn't always able to provide the things they need to support that growth. These advisers are looking to maintain flexibility as their business continues to move toward more advisory assets. This adviser is typically a tenured practitioner with more than 10 years of experience.
Despite the RIA growth, today the majority of advisers still operate under the full-service model, whether they are in the wirehouse channel or independent. The next largest group is in the hybrid model, with the smallest tier populating the RIA-only group.
While going independent may be the right move for your practice, make sure you do your homework and understand all of your options. In many ways, you have to continue to graduate and work your way toward a place in the lifecycle of your business where moving to the full RIA model makes sense.