The RIA channel is one of the fastest-growing areas of the advisory market, expanding more than 11% annually, compared with an 8.6% rate for the overall industry, according to Cerulli Associates. This growth has been fueled in part by a migration of advisers from the traditional broker-dealer and wirehouse channels. The RIA market is expected to account for nearly 28% of the advisory market by 2018, compared with a 13.7% market share in 2013.
Why are so many advisers making the move to independence? For many, it comes down to having greater control — over their business, lifestyle, income and the strategies they can offer. Moreover, according to a recent Envestnet study, three-fourths of advisers who transitioned to the RIA space were able to boost their financial situations.
Here are five benefits of transitioning to the RIA channel, either by joining an existing RIA or starting your own firm:
1. Put yourself in the driver's seat. As an RIA, you have final say on all decisions to empower your business — everything from the clients you serve and the products and services you offer to how you structure your back-end technology, office, fees and compensation.
2. Provide clients with an enhanced experience. As an RIA, you will be able to employ a larger selection of investments to meet each client's unique needs, without being limited to prepackaged offerings or a proprietary product list. You can adjust investment strategies as needed, without obtaining approval from multiple layers of management.
3. Increase your payout ratio. As an RIA, you control 100% of the revenue you bring in. Even after expenses, most RIAs earn substantially higher effective payout ratios than compared to advisers working in other channels. For example, consider an adviser who earns $800,000 in revenues in one year, and grows this amount to $1 million the following year. An adviser working in the broker-dealer channel would typically pay 15% of revenues back to the firm in fees. After covering expenses (estimated to be about 30% of revenues), this adviser would be left with a payout ratio of around 55%. An RIA, by contrast, would have a much higher effective payout ratio, around 70%, even in the first year when expenses may be higher due to transition costs. Because RIAs have more say in their choices of vendors and technology, they have greater control over their expenses and net income. In fact, studies have found that advisers who migrate to the RIA channel increase their annual take-home pay by 10% to 40%.
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4. Build your own brand. You're doing more than running a business when you are independent — you're building your own brand. You can decide on your unique value proposition and work toward your own long-term goals. As you invest time and money in growing your business, you can be confident that you're creating a long-term asset that you can one day monetize or sell to provide for yourself and your heirs.
5. Spend more time on clients, less on paperwork. As an RIA, you are also freed from many of the compliance responsibilities, certification exams and paperwork that take time away from serving your clients and reaching out to prospects. Transitioning to a fee-based model means less regulatory paperwork and leaving the broker-dealer means no longer having to complete massive amounts of the obligatory forms. This freedom is especially appealing now, as commission-compensated broker-dealers face increased scrutiny and documentation requirements under the Department of Labor's fiduciary rule. While RIAs won't be wholly exempt from these new requirements, they will be less affected than their colleagues in the broker-dealer channel.
As appealing as the path to an RIA practice may be, it's a transition that requires careful consideration, detailed planning, and a structured, strategic approach that leaves nothing to chance. There inevitably will be bumpy patches along the way, so you will need a strong resolve to preserve and work through any potential challenges. By preparing well in advance and putting a strong support team in place, you'll be better able to avoid conflicts with your previous employer, retain your best clients and hit the ground running with minimal income gaps or execution issues.
Joshua Pace is president and CEO of Trust Company of America.