How much does it cost to go RIA?

Making the leap to independence can be an exciting but daunting prospect for financial advisors. One of the biggest questions in this case, however, is: how much capital do you really need to get your own firm off the ground?

Tom Balcom, founder of 1650 Wealth Management, says the answer lies in carefully managing both your business and personal finances. "The biggest expense right off the bat is rent, depending on the area you live in," Tom explains.

After rent, he says, it’s other expenses like technology. “What kind of technology stack do you or are you going to use? Most likely, you're leaving a prior firm so also consider whether you’re going to have to fight your prior firm when you leave?”

He estimates a minimum of $50,000 in startup capital is needed to cover basics like rent, technology, and legal expenses. He cautions that unexpected legal costs can quickly add up, citing his own experience of having to change his firm's name due to a trademark issue, which cost around $10,000.

Other key expenses to budget for include compliance consulting, which can run $50,000 to $120,000 per year, and insurance, which varies based on investment risk.

Beyond that, it really boils down to personal cash flow needs, Balcom notes. He advises that advisors should have 6-12 months' worth of personal living expenses saved up before making the jump.

This ensures you can cover your mortgage, childcare, and other lifestyle costs as you build up your new firm's revenue stream.

"The main thing is your personal cash flow, not just the business cash flow," he says. "If you're making salary at a firm and you start your own company, can you sustain your current lifestyle as you start your new company?"

Andrew Evans, founder of Rossby Financial affirms that advisors should consider whether they’re transitioning to independence or building from the ground up and consider whether they want to be a single practice or enterprise group.

He emphasizes that advisors looking to build a firm from the ground up should plan to invest at least $100,000 to get their new venture off the ground. "If you're building it from the ground up, whatever number you come up with, if it's less than $100,000, you're out of your mind," he says bluntly.

This baseline figure should cover essential startup expenses, including firm creation and filing fees, licensing, back-office support, archiving, surveillance, and technology tools like financial planning software and performance reporting systems.

He acknowledges that these costs are not one-time, but rather ongoing annual expenses that advisors must account for.

"It doesn't magically disappear," he says. "That might be the startup, but then you have to keep paying that."

He highlights several other areas where advisors tend to underestimate financial requirements. One unexpected expense he personally encountered was the high cost of DocuSign, the electronic signature platform.

"DocuSign is way more expensive than people think," says Evans, also alluding to the need for Errors and Omissions (E&O) insurance.

"If you're a singular firm, it's not cheap,” he says. “We paid north of $15,000 for a premium. I wasn't surprised by that but when we had to cough up around $7500 for the number of envelopes we were using and for the value that we were getting, that's a lot of money.”

Ultimately, total startup costs, excluding time, can range from $200,000 to $250,000, says John J. O’Hare III, partner and managing director at O’Hare Wealth Management, an affiliate with Steward Partners., though the exact amount can vary widely depending on the advisor's specific circumstances and location.

At the end of the day, however, costs aren't all monetary, he notes.

“We don't always talk about the emotional and the time costs associated with some of these things,” he says. “When just transferring from another firm, there’s a lot of long days that can come up, with nobody to call when there’s a problem, when stuff doesn’t work,” he added.