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Choosing the Right RIA Structure: Understanding Your Options

The sheer volume of RIA options can make transitioning stressful. From choosing your affiliations to structuring your term sheets, every decision is important – but it can be hard to understand how they will impact your practice. Which model will best serve your growth ambitions? And what kind of RIA structure will give you control over how your practice runs? This article helps to answer those questions, presenting a clear breakdown of the three most common options - and helping you decide which best suits your requirements. Understanding Your Options: 3 Popular RIA Structures Despite the complex variation, advisors have three core options when transitioning to an RIA: 1. Start Your Own RIA You can start your own RIA from scratch and either build your infrastructure or “borrow” it from another firm. A recent survey found that 32% of advisors at Broker-Dealers are considering this option, citing a desire for higher payouts and autonomy. But will this structure actually deliver on that promise? The answer is yes and no. As the sole owner of your RIA, you are in control of all aspects of the business. You can select your own custodian; put together your own custom tech stack; and build a unique brand that represents your specific vision for the company. As a result, this might be the perfect option for an advisor who has a strong entrepreneurial spirit and genuinely wants to build a business with no restrictions. But there are some very clear drawbacks, too. The level of responsibility can be overwhelming for many advisors. You are both the manager and rainmaker for the firm. And you are responsible for everything from registering with the SEC and managing clients to maintaining your website and ensuring daily regulatory compliance. Now, of course, you can outsource many of these responsibilities, but you are in charge of finding and managing these vendors and auditing their effectiveness as partners to your practice. As a result, many advisors start their own RIA only to find they quickly lose capacity to non-revenue generating tasks. Many are forced to hire managers to help them cope, which means giving up a certain amount of control anyway. And a lot of advisors don’t even see a meaningful improvement in their earnings, as the median net profit margin of 1 million or more is 42.6%. Additionally, smaller, solo practices command significantly lower multiples than larger RIAs; a fact owners will want to consider as they think about driving their own enterprise value. 2. Join an Aggregator or Platform We define this category as a firm that allows you to join their existing RIA and run your own firm underneath it, with the RIA serving as your “home office”. In some cases you will fold under a single RIA; in other cases, you are allowed to maintain your own RIA. This structure allows advisors to gain significant scale and efficiency by leveraging centralized resources and support - and the average payout for advisors in this structure is typically in the 70-90+%. However, it is important to note that there are many variations of the aggregator structure - and they cater to very different needs. For example, a few common ways aggregator structures differ include: Level of Integration: Some aggregators allow advisors to maintain their own ADV and simply use specific services like tech or compliance; others require advisors to join their ADV but leave them to maintain their own DBAs. Level of Support: While in most cases you will continue to manage your team and daily operations, some aggregators offer extra support for these factors. It is common for firms to offer extra services, such as investment management or marketing, for an additional a la carte fee. Quality of Resources: Access to pre-built infrastructure and resources is useful for advisors, but the quality and range of these resources vary. Many aggregator firms will offer resources you are not thrilled with, and you may have no ability to change them. Ultimately, this could be a great option for many advisors, who want both autonomy and support, as long as they find the right firm to align with. 3. Join a Consolidator Firm A consolidator firm allows you to join an existing RIA and simply work as an advisor. You will spend most of your time as an advisor and won’t be responsible for running the business. The RIA provides all the resources and staff you need. This is a great option for advisors who are either nearing retirement or don’t want the pressure of running and growing their own business. However, there are several notable downsides: Corporate Feel: Consolidators tend to feel very “corporate” and many advisors who join them feel they left a large captive firm - only to end up in a very similar environment. Pressure to Sell: Advisors are often required to wholly or partially sell their practice during the transition, which can lead to regret post-transaction if the firm doesn’t end up being the right cultural fit. But how can you avoid such an outcome and select the right RIA structure for your specific needs? Choosing the Right Structure: 3 Questions to Find the Right RIA Option Now that you understand how each RIA structure works, it’s time to ask yourself a few key questions: 1. What Do You Want to Spend Your Time Doing? This is the single most important question to ask: which model will lead you to enjoy your daily workload? Starting an RIA might appeal to your desire for control, but if you dislike managing operations or thinking about business strategy - it probably isn’t for you. Equally, if all you want to do is advise clients and pick up your check, a consolidator firm will make your life easier. But if you want a balance - to grow a business you own but still spend plenty of time with clients - then you should opt for an aggregator firm. 2. What is Your Long-Term Goal? The RIA structure you choose must align with your long-term aspirations. For example, many advisors’ ambitions are to build a specific kind of practice. They need to have full reign over exactly how each aspect of their business operates and will only be able to achieve that goal by starting their own RIA. Other advisors have growth-orientated goals: they want to increase their AUM and maximize their earning potential. In most cases, this will be best served by joining an aggregator firm and leveraging shared resources to accelerate your growth. 3. What Kind of Freedom Do You Want? Most advisors transitioning to an RIA want freedom and independence. But it’s important to think hard about what that really means - and the trade-offs it involves. Almost all forms of freedom involve taking on extra responsibility, and many advisors actually don’t want the apparent freedom of starting their own RIA promises. The flip side of that freedom is being completely responsible for every aspect of the business. This may prove too much for many advisors, who could be better served by finding a consolidator firm that will offer them enough freedom - while also handling some of the heavy lifting across areas like tech, compliance, and legal. Get a Complete Framework to Select an RIA Model There’s a good chance these three simple questions have already made your path clear. However given the sheer weight of the decision, some advisors will still be unsure exactly which model suits them best. That’s why we created A Straightforward Guide to Choosing an RIA. It condenses more than a decade’s experience into a five-minute read, offering a complete decision-making framework to help you identify exactly what matters most to you - and select a RIA model that will help you get it.

Penny Phillips

Dec 04, 2024
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