Written by: Barbara Herman and Allie Brunwasser
How to determine if you should build an independent firm on your own or get help from a third-party service provider.
If you’re one of a growing number of advisors who have come to the realization that your future is to be the owner of an independent Registered Investment Advisor (RIA) firm , you may think the biggest decision has been made. But now comes the question of how to get from here to there.
When starting up an RIA firm from scratch , there are a few different paths you can take to check off all of the boxes required to build your business—including infrastructure, compliance, platform and technology.
What are your options?
Many advisors who have done their due diligence will find they can act as their own “project manager” by going direct to the custodians. Alternatively, you can choose from an increasing array of “service providers” who assume the role of general contractor in building out the firm and can also provide ongoing infrastructure support and optimization of resources.
Taking the time to think about the following 5 questions will help you determine which of these options is the right path:
1. Does your team have the capacity and skill to take on this endeavor?
Advisors who see themselves as DIYers – meaning, they aren’t afraid to roll up their sleeves and do a lot of the hands-on heavy lifting – are typically those with the strongest of entrepreneurial spirits and best equipped to take on this endeavor. They are more likely to forgo using a service provider and rely on the guidance of their selected custodian (TD Ameritrade, Fidelity, BNY Mellon Pershing, Schwab or Raymond James).
By contrast, a team of two in significant growth mode may find it hard to shift focus from client service and business development long enough to tackle this new and unfamiliar territory. Offloading the startup preparation and transition execution to experts like Dynasty Partners, HighTower Network or tru Independence allows the team to remain focused on what they do best.
2. What is your timeline? How much time do you really have and how much of it are you willing to invest?
Custodians provide advisors with a roadmap and help create a timeline of how to get from here to there, at which point it’s the advisor’s responsibility to research, vet, negotiate contracts and manage relationships going forward. Numerous third-party vendors, especially in the area of technology, must be engaged. The integration of all these unrelated pieces into a seamless and efficient process and platform is also critical. Even if time and a willing spirit are not issues, there is an opportunity-cost to consider. When working with a service provider, they will research, vet, negotiate and manage the ongoing relationships with the vendors for you. This would make a timeline of 3–6 months from the time a decision to launch is made very realistic.
3. How much control do you need? That is, are you comfortable outsourcing key responsibilities?
Advisors who want maximum control over every decision – and don’t easily trust the idea of handing over responsibility to others – may gravitate towards working directly with their custodian. Other advisors get more comfortable with the idea of outsourcing with the realization that service providers don’t take an ownership interest and work pursuant to a contract is only renewed if they continue to demonstrate value.
There are differences among service providers as to what extent they can customize their offerings. Advisors who have very complex businesses requiring access to numerous sophisticated outside resources, such as credit and lending, need to make sure that a service provider can deliver exactly what the firm requires.
Related: A Multi-Generational Breakaway Success Story
4. Are you willing to pay for the support? Put another way, do you see value in the additional expense of using a service provider?
Advisors sometimes experience sticker shock when they first see the cost of hiring a service provider. But, this is typically before they understand the potential cost savings from leveraging the service provider’s scale and institutional relationships to get better pricing and access, and before they fully appreciate the magnitude and complexity of what’s involved in launching and operating an RIA. Most service providers remain involved going forward to manage much of the RIA’s middle- and back-office.
Alternatively, there are consultants available to help set-up the firm and manage the transition process, and their involvement ends soon after the firm launches. There is still a significant cost for this, but for the advisor who is confident that he has or can build the necessary infrastructure once the right building blocks are in place, this may be a good option.
5. How willing are you to take on compliance responsibility and ongoing supervision?
Starting your own RIA means you are now responsible for your own oversight. You will file your own ADV with the SEC (so long as you have $100mm in advisor assets) and have control over compliance policies and procedures. For the DIYer, there are several law firms and compliance consulting firms that have this expertise and can be engaged solely to file the ADV and to create an SEC audit-ready compliance system and can also be engaged to support the advisor’s ongoing self-supervision. Some service providers offer a shared ADV, eliminating the advisor’s need to file his own and shifting compliance responsibility to the service provider. This can be especially attractive to businesses with less than $100mm in AUM necessary to come under SEC jurisdiction.
Options for the RIA-bound advisor are plentiful, and for most advisors, comparing the direct custodial route with the service provider model makes good sense. Often, the decision comes down to an advisor’s personal style and mindset as to how they want to start and run their business. Whether you’re a DIYer or a delegator, you are about to enter the world of independence, and you have only to choose the path that’s best for you and your clients.