Discuss with me: An IAR for an RIA

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Sep 17, 2009 5:13 pm

I work at an RIA, and have been wanting to go out on my own.  My problem is that I've spent my time as a research analyst and therefore I don't have a book of clients, which means no revenue if I go on my own.  I want to stay independent, so I don't want to start fresh at a wire or something like that.

Correct me if I'm wrong:  My firm's corporate RIA can sponsor me as an IAR, and I can go out and run my own business, right?

For instance, I can set up an operating company (LLC), and prospect for new clients, etc., all as an IAR underneath my companies RIA.  My employer would still be paying me a salary, in trade I would still be doing research for the company and give the company an equity stake in my business.

If I did this, as an IAR can I run my business totally different?  Do I have my own ADV?  Do I have to charge the same fees, or can I have my own fee schedule? 

Thanks guys

Sep 17, 2009 5:47 pm

As I understand it, you would be an employee of the RIA. If you want to be set up as your own RIA, approach your current RIA's owner and offer him a % of your new RIA in exchange for some cash up front. Just make sure to include an option for you to buy him out sometime in the future.

The way you have described still has you as an emplyoee. Who keeps the revenue?

Will your current RIA let you keep your current position and bring in some clients on the side, until you are big enough to go out on your own?

Sep 17, 2009 8:32 pm
CALI123:

As I understand it, you would be an employee of the RIA. If you want to be set up as your own RIA, approach your current RIA's owner and offer him a % of your new RIA in exchange for some cash up front. Just make sure to include an option for you to buy him out sometime in the future.

The way you have described still has you as an emplyoee. Who keeps the revenue?

Will your current RIA let you keep your current position and bring in some clients on the side, until you are big enough to go out on your own?


If I had set up a different LLC, with a different operating agreement, I would set up profit to flow the same way ownership was set - likely me getting 75% and my employer getting 25%.  There has to be something in it for him, and this seems like a way to make it so he gets essentially a "payout" for fronting me from the beginning.

I realize I would be an employee of my employer.  Essentially, I would be an employee of both companies (the way I understand it).  I would be an employee of my boss's RIA, where I'd basically be getting a consulting salary for my research work, and then I'd be an employee of the new company, which is an IAR of my bosses company, and I'd be getting 75% of the profit of this company as I start to build up the book.

The key is, that I'd be building equity in my own business.  At the current time, I have somewhat of a disincentive to add new clients, because I have a non-compete if I would leave, and I have no equity ownership in the business.  Essentially, I feel like I'm at a wire, I just get a small payout, with no equity ownership if I leave.


Sep 17, 2009 9:10 pm

The nice thing about RIAs is you can basically form deals like this.

If your current RIA firm is ok with it, then go for it!

Sep 18, 2009 8:16 am
eman07:
CALI123:

As I understand it, you would be an employee of the RIA. If you want to be set up as your own RIA, approach your current RIA's owner and offer him a % of your new RIA in exchange for some cash up front. Just make sure to include an option for you to buy him out sometime in the future.The way you have described still has you as an emplyoee. Who keeps the revenue? Will your current RIA let you keep your current position and bring in some clients on the side, until you are big enough to go out on your own?

If I had set up a different LLC, with a different operating agreement, I would set up profit to flow the same way ownership was set - likely me getting 75% and my employer getting 25%. There has to be something in it for him, and this seems like a way to make it so he gets essentially a "payout" for fronting me from the beginning.I realize I would be an employee of my employer. Essentially, I would be an employee of both companies (the way I understand it). I would be an employee of my boss's RIA, where I'd basically be getting a consulting salary for my research work, and then I'd be an employee of the new company, which is an IAR of my bosses company, and I'd be getting 75% of the profit of this company as I start to build up the book.The key is, that I'd be building equity in my own business. At the current time, I have somewhat of a disincentive to add new clients, because I have a non-compete if I would leave, and I have no equity ownership in the business. Essentially, I feel like I'm at a wire, I just get a small payout, with no equity ownership if I leave.





Sounds like you'd have a conflict of interest that would put you at odds with the CFA Standards. But I guess that would depend on your interpretation. Have you consulted the Institute?



Otherwise, it seems like a pretty sweet deal.

Sep 18, 2009 10:52 am
Moraen:


Sounds like you'd have a conflict of interest that would put you at odds with the CFA Standards. But I guess that would depend on your interpretation. Have you consulted the Institute?



Otherwise, it seems like a pretty sweet deal.


This definitely would break the code if I didn't have my employers permission.  But, with employers written consent, it would be fine.  And, since my employer would be an equity owner in the business he would obviously be giving me his consent.

I see it as a relationship that works like this:
I still work for employers firm XYZ, and get paid a base salary that's like a "consulting" fee for my research and handling some of my previous tasks
I also am working for the new company, with my primary mission in the new company just being bringing in new assets and managing those assets. 

In the end, it wouldn't be a conflict because my employer would know that every new client I was bringing in would go under the new company, and he'd have ownership of that.  Essentially, it would be like a subsidiary of the parent company.

Someone please slap me around if I'm thinking way off here..

Sep 18, 2009 1:48 pm

speaking strictly from the advertising perspective, its going to be a problem to set up your own LLC when you are an IAR of an RIA. You, the IAR, is listed as an individual on the RIAs Form ADV. Being that you are an IAR, you will be distributing the RIAs Form ADV part 2 with clients. The name of your LLC is not on Form ADV Part 2. When you advertise for business, you will likely do so under your LLC name. This is called "holding yourself out" and is a problem because your LLC is not registered as an RIA with the SEC or the state in which you do business. If this is brought to the attention of the state or SEC, you will likely get into trouble.     



If you did set up something like this, your employer's Form ADV will also have to be amended. Speak to an advisory attorney.

Sep 18, 2009 2:01 pm

Couldn't he do a "doing business as" under his firm's RIA, and skip all the problems?

Sep 21, 2009 2:42 pm

Anyone else with any experience or thoughts on this issue?

Sep 21, 2009 5:06 pm

why not just start up your own RIA?

Sep 22, 2009 8:33 am
aeromaks:

why not just start up your own RIA?


Unfortunately, I can't just start up my own RIA on my own.

I started my career on the institutional side as a research analyst.  The good and bad of that start:  Good - I spent all of my time in research and analysis, am now a CFA Charterholder, and know how to manage portfolios 100x better than the average advisor who's been in the industry less than 10 years.  The Bad - I didn't get to build up a book of clients.

So, starting an RIA on my own with zero clients isn't a great option, as I don't have another source of income in the startup to support my family.

I'd love to have an investor who wants to get me up and going - if there are any firms out there who do this sort of thing, by all means, please let me know:)

Sep 22, 2009 12:05 pm
eman07:
aeromaks:

why not just start up your own RIA?


Unfortunately, I can't just start up my own RIA on my own.

I started my career on the institutional side as a research analyst.  The good and bad of that start:  Good - I spent all of my time in research and analysis, am now a CFA Charterholder, and know how to manage portfolios 100x better than the average advisor who's been in the industry less than 10 years.  The Bad - I didn't get to build up a book of clients.

So, starting an RIA on my own with zero clients isn't a great option, as I don't have another source of income in the startup to support my family.

I'd love to have an investor who wants to get me up and going - if there are any firms out there who do this sort of thing, by all means, please let me know:)

 
Do you have sales experience?  If not, I can't imagine anybody wanting to sink money into a sure-to-fail venture.  You may be the greatest money manager alive, but if you can't sell yourself and your value, you won't survive.
Sep 22, 2009 1:11 pm
deekay:
Do you have sales experience?  If not, I can't imagine anybody wanting to sink money into a sure-to-fail venture.  You may be the greatest money manager alive, but if you can't sell yourself and your value, you won't survive.


I understand your sentiment, and it's something I would say to a newbie.  But a newbie I am not, I have experience.

My survival is not anything I'm concerned about in the least.

Sep 22, 2009 4:34 pm

You've got a good attitude toward this business - don't have a plan 'B'.  However, I was asking a different question:  Do you have retail sales experience?  Believe me, institutional sales is a totally different animal than dealing with mom and pop.

Sep 22, 2009 6:36 pm

will agree 100% with deekay.

you need retail experience. You can be the best money manager in the world, but if no one knows about you, what good is it? And last but not least... clients dont care if you are the best or not, they want someone to listen to them, assess their goals, needs, craft a financial plan, and put it into action.

If you sell yourself as the best money manager, people will leave you as soon as there is the next downturn, or emerging markets doubles and your portfolios dont.

retail sales experience is the most important thing to succeeding in the business, next to marketing/prospecting.

Sep 22, 2009 8:49 pm
aeromaks:

will agree 100% with deekay.  

you need retail experience.  You can be the best money manager in the world, but if no one knows about you, what good is it?  And last but not least... clients dont care if you are the best or not, they want someone to listen to them, assess their goals, needs, craft a financial plan, and put it into action.

If you sell yourself as the best money manager, people will leave you as soon as there is the next downturn, or emerging markets doubles and your portfolios dont.

retail sales experience is the most important thing to succeeding in the business, next to marketing/prospecting.


Guys - I know you're trying to help, but seriously, don't worry about this.  While I said I worked on the institutional side, my firm had both individuals and institutions.  I've been through the ringer and know plenty about all of those things, and experience as well.  The one thing I didn't do was build my OWN book.  Mistake in retrospect building my employers book for so long, but nothing to do about it now.

Let's get back to the topic please.

Sep 22, 2009 9:01 pm

I think the point was you aren't going to get any venture capital when you don't have any history of gathering assets.



While you may have prospected, no one is going to touch you if you go out on your own with zero assets.



Unless you start a money management firm, not an advisory practice.