Pros and Cons of RIA

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May 15, 2008 4:21 pm

What are some of the pros and cons of the following:

 
Being an IAR under an RIA at a firm such as LPL
Creating your own RIA and using a B/D such as Scwab or Fidelity
Creating your own RIA and using a B/D such as LPL
 
Secondarily I am also intersted in how fee only folks handle insurance business for life, disability, LTC?
May 19, 2008 5:42 pm

I've been looking at some fee-only financial planners' websites, and it's definitely an interesting concept. Naturally, they boast about their lack of any conflicts-of-interest, and they appear to be mostly correct about that.

 
As far as I can tell, they help you implement their advice/plan at one of the no-load families or a discount brokerage firm. The main conflict I see with this concept is that they charge for advice and then divest themselves of the client--and any future emotional outbursts--regarding investment performance.
 
I gather that they don't have any custodial issues if they're sending your money away to be managed, i.e., they aren't responsible for taking checks to the bank, reviewing accounts, etc.? 
 
Like I said, I have no idea what they charge (that information isn't posted on any of the sites I've looked at), but I can't imagine a person being too excited about writing a check for several thousand dollars just for "advice" and no further, on-going investment management/monitoring.
 
I can't imagine many of us lasting too long in this business if when we got ready to put $500k in mutual funds, we told our clients we needed a separate check for $10,000 for our fee. It's obviously much easier for them to stomach the huge commission if it's taken out of the check they're rolling over.
 
I don't know what these folks charge for a "financial plan," but I can't imagine a successful fee-only planner earning nearly as much as a successful financial planner who does commission and fee-based business. However, unless the folks whose websites I visited are all married to successful lawyers, they seem to be doing okay, because they all have some very expensive hobbies listed.
May 19, 2008 6:14 pm

Borker Boy,

I'm not sure why you critique a business model you obviously don't begin to understand.  I don't mind helping out a bit if you show you are willing to do some legwork beyond casually looking at some websites. 

For now all I'll say is that Registered Investment Advisers (RIAs) are free to charge fees to produce a plan, as well as to charge fees for managing a client's portfolio, or to provide a plan and manage the portfolio for only AUM fees.  They are free to charge just about anything and any way they wish so long as it is fully disclosed along with all conflicts of interest.  I don't know where you got the notion that they typically charge for a plan and invest the money and then disappear.  The norm is very definitely the exact opposite of that.

If you want to learn more, a good starting place is the websites of one of the larger custodians who work with RIAs, such as Schwab Institutional or Fidelity Institutional Wealth Services.  Spend some time there and you'll understand this much more.  Here are some links.

http://www.schwabinstitutional.com/public/

http://fiws.fidelity.com/index.shtml

Once you grasp the basics you'll be much better situated to offer your opinion on this business model.




May 19, 2008 6:38 pm

I read my post again and am still having difficulty finding the part where I said these folks "charge for a plan and invest the money and then disappear."

 
As you, I and everyone else on this forum can clearly see, I said nothing even remotely close to that. I realize that RIAs "are free to charge just about anything and any way they wish," but the folks I'm referring to only charge a fee for advice. No AUM fees, no management fees, no commissions, just a fee for advice and nothing more.
 
My first impression was that charging only for advice wouldn't be very profitable, but like I said
 "they seem to be doing okay, because they all have some very expensive hobbies listed."
May 19, 2008 6:44 pm
jwcopper:

What are some of the pros and cons of the following:

 
Being an IAR under an RIA at a firm such as LPL
Creating your own RIA and using a B/D such as Scwab or Fidelity
Creating your own RIA and using a B/D such as LPL
 
Secondarily I am also intersted in how fee only folks handle insurance business for life, disability, LTC?


I'll offer a condensed version, since this can get into many different permutations.

The main distinctions involve control and, to a lesser extent money and hassle.

Anytime you are an IAR under someone else's RIA, you give up some degree of control but save yourself some money in setting up your own RIA, and some of the hassle involved in compliance, since someone other than you takes responsibility for that.  In exchange, they also take some small percentage of your revenues.  This option typically works best for smaller books, and those who have a pretty 'vanilla' book, as the corporate RIA will allow for most typical stuff but not much out of the ordinary.

OTOH, if you create your own RIA, it costs a bit more upfront in legal fees, but it is yours and you decide exactly how you want to operate.  You are in control.  You are also responsible for ongoing management & compliance.  You will also keep more of your revenues.

If you will do zero commission business - and be fee only - you would have no need of a broker/dealer.  Instead you would partner with an institutional custodian like Schwab or Fidelity or others.  Note these are NOT b/ds - they are custodians.

IF you ALSO want to be paid commissions AND get paid fees under your RIA, you can do so by affiliating with an independent b/d that allows such relationships - the so-called 'fee friendly' b/ds.  This dual registration or hybrid approach is increasingly common.  Fees go through your RIA, commissions go through your b/d, then to you as a RR.

Finally, the option you mentioned of your own RIA with LPL is a variation on this last arrangement, only LPL acts as both custodian and b/d, but through different legal entities.  It's a pre-built approach to dual registration that is simpler for many RRs to grasp, but they give up some control and revenues.

Finally, on the insurance question - strict fee only RIAs cannot really handle selling variable insurance such as VUL or VAs, but must refer that out to someone who can be compensated by commissions.  They can, however, charge a fee for reviewing and recommending insurance.

However (here it gets into variations again) dual registered or hybrid RIAs (fee based) can also sell variable insurance through their independent b/d (or, in the case of fixed insurance directly with the insurance carrier if they are so set up) SO LONG AS they fully disclose that they are receiving a commission and the resulting potential conflict of interest.

Not sure if that helps.  As I said, the numerous variations possible start to make this
complicated real fast, but it's really pretty straight forward once you
understand how the non-FINRA, non-B/D world operates.

May 19, 2008 6:50 pm
Borker Boy:

I read my post again and am still having difficulty finding the part where I said these folks "charge for a plan and invest the money and then disappear."

 
As you, I and everyone else on this forum can clearly see, I said nothing even remotely close to that. I realize that RIAs "are free to charge just about anything and any way they wish," but the folks I'm referring to only charge a fee for advice. No AUM fees, no management fees, no commissions, just a fee for advice and nothing more.
 
My first impression was that charging only for advice wouldn't be very profitable, but like I said
 "they seem to be doing okay, because they all have some very expensive hobbies listed."


I was paraphrasing this part of your post:

"As far as I can tell, they help you implement their advice/plan at one
of the no-load families or a discount brokerage firm. The main conflict
I see with this concept is that they charge for advice and then divest
themselves of the client--and any future emotional outbursts--regarding
investment performance."

Perhaps you could clarify what you meant by "divest themselves of the client"?  Sounds a lot like disappearing to me, but apparently I misunderstood you.

May 19, 2008 10:54 pm

Morph is right---that is exactly what you said Borker. As a new rep for a indy RIA, having left Jones a few months ago, I could not believe that anyone could post something so 180 degrees wrong as Borker did. Makes no diff, really, just incredible how misunderstood this biz is by folks IN THE BIZ.                                                                                                                                                                                                                     I have MORE responsibility (fiduciary) and much more time (less clients but larger) to service them- most definitely not to divest myself of the results of implementing the plan! There is no cost upfront, and the total cost (fees plus no-load index funds or ETFs) is comparable to a mutual fund (MUCH lower after taxes).

 
Borker had one thing right--I do not have a conflict of interest anymore regarding product as I get zero commissions. Sleep great.
May 20, 2008 9:57 am

Thank you for the dialogue so far.  I do hope we can focus on the original question about what format works best for people, why they like one way over another.  I feel the 'hybrid' format make the most sense to me so far.  I have a hard time doing all the work, identifying a need for disability insurance or LTC and recommending they talk to someone else.  Seems like I do all the work, then someone else just gets the commission which could be more than what I charged for the plan.  I did not get in the biz to be paid the least out of everyone the client deals with.  And if the fee only are actually referring to insurance agents and getting part of the commission or splitting, then they really are not fee only.


I am also debating on whether or not I would want to create my own RIA while keeping an affiliation with a B/D for the instances where I do need commission products.  I guess I could become an RIA and just affiliate with a General Agency or two for insurance business and I would be nearly complete.
May 20, 2008 10:22 am

To go back to your original question, "Secondarily I am also intersted in how fee only folks handle insurance business for life, disability, LTC?", the answer is that largely they don't.

 
If someone is fee-only and they accept AUM fees, insurance creates huge conflicts of interest for them.   Here's just a small example from my last meeting.  We've determined that LTCi makes sense and that the best way to pay for it is putting some IRA money into a SPIA to pay the bulk of the premium.    Between the SPIA and the LTCi, I'll make in the neighborhood of $5,000.  However, by making this recommendation, I will lose roughly $700 in annual fees.   In terms of my own income, it's basically 6 of one or half dozen of another.  I don't have a big stake in what my client does.  I get paid regardless.  I pushed the client to do it because it is in his best interest.
 
What if I was fee-only?  How much time would I prepare to make a sale that will cost me $14,000 over the next 20 year?  How much effort would I put into making the sale?  Would I even recommend it?  Is it in my client's best interest to pay me a fee and then have to spend extra time meeting with someone else who will earn a commission?  Has anyone ever seen a fee-only planner recommend using a SPIA to fund an LTCi policy?
 
I think that fee-only without AUM is fine, but fee-only with AUM fees is ripe with conflicts unless someone is strictly being an investment advisor and not a financial advisor.
 
JW, I think that if you are going to go the route of creating your own RIA, you really want to punt the B/D.   Otherwise, you are still under their thumb for EVERYTHING that you do.
 
(Disclosure: I am an IAR for an RIA)  
 
 
May 20, 2008 10:27 am

"I do not have a conflict of interest anymore regarding product as I get zero commissions. "

 
If your client, puts $1,000,000 into a SPIA, how much money do you make?  If your client puts $1,000,000 into investments, how much money do you make?  If your client leaves his $1,000,000 in CD's, how much money do you make?  If your client pays off $1,000,000 of debt, how much money do you make?  If your client buys a single premium life insurance policy for $1,000,000, how much money do you make?
 
Now, please explain how you have no conflicts.
May 20, 2008 8:44 pm

Pros



Being able to offer an unlimited offering of investment products. You can counsel people on anything that has to do with their investment portfolio, financial planning matters, estate planning issues. You can charge hourly consulting fees, or AUM fees if you choose and have the flexibility to implement a plan, or advise clients who prefer to implement your recommendations on their own.



You can trade multiple accounts simultaneously, and manage client assets on a discretionary basis. For advisors who prefer to spend more time managing money, and less time having to ‘sell’ clients on the concept of making small changes within portfolios, RIA’s have a clear advantage. I executed 10,000 trades within 2 hours two weeks ago, and didn’t even have to call a single client to explain our allocation changes. We focus on the strategy of portfolio management, and NOT the mechanics of having to contact 400 clients in order to implement an allocation change. This type of efficiency is the largest benefit of going straight RIA.



As an RIA, you customize your deliverables, provide ‘your’ product without a BD telling you the manner or the structure of your advice. You choose your analytics programs, performance reporting platforms, and get to design the clients’ experience as it’s most appropriate for your client base. You can charge fees for attending, reviewing, or recommending other financial products you might not be able to offer. You can start your own hedge fund or consult to businesses looking for financing. You can set up a related business to compliment your existing RIA practice – it’s all up to you.



If you want to offer VA’s, insurance, SPIA’s, or anything within the insurance world, it’s totally possible. If you want commissions to be paid to your RIA, or would prefer the ability to have each IAR compensated for insurance business, either way is possible.



You design the firm the way you want. Limitations rarely apply.





Cons



You have to design your own firm. It takes time if you want to do it properly. Anyone, myself included, will tell you it’s not easy to do.



You have to create your ‘brand’ and everything affiliated with your message. It’s a system that’s built on the components (performance reporting, trading, billing, etc.) that you have to find the time to research, choose, pay for, and maintain. As an RIA, you need to be your own compliance officer, information officer, CEO, CFO and business development specialist.



You are on the hook for an SEC audit. Once they come to the office, they are sitting across from you and your chief compliance officer. We aren’t talking about a two-hour review from your friendly BD just making sure your SIPC sign is in the proper place. The accountability starts and stops at your desk, and there isn’t any type of fallback BD relationship that can take the responsibility for failing to maintain proper books and records. It’s all you, and no one else.



Compliance requirements are to be maintained expertly, procedures documented, and everything is to be kept up to date and accurate given the ever-changing compliance landscape.





Lastly



It was the most rewarding professional experience of my career. I would do it again, plain and simple.



C

May 21, 2008 6:59 am

anon- you are right; my comment was short hand and not very precise. I am fee-based, in that I will do a SPIA for commission if it is right.

 
no such thing as NO conflicts; I was stretching it there for effect--got carried away as I am so happy to not have to charge mutual fund commissions anymore (and annuities are also no load now)
May 21, 2008 6:49 pm

Captain, good post.

 
newnew, thanks for the clarification.   I firmly believe that the conflict level is in direct proportion to the advisor's need/desire for immediate compensation and mode of compensation is very much a secondary issue.
May 22, 2008 11:41 pm

Thanks -



I agree with your comments. The level of conflict seems more than apparent when there is a high need for immediate compensation.



Good times, and a good weekend to everyone.



C