RIA vs Wirehouse

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Feb 24, 2015 6:13 pm

I am being recruited by two large wirehouse firms as well as an independent RIA.  In speaking with the firms and various FA's and IAR's I have received conflicting answers on payouts.  I have heard anywhere from 25BP up to 108BP net earnings on AUM.  I realize it is not an exact science and AUM is only one part of the formula,  but what should I expect to gross and then net in my first year if I have $ 10MM in AUM for the entire year?  I would greatly appreciate any insight or thoughts. 

Feb 25, 2015 10:21 am

Tough question. 10MM is a great start and I wouldn't recommend anyone going independent without that or at least a reasonable chance of getting there in one year. Comparing Wirehouses to Independent is kind of hard but I have worked at both so I will try. The Wirehouse is going to depend on where you go but lets just use ones I know (Morgan and Merrill). I will also assume you negotiate to the top payout for the first 3 years (you really should negotiate that). So your payout will be around 40% of your total revenue. To find out your total revenue is really up to you. If you truly are doing only Managed money (which is really a great way to start) then it will depend on what you charge. I charge from 1.25% to .75% on my managed money so lets call it 1.00% average. That means you will have a 100K of revenue with a payout of 40K after everything. So you will be paying about 60K to the wirehouse for a computer and tech and a nice cubicle!!!!

That is why I went Independent after some soul searching. Taking that same approach, I bought a computer, rented some office space, and bought some furniture. First year was about a 77% payout. Didn't have a name people knew from commercials (or from the crime blotter) but I got an extra 33% payout (at the time the top was 44%). Also that meant I could have less clients and make the same amount meaning I could work "harder" for my smaller client base which had them give me more referrals. Within two years I had almost doubled my "salary" from when I was at a wirehouse and worked about 75% as much of the time.

Hope that helps.

Feb 25, 2015 2:50 pm

Thank you!! Very helpful. Not easy to find this sort of information. The wirehouse is offering to pay me $75k base for 2 years and 20% commission. Year 3 I ramp up to 40% commission and no base salary. There is a possibility of asset sharing with a soon to be retiring broker - I will split the 20% commission with him in the first year until the assets are fully turned over to me. Is this a good offer or should I punt?

Mar 3, 2015 2:02 pm

So sorry I just saw your response. It sounds like a good deal for starters. I wouldn't worry to much about the retiring broker as there is always a "retiring" broker... Face it, this industry is "dying" out because the majority of people in this industry are well over 55. Just speaking with my broker dealer and their back office, the average advisor age goes up 2 years for every year that passes. So if it was 55 last year it will be 57 next and so on.

For me the bigger question is how long do you want to be in this industry and what do you want at the end? If you are looking for no more then 10 years and will be happy with around 150K, take the wire house job. You will get a nice 401K and steady pay for 10 years. If you are going to work longer or want more, search Brokercheck for advisors with more than 20 years experience that are independent and call them to see if they have a succession plan. You will make far more (think around 300K) and at the end you will have a business to sell as your retirement instead of a 401K. The RIAs always scare me because the majority of the ones I have met are only RIAs because of U4 issues and they didn't want regulations on them (read very questionable actions). You could probably find a rep that will be retiring in the next 3 years. Go work with them.

I actually did that and can send you business plans and models I used if you are interested. Actually have spread sheets that compare wirehouses and independents/RIAs if you haven't made your decision yet. You can PM me with your email and I will send you the info.

Mar 5, 2015 10:50 am

Thank you!! I had not thought about the possible U4 issues with RIA's. Excellent point. Very much appreciate the advice!!

Mar 6, 2015 1:19 pm

I would echo a lot of the comments made here. The infrastructure that a wire house provides can be useful in certain situations. For example, the performance reporting, account billing, any research or portfolio management capability, etc can all be pretty expensive to obtain as an independent. All that to say, I'm a huge fan of the independent realm. There are a number of ways to obtain this same level of infrastructure in a way that gives you more upside as a 'business owner financial advisor' especially when thinking long term. Of course, there would be a list of items, beyond just office space, that you'd need to track down. From CRM to portfolio accounting software etc. And, yes, I also see the 'retiring broker' idea being held out a bit too often...! If you have any follow up questions about third party help, I'd be glad to help in anyway I can. Best of luck.

Mar 16, 2015 10:07 pm

Thank you Steve! Very much appreciate your advice.

Mar 27, 2015 9:32 am

I am starting out as an advisor and am looking to primarily do RIA type business for a few large ($1MM to $2MM) but would like the flexibility to also do commission business for smaller accounts (less than $100k AUM). Should I look for a position with an RIA firm or pursue a regional b/d that offers a hybrid (fee and comm) model? I already have my Series 7 and other FINRA licenses from many years working in Opns at a senior level. I am a CFA Level II candidate and am somewhat nervous about the comm business and possible conflicts with the CFA leanings toward fiduciary reqs. I believe the fee approach is the right approach overall and am wary of a b/d as they seem to push their products (mutual funds, variable annuities, credit cards, etc..) on to their FA's to sell to clients. I do not want to sell VA's and am not a big fan of mutual funds or ETFs for clients. Your thoughts?