Is RIA Worth It?

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May 10, 2010 11:59 am

Hello All,

I am thinking about getting started as a self RIA and thought I might get some good input from this forum.  Before I go any further, I want to know if its possible to make it in this industry by focusing on lower net worth clients.  I know lots of people that come to me for investment adivce and the like but aren't wealthy by any means.  Is it possible to be profitable by taking on a higher number of clients with lower net worth? I am looking for a custodian that would cater to this style of managment.  That being said, I obviously wouldn't turn down high net worth individuals, but starting out I would most likely have middle to lower net worth clients.  Thoughts?

Thank you.

May 10, 2010 1:50 pm

Mac,

Hopefully when you say "lower net worth", you are not just referring to people funding a Roth IRA each year.  You have to look at the numbers....let's just say for simplicity that you charge a 1% fee (after some fees and stuff).  Having $10mm (that means millions ) in assets under management (AUM) would give you $100,000 in revenue.  That's before ANY overhead.  You will have to pay rent (unless you use your house), technology charges, some various custodian fees, compliance costs, and various other expenses.  If you did it out of your house, I am guessing you could do it for $25K on total expenses.  That would give you net of $75K.

 However, if you are going to truly focus on lower net-worth folks, that $10mm might take you years to accumulate.  If you were aggressive and found 4 or 5 new clients per month, you would have, lets call it 50 new clients per year.  After 5 years, that's 250 clients.  You would need to have an average balance in the accounts of $40,000 to meet your $10mm.  And that's assuming you found 50 new clients every year, and they each had 40K or more.  In the indy/RIA world, that's too many clients, and not enough assets.  So you need to really find fewer clients with more assets.  Do you have a plan to get there?

Bottom line, if you have a spouse (or other income or assets) that can support you during the ramp-up phase (call it 4 or 5 years), or your income needs are REALLY low, it could be a great way to go.  But all of those things need to fall into place to make it happen.

May 10, 2010 1:51 pm

Oh, and a few custodians will allow small balances - Trade-PMR comes to mind.

May 10, 2010 2:24 pm

Mac,

I agree with B24's comments generally.  You might be able to help yourself by structuring your service and fee schedule for smaller accounts.  You could charge more than 1% for starters as well as have a lower tier of account where some services, for example, a personalized comprehensive financial plan, are available for an additional fee (e.g., a few hundred dollars ). 

In addition to TradePMR, check out Scottrade.

I am just getting started myself, with a similar philosophy to yours. 
For me, this is about making a "decent" living, doing what I enjoy,
while giving something back.  I've seen too many people with limited
investable assets, including friends and family, get screwed by
so-called professionals (brokers, banks) giving bad advice.  Everyone
deserves better than that.  This is a mid-career change for me and I
have already made some money as a corporate finance executive.  But I
still need to pay bills and accumulate a little wealth, so I will
attempt to balance the "social" with the "economic" motivations.

Good luck.

May 12, 2010 9:51 am

Indy RIA

1% on AUM + hourly fees + fixed retainer = play golf 2 days a week.

May 12, 2010 10:38 am

[quote=matt1957]

Indy RIA

1% on AUM + hourly fees + fixed retainer = play golf 2 days a week.

[/quote]

What?

May 12, 2010 7:50 pm

Any opinions on how much AUM you need to be a viable stand-alone RIA? It used to be 50m, is it more like 100m now?

May 20, 2010 11:59 pm

Thanks everyone for making mention of Trade-PMR in the posts.  Yes, focussing on "middle-America" is certainly possible and viable.  It partly depends on your geography.  I know of several RIAs located in rural low cost of living places managing $15 million and they have a great lifestyle.  Bigger does not always mean best; sometimes other factors come into play.

Building an RIA firm; like any other business takes time though.  The early years will be tough; you'll knock your head against the wall at least a dozen times but before you know it; your doing great.

Be tenacious; enthusiastic and client-centric and you'll do fine.  Best of luck to you!

Fred

May 31, 2010 12:50 am

Humn... what is your experience level and what exactly is your target market?  how much in assets?

Also, do you want to manage just investments or going to be doing financial planning and insurance as well?

Jun 10, 2010 12:58 am

[quote=Milyunair]

Any opinions on how much AUM you need to be a viable stand-alone RIA? It used to be 50m, is it more like 100m now?

[/quote]

I'm not sure when $50MM was required to be viable.  For me, once $20MM was hit life got pretty easy.  Once you pass $50MM you can pretty much coast - outsource a lot of stuff, hire a couple good employees, and have plenty left to live very well.

Jun 10, 2010 8:49 am

$50 or $100 million to be a viable RIA?  Sounds like wirehouse and Jones propaganda.

Jun 10, 2010 3:42 pm

Sorry, I don't get it. Last I checked, for a one person office, the numbers didn't really make sense under 50m. I think 25m  was the minimum for Fidelity, but with an independent RR payout, 50m looked more reasonable.

I'm also asking, how much AUM are firms like Fidelity or TD looking for these days, for a solo office guy to move from RR to RIA?

Jun 10, 2010 3:51 pm

I know RIAs with $5 million under management.  They do fine.  I think Fidelity is asking $15 million, TDA doesn't care, as long as you have a viable business plan.

Not to mention, they don't even check to see how many assets you are currently managing. You just tell them, and they take your work for it.

Jun 10, 2010 4:23 pm

I wonder about the regulatory environment for small RIAs. It looked scary a couple of years ago. Wonder if it will get harder, or more expensive. I wonder if registering with the feds would be better, or keeping it under 25m and just going with the state. I guess everything could change over night, just commenting, I'm sure it would be best just to do a little research if I was serious right now.

Jun 10, 2010 4:28 pm

Depends on how you want to live.

I'm a small RIA that has little overhead and I do just fine.  You need to look at it and run it as a business.  I'm an expense / overhead hawk.  Very little in my model.  No physical office. Leverage technology as much as possible provided a decent ROI.

15 AUM @ 1% = 150k fee income

$125/hr * avg. 10 hr/week * 50 weeks = 62.5k

Total Revenue = $212,500

Expenses

Running the biz 10% of revenue = 21k

Other Expenses 5% of revenue = 10k

Total Expenses = 31k

Net = 181K

Add in some creative tax accounting / bene's pushed through the biz and your after tax return isn't too bad.

Jun 10, 2010 5:15 pm

One of the things I can never understand is who would do business with a financial advisor that has no office?  I have a buddy that went indy a year or so ago, and the only biz he gets is little crap stuff.  I don't think he's even over $5mm after 4 years at Jones and 1 year indy.  Part of it is his work ethic, but that's another story.

Jun 10, 2010 5:16 pm

Oh, and Matt, I was not criticizing, 180K net is damn good for 15mm AUM.  I just wonder how you get business without an office.

Jun 10, 2010 5:16 pm

Yep, I get the last part.

Is your hourly for new business, or do you charge everyone a minimum - do you do an annual financial planning deliverable, or what?

Where do you meet with clients, I imagine mostly over the phone after everything is set up.

Looks like you're in the sweet spot. Smart. Thanks for the view.

Jun 11, 2010 10:10 am

Perhaps it's because I'm not overly familiar with the RIA billing model, but do I understand correctly that you're charging your clients 1% on their money, plus $125 an hour for other work?  Are you charging them for both money management AND planning?  Or are you charging the $125/hr if you're just setting up a financial plan for them and not actually managing their money? 

Jun 11, 2010 11:24 am

I separate the two.  Managing money is managing money.  Planning is planning.  They are two different "products" that I offer and thus charge separately.  One caveat, I do provide a "base" plan with the money management piece.  One offs and other meetings I charge for.

None of my prospects/clients have ever mentioned concern about a lack of office.  My job is to service them and as such I meet them where it is convenient to them.  Their time is my money.  I don't waste it by having them come to "my office".

Besides - it is alot easier to meet more potential prospects by being introduced while at their place of employment.