Forming an RIA

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Nov 28, 2006 6:42 am

Why don't more reps start their own RIAs instead of affiliating themselves with a b/d. A friend of mine has filed with the state to start an RIA. He says with assets of less than 30 mill, an RIA can be set up however compliance falls under the state. Also how difficult is it to set up and throughout the life of the RIA? My friend says the start-up is not that bad. Typical state govn't paperwork.

Nov 28, 2006 11:17 am

I left Jones to start a state RIA in NC. I'm surprised more brokers don't do this, too. It's extremely easy and it opens so many more ways to be compensated. I charge $150 hourly to put together recommendations and then I can charge an asset-based fee to implement and monitor. I also will charge asset-fees for investments that aren't with me, like 401(k)s and VA's. I have no regulation by the NASD and I keep 100% of the fees. My monthly overhead is around $1200, including rent, E&O, Health Ins., phones, internet, biz ins. Everything else is take-home.


I think it's a no-brainer!

Nov 28, 2006 11:24 am

Can the fees that are charged be directly deducted by the custodian to you, or does the client have to actually receive a bill from you and write a check?


I would think this is where some (including me) would see a hang up...even though in reality there is little difference, it is one thing to put someone in a wrap account where they are charged a fee, and it's entirely another to ask them to write a check.  Especially in a down market.

Nov 28, 2006 11:32 am

My understanding is that starting an RIA eliminates the ability to do retail brokerage (commission) trades.  Did you RIAs give that up or work around it by converting everyone to fee-based?

Nov 28, 2006 11:36 am

The way I frame the first meeting is that they have no idea all the fees they're paying now. I run some morningstar reports and add up all the fees + commissions. I then show them how moving this stuff into low cost investments will save them X amount, including my fees. My custodian will deduct and deposit for me, but I send an invoice to the client at the same time. I call them and tell them to hold on to it, since my fees are tax-deductible while commissions are not. If the assets are somewhere else, like in a VA, I have to invoice the customer for the money. I've had nobody blink at that, but my avg account size now is about $750,000, so writing a check for 1/4 of 0.70% is no biggie.

Nov 28, 2006 11:41 am

Yes, you are correct IndyOne. All investments are fee-based, but LTC and Life are still commissioned. I also get the up-front money from putting the recommendations together, $150 an hour. I'll tell the prospect at the end of the first sit-down "You've got a mess here that needs some work. It'll take me 2 hours to do some research and put together some actionable recommendations, so if $300 is reasonable, let's meet next week at this same time." If they won't agree to the $300 I know they are probably tire-kickers. If they will pay, it covers my time. I'm trying to get up to 40 billable hours/month. It's not 8% from a VA, but that's exactly what I sell against.

Nov 28, 2006 11:56 am
Indyone:

My understanding is that starting an RIA eliminates the ability to do retail brokerage (commission) trades.  Did you RIAs give that up or work around it by converting everyone to fee-based?



You can also be dually registered...still affilliate with a b/d for commission business, and separate from that have your own RIA.

Nov 28, 2006 11:57 am

Interesting...thanks, JoeDa...I learn something new each day...

Nov 28, 2006 12:23 pm
EDJ to RIA:

I left Jones to start a state RIA in NC. I'm surprised more brokers don't do this, too. It's extremely easy and it opens so many more ways to be compensated. I charge $150 hourly to put together recommendations and then I can charge an asset-based fee to implement and monitor. I also will charge asset-fees for investments that aren't with me, like 401(k)s and VA's. I have no regulation by the NASD and I keep 100% of the fees. My monthly overhead is around $1200, including rent, E&O, Health Ins., phones, internet, biz ins. Everything else is take-home.


I think it's a no-brainer!



What types of investments do you include in your practice?

Nov 28, 2006 12:39 pm
joedabrkr:
Indyone:

My understanding is that starting an RIA eliminates the ability to do retail brokerage (commission) trades.  Did you RIAs give that up or work around it by converting everyone to fee-based?



You can also be dually registered...still affilliate with a b/d for commission business, and separate from that have your own RIA.


Depends on the B/D.  Although some will allow you to maintainyour own RIA, they won't necessarily let you hold assets there.  You might only be able to use it for Financial Planning fees, not asset management fees.

Nov 28, 2006 12:47 pm
FreedomLvr:
joedabrkr:
Indyone:

My understanding is that starting an RIA eliminates the ability to do retail brokerage (commission) trades.  Did you RIAs give that up or work around it by converting everyone to fee-based?



You can also be dually registered...still affilliate with a b/d for commission business, and separate from that have your own RIA.


Depends on the B/D.  Although some will allow you to maintainyour own RIA, they won't necessarily let you hold assets there.  You might only be able to use it for Financial Planning fees, not asset management fees.



Exactly right...because as I understand it the b/d is now responsible for monitoring your RIA business even if you aren't holding assets with them.

Personally I'm glad for guys like Captain and others who have chosen this path, but for me it's too much administrative hassle for the extra money.  My firm's corporate RIA does all that for me and only takes 10% of my revenues(or less as my gross goes up).

Nov 28, 2006 1:00 pm

The products I use for accounts that I hold are primarily low-cost mutual funds and ETF's. I run VA's through Vanguard or Fidelity and act as limited power of attorney. Life, LTC, and fixed annuities through Bisys. 401(k)'s are obviously help at the plan custodian.


I looked into dual registration, but the cut to the B/D and the compliance headaches seemed too much. I wanted it as simple as possible.

Nov 28, 2006 5:54 pm

Now that was a good topic.

Nov 28, 2006 7:05 pm
Nov 28, 2006 7:31 pm

We have a practice with $240 million. $150,000 per year in overhead,

$1.7 million in revenues, all fee-based. Each partner earns $225,000 per

year in salary.



We use discretionary investment models which use 1.) separate account

managers, 2.) mutual fund and ETF models. We manage the models, and

ALL positions within client accounts are traded in bulk. It's the most

efficient model, period. Too many times in the past when you work for

ML, Wach, SB, etc, you are focused on 1.) calling the client, 2.) getting

them to agree, 3.) hitting the computer to do the trade, 4.) Calling the

next client. It's a horrible process which expends more effort in the

mechanics of managing the money, rather than the due dilligence

required to manage the client assets. Clients do NOT care about whether

or not you are using Vanguard, Fidelity, Davis or the American funds...

the name is meaningless. It's the process that matters, plain and simple.



We dually affiliate with a B/D to keep our variable annuities, and outside

mutual funds. However we are 1035ing the annuities to the no load

annuity through Fidelity (our custodian) and eventually transitioning the

remaining (very small) numbers of outside client accounts to our RIA

through Fidelity.



I plan on giving up my Series 7 within 12 months.



Compliance - We outsource our compliance consulting to a third-party

firm which conducts our mock audits, etc., and they make sure we are

doing what we need to be doing in order to be prepped for an SEC audit,

when the time comes. We meet once per quarter just to do a review, and

it costs us $4,000 per year for 20 hours of their review work.



Performance reporting - we can use anything we want. We are in the

process of outsourcing this need also at 2 basis points on the AUM.



After the $25,000 in per partner overhead for staff, insurance, rent, blah,

blah, we are left with a 100% payout. For us, it's a 87% payout after all

expenses, with NO haircut on behalf of the custodian. On January 1st,

we'll have a record of all the closing account balances as of Dec. 31. We

hit a button, export the list of account numbers, their billing rate, and the

amount of the quarterly fee. 30 minutes later, the fees billed (100% of

them..) show up in our 'master' account at Fidelity. The next day, the

funds are held within each of our individual accounts after the quarterly

expenses are deducted. It's that simple.



Starting the whole thing - It's not the easiest task. It took the SEC 4

weeks to approve our application. We started the process in March and

were complete by June 1.



Most dually registered advisors will be responsible for E/O coverage

twice... once at their BD, and then once at their RIA. You can't mix the

two, and coverage for each side of your business (RIA and BD) will run

$1,700 per year x 2.



You need to set up e-mail archiving to make sure ALL of your e-mail is in

a format that is 1.) able to be searched by keyword, and 2.) can be kept

for up to 7 years.



When setting up your firm, you will most certainly need to consult an

attorney. There are some excellent attorneys which have the expertise to

do both RIA registration, and the creation of your ownership entity. You

NEED to be careful NOT to have any existence of ownership during your

employment with the firm you are leaving. This could be considered to

be an 'outside business interest', and would have to be reported to your

firm. So, think carefully about having your attorney OWN the entity you

are creating until you leave your firm. After you depart, purchase the firm

from your attorney and you are done.



Custodian will keep ALL 12b1 fees generated from your mutual funds.

Just an FYI. But, you will have the ability to use non-12b1 funds which

will make for a quick savings for your client, and better returns for the

same fund, perhaps. Davis NY Venture Y, vs. Davis NY Venture A, as an

example.



If you would like, you can pass along the transaction fees to your clients.

Generally ranging from $10 to $12 on equity-based trades, nothing on

bonds since they are an inventory item, and $0 to $30 on mutual funds

depending on whether or not your custodian earns any revenue sharing

$$'s from the fund.



Lots more to share... any questions?



C

Nov 28, 2006 7:46 pm

Sorry one last bit...



It really isn't for everyone. I created our own letterhead, business cards,

website, logos, investment risk questionnaire, signs and office decor.



However, it was truly a labor of love. I loved every minute of it, and

wouldn't have had it any other way. I think most advisors would like to

have it the way they want it, but sometimes put the payout percentage on

a pedestal. We didn't do it just for the better payout, but we did do it for

the ultimate control of the 1.) firm we own, 2.) the brand we created, 3.)

the direction we want to go, and 4.) the responsibility that the product we

produce is our own.



The concept of joining LPL, or Raymond James' RIA platform is a good

one. Some people aren't cut out to create a brand on their own. They

don't have the ability nor to they possess the drive to do so. But, if you

have the sales, analytical, and ownership mentality it can certainly work in

your favor.



Lastly, think about selling your practice... or, for that matter, buying into

another practice. The ONLY way you will command top dollar is by

creating a discipline that can be executed through discretionary portfolio

management. If your buyer can't step into your shoes and start driving

the portfolios immediately, you've got a problem. Granted, clients are

different one after another, but.... they all fit into some type of risk profile

that can clearly be categorized and managed appropriately.



I really think it's the way a true independent firm should function.



Next step.... (can't say just yet, but it's a good one). Good times.



You create it. You own it.



C

Nov 28, 2006 7:58 pm

hi
thats a lot of useful info..appreciate it....just a quick question...u said do not have ownership in a biz entity while employed with a b/d...i plan to go indy with a b/d in early jan..and have just filed for an llc{ single member llc}...i will not be doin anthin till i resign{ transferrin accounts or using the llc etc} and in essence its just a shell till i resign..i guess i wanted to get everything ready before i resigned.....so is that not right?? can i not file for an llc and have it active just before resigning.? what r my options at this stage....

Nov 28, 2006 8:11 pm

Go away macca. You have no use here.

Nov 28, 2006 8:41 pm

Captain for what it's worth I have my own brand name, logos, letter head, and so forth.  I own my own DBA, and my clients are mine by contract.  I just don't want to deal with all the other stuff.

Nov 28, 2006 8:48 pm

Jeno -



What I am saying is that while you are still employed at your soon-to-be

former employer, you should NOT have an ownership interest in your LLC

while you are still employed, but have yet to leave, your current employer.



Like this...



You work for XYZ Big Firm.



You shoudn't have any unapproved outside business involvement while at

XYZ Big Firm.



So, you set up an LLC, and own it yourself.... you may have opened

yourself up to litigation since you now own an interest in an outside

business.



You can hire an attorney to set up your LLC, however, you do NOT take

ownership of the LLC until you have separated from XYZ Big Firm.



As for having your LLC in your ownership and under your control before

you resign, I say this... it's a potential problem since you did not report

the ownership interest to your firm, and didn't get prior approval from

your compliance dept to own an interest in your LLC. That's where the

rub can be problematic.



Don't take this as legal advice... just consult an attorney before you take

ownership in anything before you resign. Also, when you file your ADV

with the SEC through the RIA application process, your name is 'out

there', and available for your existing firm to look and see what you are

doing. The RIA should be owned by your LLC, and the LLC should be

owned by someone other than you or your spouse. Attorney, as the

owner, would most likely be the best person and then you purchase it

from them once you separate from your existing BD.



Consult the attorney again, and if they don't have advice and experience

in the matter of a 'quiet' registration process, ask them to follow-up with

someone who certainly does.



Good luck.



C