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

[quote=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?[/quote]

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

[quote=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!

[/quote]

What types of investments do you include in your practice?

Nov 28, 2006 12:39 pm

[quote=joedabrkr] [quote=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?[/quote]

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

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

[quote=FreedomLvr]

[quote=joedabrkr] [quote=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?[/quote]

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

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.

[/quote]

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

"Research examines whether advisers add value
Allan Roth is a CPA and Certified Financial Planner
 
September 1, 2006
We’ve all wondered at times what we are getting from our financial advisers. Studies have shown that stocks recommended by Wall Street tend to underperform the stock market as a whole, but can financial advisers add value in the selection of mutual funds?
 
Well, a groundbreaking study has just been completed on this subject, which Donald Moine of Morningstar calls “the study of the decade.” Moine also predicts it will create a firestorm of controversy. I completely agree with both statements.  
 
This study, entitled “The Costs and Benefits of Brokers in the Mutual Fund Industry,” compares mutual funds sold by advisers to those bought directly by consumers. It was performed by Daniel Bergstresser and Peter Tufano of the Harvard Business School and John Chalmers of the University of Oregon.  
 
The definition of “broker” used in this study is a standard definition and spans Wall Street firms to independent financial advisers. It compares mutual funds sold through this professional sales channel to mutual funds bought directly by the investor.
 
I won’t get into the details of the methodology, but I did speak to one of its authors and am convinced it is statistically sound, covering trillions of dollars in mutual funds from 1996-2002. The questions examined are:
 
Do brokers give clients access to funds that are harder to find? Yes — the study leaves no doubt that if you are looking for funds that are less known and hard to evaluate, a broker can provide access to these funds.
 
Do the broker selected funds outperform those selected directly by the consumer? No — not by a long-shot. The broker selected funds have higher distribution and other costs, which impacts performance. Curiously, the study found the funds underperformed by far more than the costs would have predicted. The only exception noted was in money market funds.
 
Do the brokers provide superior asset allocation and help consumers avoid investing pitfalls, such as chasing the hot sectors? No — there was very little difference between the broker-sold and directly purchased funds here. Buying assets that have already gone up is hard to resist, whether you’re a broker or an investor.
 
Do brokers merely sell what they are paid to sell? Not the biggest epiphany to come out of this study, but yes — the data tends to support this conclusion. Freakonomics in finance is alive and well.
 
In a nutshell
 
An often stated reason for using professional advisers is that they provide access to superior performing funds, as well as the focus and discipline to stick with the plan.  
 
This study shows it simply isn’t so.
 
An investor buying funds sold by advisers is likely to underperform the do-it-yourselfer, and is just as likely to chase the hot asset classes and funds. If you think you are getting value in these areas, statistically speaking, you are probably wrong.
 
Should you now go out and fire your broker? No.  
 
I spoke with one of the study’s authors, John Chalmers, and he was quick to advise that one could not jump to the conclusion that the investors buying broker-sold funds would have been better off had they invested on their own.  
 
Investors using brokers may not have done the same as those that bought funds directly, he said. They might have kept the money under their mattresses or fallen for the latest annuity. (So much for the salesmen on this site claiming that is was a biased study!! This guy is doing everything he can to toss a bone!! And lol about the annuity!! )
 
Furthermore, the definition of value is an individual one, and there is always the possibility that you might be getting benefits from your adviser that were not part of this study. Perhaps your adviser is helping you understand the need to start saving for your financial goals, or even acting in the capacity of a life coach. (I suggest that a friend can do this for free....or hire a life coach....for much less.)
 
Here’s my take
 
People pick their financial advisers based on relationships. Believing that someone has your back, financially, might not be adding economic value, but surely adds psychological value. (Why can't you advisors see the destruction you're doing to people's lives??!?)
 
Not to minimize the psychological value, but when it’s all said and done, the investor is looking for performance in order to reach his financial goals. And when it comes to performance, it’s nearly impossible to get accurate information about an adviser’s track record.
 
The majority of those advisers claiming to be beat-the-marketers are actually far underperforming the do-it-yourself investors. They only think they live in Lake Woebegone.
 
Many advisers point out that returns are far more important than costs. While this is a true statement, this study yet again proves that those higher costs result in lower performance. It also points out that advisers’ investment behavior proves to be no better than the do-it-yourselfer. (Read this twice) 
 

It’s far easier to sell an investment after it has gone up and received all of the media attention.
 
Bolstered by the results of this recent study, I’m going to beat my usual drum and suggest that whether you use an adviser or do it yourself, always remember that costs matter. And never, never chase the hot fund, or even the hot asset class.
 
Is Your Broker / Adviser Adding Value?  The Recent Study entitled: Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry would say "Nope".

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=616981
 
1) Ask him to benchmark your long-term performance against three low cost funds, according to your proportionate asset allocation.
 
Vanguard Total Stock Market Index (VTSMX)
 
Vanguard Total International Stock Index (VGTSX)
 
Vanguard Total Bond Market Index (VBMFX)
 
2) Ask him to calculate your total annual costs. Did he include:
 
All fixed fees or percentage of asset fees?  
 
The expense ratios of all of the mutual funds, including what are called 12b-1 fees, for distribution charges?  
 
Estimated hidden costs associated with the turnover within the fund?  
 
 
3) Are there any warning signs, including:
 
How does he react to your requests above?
 
Is he performance chasing, recommending investments after they have gone up?
 
Is he making short-term predictions like “August and September are bad months in the market”?  
 
Do you understand the strategy he is using?
 
Do you understand each of the investments within your portfolio?"
 
http://www.thepbj.com/story.cfm?ID=9733 
 

 I applaud your moving to RIA, boys, but .7% ontop of flat fee?!  How do you sleep at night!  I invest in index funds at Vanguard and keep ALL EXPENSES at .2%!  To see what the extra .7% will do to your clients' money, check out this site:

http://www.retireearlyhomepage.com/

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