The New New RIA Model: Sharing Back Offices

The barriers to going independent are shrinking. Don’t believe it? Check out Mraz, Amerine & Hirschler & Associates, a new RIA in Modesto, Calif., a firm launched by three wirehouse advisors who left Morgan Stanley earlier this month with $400 million in client assets. To avoid dealing with the hassles of starting a business, the group affiliated with an already existing RIA: San Jose, Calif.-based Concert Wealth Management, which will share all of its back-office support and compliance with the new team.

The barriers to going independent are shrinking. Don’t believe it? Check out Mraz, Amerine & Hirschler & Associates, a new RIA in Modesto, Calif., a firm launched by three wirehouse advisors who left Morgan Stanley earlier this month with $400 million in client assets. To avoid dealing with the hassles of starting a business, the group affiliated with an already existing RIA: San Jose, Calif.-based Concert Wealth Management, which will share all of its back-office support and compliance with the new team.

David Mraz and his partners had been thinking about going independent for a while, but resisted because of the operational challenges of starting an RIA. “We wanted to be in the financial-advisory business, and not be distracted by the back-office administrative and technology concerns,” says Mraz. “After evaluating our strengths and weaknesses, we felt we didn’t have the expertise needed to build the right platform or put the right technology in place.” Lucky for them, Felipe Luna, himself a former wirehouse advisor and president of Concert Wealth Management, was looking for a firm like theirs to which he could offer (for a fee) the very capabilities Mraz’s team were lacking.

Barnaby Grist, managing director of Strategic Business Development at Schwab Institutional, says RIAs helping newbie RIAs get started is a fairly new model: “We’ve started getting more active in referring wirehouse reps to advisors who are interested in helping them get on their feet and running. This is the very beginning of a very big trend. A significant percentage of new RIAs will choose to go this way." Over the next three years, a quarter of all advisors who want to start their own RIAs will piggyback off an already existing RIA that’s willing to provide all the back-office services their wirehouse or independent broker/dealer used to provide, he predicts.

Schwab says the “incubator,” or “outsource” model, is emerging as an alternative approach that advisors are considering when deciding to leave the wirehouse. Rather than start up their own firm entirely, or join an existing RIA, the advisors work under an existing firm’s RIA. The newly independent advisor gets their own identity, but they are immediately plugged into the existing firm’s back-office and support network. “There are a lot of advisors who love running their own businesses, but don’t get thrilled about doing payroll or SEC registration. Now there are firms out there to help those guys by providing them with all the gritty nuts and bolts to run their business, but also give them the freedom and independence of focusing on their clients and investments,” Grist says.

Of course, such services do not come without a cost. For all of the services Luna provides (including technology, client relationship-management systems, performance reporting, human resources, legal and compliance, as well as the initial steps involved in launching the office), he charges between 15 and 30 percent of annual revenue. Grist says the industry average will be somewhere between 20 and 40 percent. That’s not bad considering the average annual expenses for an RIA is about 35 percent, according to industry consultants.

Grist says bringing on new RIAs may not be a good idea for all firms. “Only a small number can actually do this to the full extent. The typical $100 million RIA is not going to have the infrastructure that he can scale up this way,” he says. Also, the owners of the existing RIA should be willing to let the new firm operate how it wants. For example, the new RIA may have a different investment philosophy. Also, RIAs considering such a model should beware of wirehouses’ TRO wrath, where firms sue departing brokers when they try to take clients with them. Luna’s firm is one of the few RIA firms that’s signed onto the Broker Protocol that says firms will not sue brokers jumping ship to a firm that’s signed the pact.

But for Concert Wealth Management—and perhaps the RIA industry—this is just the tip of the iceberg. “We’ve tried to emulate the wirehouse environment without the controlling aspect. I expect when the dust settles on this first deal, advisors who have balked at starting their own RIA will see that it’s doable, and we’ll see lots of interest,” Luna says.

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