Starting RIA- need 3rd party manager

If you are starting your own RIA, you will not be using an independent BD

for separate account management.



Your question is confusing.



As a guess, if you are looking at hiring separate account maangers

(directly) for individual portfolio management, you will most certainly find

the account minimums to be your biggest hurdle.



If you are a new RIA, you will have partnered with a custodian. Most

custodians have a wrap-fee arrangement, and a large group of managers

with account minimums which are greatly reduced compared to ‘going

direct’ to the money management firms directly.



An equity manager through the wrap program at Fidelity will get 40 bp,

with an additional 20bp for transaction fees. Total expense is 60 bp

before the advisory fees.



As for who we use, I’d really say it’s up to you to do your homework.

That’s what we get paid for.



I’m happy to respond, if you want to clarify your question.



C

Captain- thanks for the response.  To my knowledge, as an RIA, I have 3 options.  1) go direct w manager only  2) go direct w manager and only do commission biz thru BD.  3) do fee and commission biz thru BD.     I know I will do option 2 or 3 as I need to do commission biz.   My question is this: is there any advantage of doing fee biz thru a BD (this arrangment requires that I pay my BD % of fee revenue- so what is the potential benefit of doing it) ?  Maybe my affiliation w a BD increase my chances of getting a better deal w the manager?  I spoke w SEI regarding working directly and they quoted me at a very high cost...I was hoping to pay a manager 40-60 bps.  Thanks very much for your input.

WC -

If you are working as a true standalone RIA, you should have (though not required) a custodial relationship - essentially, a place that holds your client assets, and produces monthly statements.  This would be your custodian.

Your custodian (much like Fidelity is for me...) would actually have a platform to accomodate managed account business.  This platform can have two parts: 1.) one where you go with the manager directly, and 2.) another where the manager is a part of a small supermarket of managers which are available at LOWER minimums, and LOWER manager fees than if you went to them directly.  For Fidelty their primary platform is referred to as the Separate Account Network.  The secondary platform is referred to as Envestnet.

The Separate Account Network is where you go to the managers, direct, and are responsible for meeting a slightly lower account minimum, but have other costs (trading fees) that may apply.

Envestnet is the platform where you offer a bundled trading fee/manager fee solution to your clients.  You, then, bill your fee separately (albeit from the same account) as another line item on their statement.  Envestnet, however, has greatly reduced minimums and also (since they are on a super efficient trading platform for smaller accounts...) offer the manager fee at a reduced expense to the client (generally 40 to 60bp).

If you affiliate with a BD, you'll be paying rather high costs to your BD, and I'm confident that you may not have the best in terms of manager selection.  Additionally, there are few BDs that allow you to maintain your OWN RIA without having to affiliate with their own RIA through the BD.  It's not a great combination.

So, I see it as these three options:

1.)  Affiliate with a custodian who has a nice third party money mangement platform (such as Fidelity or Schwab)

2.) Affiliate with a BD, who has a 3rd party platform also, but expect to lose lots of $$s in lost payouts.

I don't see an advantage to doing fee business through a BD, especially when using separately managed portfolios.  They are terribly expensive through a BD, or other quasi-independent platforms such as LPL, or other. 

However, if your commission-based business is a significant portion of your revenues, your hand might be forced into doing the BD arrangement, just to accomodate both portions of your busines through one platform.  Again, if you are going to do it that way, expect that your OWN RIA may not be an option.  I say that, but am not familiar with the SEI platform.

A BD affiliation, if they have a consolidated group of arrangements with the various managers, may assist you in meeting you smaller account minimums.  But, in general, if they are NOT on the BD platform, you are still having to meeting their minimums before they will take on your client account for management.

C

Thanks, Captain, great discussion.

Here are random some thoughts:

LPL rep was saying that a lot of folks going RIA underestimate the costs of compliance. And, b/d offers a whole layer of liability protection, which has economic value.

Just got off the phone with a guy who has an RIA - the meetings are recorded and the RIA has someone sit in on the phone to listen for compliance. Guess the advisor is paranoid? Plus, the client is an analytical pain in the butt. I'm glad he chose the RIA about five years ago over me. Wonder why he is calling me and telling me all about his relationship with his advisor. " Just in case. " The advisor is "letting" him keep 90% stocks right now.

My point is, maybe some b/d clients are less analytical and more fun. If you like super analytical clients, go RIA.

On the fee question ... 

So, for example,  if you were at an "average" payout at LPL of 91%, using their RIA all wrapped up with your other broker dealer revenues, (loads, trails, wrap fees, insurance commissions and trails) - 9% of a small number ( $20,000 in fees?) is not a big number. You don't mainly make your money on fees.

Does it really make sense to go RIA with under $50m AUM? Schwab RIA says no.

What about your business model - broker dealer makes wearing different hats (Solo Practice) easier. The real question - do you want commission business (flexibility) or not?

In the back of my mind, if things fall apart again, I can always go out and sell some permanent insurance to small business owners. ( Worst case.)

Anyone want to join the free thinking fray?

Right now I'm bored - so, I'm responding in the middle of the day... shame on me...

First, the guy who tapes his conversations is way too paranoid, and... he doesn't run the type of business that he should.  Any behavior like that, makes me think that something isn't right.

We have a multi-person firm.  I have a dedicated compliance officer that is also an advisor.  We outsource our compliance to a consultant who keeps us in the loop as to what needs to happen.  We have quarterly consultation meetings, she crawls through our files, etc, and tells us what our deficiencies are, if any.  Compliance isn't near as expensive, or time consuming as people think.  You do it right along the way, and it's not a problem. 

On BD clients being more fun, and less analytical... I actually think it's the opposite.  RIA clients have the mentality to let you run the portfolios the way they should be.  Meaning, discretionary portfolio management will limit the number of holdings within your practice, you can actually track everything (since it's limited to 15 funds within your various models), and it just makes everything easier for the client, and you.  So, clients on the RIA side, IMHO, are less tedious, less likely to push the portfolio into something (i.e. the client who wants to buy this stock, blah, blah), and you are most likely to instill a discipline across ALLLLLL of your accounts.  You need to make a move from one fund to another..... it's done in 2 minutes for ALL of your accounts.  To me, the analytical environment for the ADVISOR (not the client) has been tremendously elevated, since you get to spend your time managing the portfolios, rather than the mechanics of calling each and every client, and explaining why you want to sell XYZ fund, etc.  More time managing (which is what client think the BD guy was doing all along), and less time selling people on the concept.  Either they trust you, or they don't.... the RIA clients trust you and your abilities.

$50 million AUM?  Sure thing.  I don't see an issue there.

Solo models through an RIA are difficult.  Being all things in my practice isn't possible.  I do the investment management, others people are: I.T. Guy, Compliance Guy, CFO guy.  We all work together. 'Silo' practices are awesome.  You still have your clients, but everyone pitches in for firm management, and portfolio management, etc.

There are some very, very interesting things happening on the BD/RIA dual affiliation model.  I can't say anything yet, but you'll be shocked at what will eventually evolve within the next 12 to 18 months.

As for commissions vs. fees - I can't wait to give up my 7 license.  I just love the RIA stuff too much, that I can't see why I should keep the 7.  I like the neat and tidy portfolio atmosphere that I have within my RIA and the portfolio management stuff, that I have no desire to manage dissimilar portfolios ever again.

Lastly, on payouts... when I conducted my due dilligence on LPL, RJ, Fidelity Schwab and everyone else, I found that the 91% payouts, weren't really 91% payouts.  We all know it, but those numbers still float around.  After the deduction of trading costs, firm retention, yes... they multiply SOME number times 91%, but it's a reduced number.  Hell, I watched the LPL guy stumble over his words when we did the math in Boston... he said, 'yeah, if you are doing this type of business, the LPL model doesn't make sense'.  So, that being the case, the separate account business isn't as attractive.  Take all things being equal, I'd rather have 100% payout on everything I do.  That's what I have.  My starting point is 100%, my clients pay the trading costs which sometimes exist, sometimes don't..., and they like it just fine.  No haircut, firm retention, goofy payouts... nothing.

So, that's my story.  I was just thinking about just how much control we actually have through our business regarding EVERYTHING we do.... right down to the capabilties brochures, informaitonal booklets that we prepare for non-profits, and the performance reports that we just finished designing.

It's a good life.

C

Well, it sounds like you are going everything right, you are "there". And it reinforces my notion that you need a team, or silos within a team might be even better.

Can't wait to figure out the changes that are coming. I have to wonder how the regulatory environment will affect things - for example, wrap accounts at broker dealers, and for some, the payment of selling arrangement fees. Will this drive the RIA world, the separation of church and state at b/d's, and that being the case, make RIA more attractive? One Spitzer, one lawsuit and the playing field changes.

Not so much concerned about that right now, except as it relates to moving from one b/d to another. A lot of work if the whole game changes. Will b/d s become more expensive, a lot of things could happen.

Thanks for sharing some fantastic and informal insight.