Forming an 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!

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.

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?

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.

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.

[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.

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

[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?

[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=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.

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.

Now that was a good topic.

"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/

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

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

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…

Go away macca. You have no use here.

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.

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

 I did a lot of research on going from broker dealer to RIA.The numbers look very attractive.

The liability looks very scary. I get the impression that being affiliated with a broker dealer provides a very costly, but extra layer of protection from the public. At least in my state, the cost-benefit looks questionable.

Also, advisors have been going from b/d to RIA in record #s. I don't get the sense that the b/d industry will take this lying down (powerful interests).

Now it appears there are some serious regulations in the works to crank up scrutiny over the myriad of smaller RIAs in the states. Schwab says you should have at least 50m under management to go RIA, but who knows, they appear to be a bit of a bully in the industry.

Fidelity will take a lot less. You get a "kit" by hiring from amongst a few lawyers that specialize - but you take the hit if there are problems.

A lot have been going RIA, and the last five or so years have been pretty good in the markets. Might want to be careful about leaving the "protection" of a b/d, if there is still an economic cycle, beyond soft landings (there is). What say you about potential liability?

When I interviewed the other BD’s that also offered an RIA component,

they said this…



"We look at this as a partnership. If you get sued, we’ll back you up, but

the responsibility will be shared depending on the situation. If you were

at fault, it’s your responsibility."



I don’t look at the BD/RIA or the straight RIA as really any different. The

responsibility is squarely on your shoulders. If there are settlements, it

will come out of your pocket no matter which direction you go. Errors

and Omissions insurance will cover you based on the advice you provide.

Deductible is $10,000 to $20,000 with a per incident total coverage of

$1,000,000. So, you get sued, the insurance company has a duty to

defend you and your situation (there are different types of insurance

BTW). I don’t see it as any more risky than being an advisor at a

wirehouse. Got an order error? You pay it. Got a judgement against you?

You will have some responsbility to pay… sometimes with your job or

even your career.



As for the regulatory environment on smaller RIAs - I know that most

people do say that you shoudln’t go the RIA route alone unless you have

$50 million AUM. I agree with that. Solo operations are finding that they

NEED to outsource compliance issues, since they really don’t have the

time or ability to be their own CCO (chief compliance officer). The SEC is

looking harder at solo practices that serve as their own compliance dept.,

and the suggestion is that it should be delegated to a third party.



If there are problems in your transition, yes, it’s your responsibility. But

again, the road to gaining independence through another independent BD

will still be expensive, since they rarely share in the full defense and

payoff to the contra firm. It’s a liability, no doubt… but, definately worth

the risk.



A note on doing business in a litigious environment - Discretionary

portfolio management, proper risk assessment, and performance

reporting can assist greatly in running your practice. Most advisors have

WAAAYYYYY too many positions to monitor effectively, and as a result

open themselves up to significant liability. How can you monitor 500

different positions? No way. Build portfolios that can be monitored

easily, are well researched, and fit the appropriate risk classification of

your client. E/O coverage will take care of the large bumps if your advice

wasn’t negligent. Have a process, follow that process, and be true to your

risk classifications. The risks can be mitigated quite a bit by limiting the

number of holdings for your clients and the type of clients you advise.

There have been lawsuits against advisors who didn’t monitor the client

portfolios… too many positions, and not enough time lead to disasters in

client portfolios and lawsuits.



Limit the number of positions, build model portfolios, and take care of

the client… you should be fine without the prying eyes, and expensive

relationship known as the BD/RIA. They are very, very expensive.



C

Good stuff Captain.  Good stuff!

Captain, not clear. If you affiliate with b/d for part of book, rest of book with RIA you are on your own for liability.

If I currently affiliate with large, branded b/d, their reputation is on line alone with me (newspapers). If I'm compliant with b/d, they have an incentive to protect their own internal process.

Fidelity RIA rep says a lot of small RIA are not even picking up E&O due to cost.

Guess we agree, 50m is a minimum. Even then, I think the environment will get tougher. But the more the AUM, the better the economies.

TenthTee -



1.) Yes, you are correct. If you own your OWN RIA, and also have an

affiliation with a BD, the liability is determined to be separate and

definable assuming you get sued. You get sued by one of your BD

clients, the BD’s E/O insurance will kick in. You get sued by an RIA client,

your E/O insurance carried through your RIA will kick in. Neither will

cover both types of business if you maintain that business at separate

firms (i.e. Fidelity for your RIA, and Purshe Kaplan for your BD).



2.) Yes, they have an incentive to keep your noses clean. Nothing wrong

with that. However, my partner popped into my office today and said ‘it’s

just like [prior firm]’ - My comment? They are the BD, and it’s their ass on

the line. I typically find that BD’s have to regulate based on a lowest

common denometer… meaning, they have silly rules that they want

enforced no matter what your capabilities, experience, or clean record.



3.) I agree - Smaller RIAs aren’t doing the E/O insurance due to cost. Not

sure which way to comment on this, but it really depends on your

practice. We are with Fidelity and have really put that question through

the wringer and finally decided that we will get the coverage. Our

business isn’t generally a ‘high risk’ practice, however, strange things can

happen. So, that being the case, we erred on the side of caution, and

bought the coverage.



4.) Minimum asset levels. $50 million is a good number. If you are

managing $40 million at a 1% fee, you’ll still have a great shot at having a

great little practice. But, economies of scale known, it is better to have

partners to share in not only the expenses, upfront, but the time element

required to carry out the tasks which exist, regardless of practice size, in

order to function as an RIA. Solo practices are harder to run, since you

get to do everything. Add 2 partners, and an additional $75 million in

AUM, and the numbers look a whole lot better.



Just my $.02



C

Great, that validates and clarifies a lot. To the next level. Appreciate your generosity and thoughtfulness. tenth.

[quote=EDJ to RIA]

.... since my fees are tax-deductible while commissions are not. [/quote]

Exactly wrong. Investment advisory fees are a tax deduction only to the degree that they exceed 2% of AGI.

Commissions are FULLY tax deductible.

[quote=san fran broker][quote=EDJ to RIA]

.... since my fees are tax-deductible while commissions are not. [/quote]

Exactly wrong. Investment advisory fees are a tax deduction only to the degree that they exceed 2% of AGI.

Commissions are FULLY tax deductible.

JoeDaCPA...very good.  I would call buy commissions a deferred deduction and sell commissions and immediate reduction in capital gain or increase to capital losses.

Commissions in qualified accounts are not deductible per se, although they do ultimately reduce the amount of taxable income one has to withdraw from the account.  IRA fees are deductible subject to the 2% of AGI limitation and ability to itemize.

There...have we parsed this enough now?!!

I'm violating my rule of not posting during business hours, but this topic is a good one....

Actually, the best part is having your client remit the advisory fees INTO their IRA as a tax deductible item.  You can do the same for a Roth IRA.  Imagine having a client 1.) make an $8,000 remittance into their Roth as an advisory fee, and 2.) then having them deduct it on their tax return.

I'm not sure, actually, whether or not the Roth IRA fee remittance would be a deduction, since the fees apply to a tax-free account, basically.  I know that fees paid for advice concerning the management of a municipal bond portfolio are NOT a deduction.

Can't do that with commissions.

C

I’m not sure about the deduction on a Roth fee either, but it sounds plausible.  I have certainly advised AGAINST re-depositing traditional IRA fees into the IRA, as a fee deducted inside an IRA is like a tax-free withdrawal.  The Roth is a whole different story though and will probably start hitting some radar screens as the balances inside of Roth IRAs grow to sufficient levels to raise the question.

[quote=Indyone]I’m not sure about the deduction on a Roth fee either, but it sounds plausible.  I have certainly advised AGAINST re-depositing traditional IRA fees into the IRA, as a fee deducted inside an IRA is like a tax-free withdrawal.  The Roth is a whole different story though and will probably start hitting some radar screens as the balances inside of Roth IRAs grow to sufficient levels to raise the question.[/quote]

If you were to invoice them and they paid the fees OUTSIDE the tax sheltered account, it would not likely be deductible.  However, there would still be a tax advantage in that you’re paying the investment expenses OUTSIDE the account and thus maximizing the invested assets that remain WITHIN the tax sheltered account.

[quote=joedabrkr] [quote=Indyone]I'm not sure about the deduction on a Roth fee either, but it sounds plausible.  I have certainly advised AGAINST re-depositing traditional IRA fees into the IRA, as a fee deducted inside an IRA is like a tax-free withdrawal.  The Roth is a whole different story though and will probably start hitting some radar screens as the balances inside of Roth IRAs grow to sufficient levels to raise the question.[/quote]

If you were to invoice them and they paid the fees OUTSIDE the tax sheltered account, it would not likely be deductible.  However, there would still be a tax advantage in that you're paying the investment expenses OUTSIDE the account and thus maximizing the invested assets that remain WITHIN the tax sheltered account.
[/quote]

Joe, that's a good counterpoint, but it just proves that there's not a clearcut answer there.  What you've said makes sense in the accumulation phase, but for my $5 million dollar client who is 78 years old, in a tall tax bracket, and absolutely needs to start shrinking her IRA due to the potential estate tax mess that's looming, I'll stand by my recommendation to deduct her fees from the IRA balance.

[quote=Indyone]

[quote=joedabrkr] [quote=Indyone]I’m not sure about the deduction on a Roth fee either, but it sounds plausible.  I have certainly advised AGAINST re-depositing traditional IRA fees into the IRA, as a fee deducted inside an IRA is like a tax-free withdrawal.  The Roth is a whole different story though and will probably start hitting some radar screens as the balances inside of Roth IRAs grow to sufficient levels to raise the question.[/quote]

If you were to invoice them and they paid the fees OUTSIDE the tax sheltered account, it would not likely be deductible.  However, there would still be a tax advantage in that you’re paying the investment expenses OUTSIDE the account and thus maximizing the invested assets that remain WITHIN the tax sheltered account.
[/quote]

Joe, that's a good counterpoint, but it just proves that there's not a clearcut answer there.  What you've said makes sense in the accumulation phase, but for my $5 million dollar client who is 78 years old, in a tall tax bracket, and absolutely needs to start shrinking her IRA due to the potential estate tax mess that's looming, I'll stand by my recommendation to deduct her fees from the IRA balance.

Captain wrote:

"I know that most
people do say that you shoudln't go the RIA route alone unless you have
$50 million AUM. I agree with that."

I think differently about this. I started my RIA with less than $5 million AUM. The way I cover cash flow is to charge $150/hr. I'm getting up to 10 billable hours a week x 4 weeks = $6000 per month in consulting fees. There's no transaction fee to me (my firm) and it's immediate, not billed in arrears each quarter. I then can be selective about who I recommend for ongoing management. I'm trying to maintain a per-household minimum of $500,000. At $500,000 I charge .70% of AUM, whether it's held with me or somewhere else. When I get to $25 million AUM, that's $175,000 gross asset-fee plus any Life or LTC plus the hourly fees. Plenty for my lifestyle and needs. Average of 50 clients will allow me to stay in constant contact, which is the key for retention.

I think Captain's business model is terrific, but it's not the only way to go...

[quote=EDJ to RIA]

Captain wrote:

"I know that most
people do say that you shoudln't go the RIA route alone unless you have
$50 million AUM. I agree with that."

I think differently about this. I started my RIA with less than $5 million AUM. The way I cover cash flow is to charge $150/hr. I'm getting up to 10 billable hours a week x 4 weeks = $6000 per month in consulting fees. There's no transaction fee to me (my firm) and it's immediate, not billed in arrears each quarter. I then can be selective about who I recommend for ongoing management. I'm trying to maintain a per-household minimum of $500,000. At $500,000 I charge .70% of AUM, whether it's held with me or somewhere else. When I get to $25 million AUM, that's $175,000 gross asset-fee plus any Life or LTC plus the hourly fees. Plenty for my lifestyle and needs. Average of 50 clients will allow me to stay in constant contact, which is the key for retention.

I think Captain's business model is terrific, but it's not the only way to go...

[/quote]

Please elaborate on this for me....I'm quite intrigued.  What are your expenses and income?  It looks like you are charging about 1.4% of assets, but in 'billable hours'?  Thank you for your input.

Oops…my math was off because I didn’t quite understand your model.  I think I get it now.  Still, please elaborate.

I set up a meet and greet and tell them to bring their tax return and a list of assets (I have a letter that spells this out like a checklist). We talk about their situation, what their biggest concerns are, goals, etc. I then ask them about their assets: what is it, how much, how long, expenses, etc. They never know off hand, so they hand over the folder of stuff. I start drawing a flow-chart of all their accounts, like "Bank IRA CD", "Bank #2 IRA CD", "401k", "EDJ Joint", "Scottrade single", "LTC from XYZ Co.", "Life Ins.". Usually it ends up with a half-dozen or more different accounts. I've had as many as 15 accounts between a husband and wife.

I then can ask questions like "How have you coordinated these accounts?" or "What is the total of all the fees and expenses you pay accross all these accounts?" They never know for sure, so I say "Don't you think it's important to know?" They all say yes. I then tell them I need to do some research and put together some recommendations on how to reduce their expenses, save taxes, etc. I say "It'll take me two hours to do this work for you, so if you think $300 is reasonable, let's get back together next week and I'll show you how to improve on what you're doing." We set the appt.

This gives me the opportunity to get paid for my time and also to help me determine if they're a good candidate for ongoing advisory services. If I think they'd be a good client, I present my recommendation that by transferring their accounts and consolidating they'll have a much simpler and coherent plan. If they aren't a good candidate (little assets or personality conflict) I'll give them my recommendations and tell them that if they need further help, they can contact me quarterly and we can do another review for an hourly charge.

I'm trying to limit my households to $500,000 minimum. My fees start at 1% but I often reduce them to .55% to win ALL their business. I use Vanguard funds and ETFs, and also some Ishares, so they're total is often less to me than what their MFD management fee was before.

Sorry I've been so long-winded, but I wanted to make sure I was clear.  

Sorry, forgot to mention my expenses.

My one-room office is $400/mo including utilities. Clearwire internet and vonage phones are $125/mo. I use SSG as custodian, no quarterly charge, but $60/yr per account for IRR performance reports, avg $250 transaction fees to implement plan. SSG provides me NetExchange Pro for free. E & O for year is $850, biz ins runs $257/yr, office supplies maybe $50/mo. Health Savings Plan for family is $350/mo. Dental out of pocket.

That's all I can think of right now...

Thanks…very helpful.

EDJ to RIA

How many assets did you bring over?

EDJ to RIA,

Very, very, very helpful info.  Thank you for all of it.

I am just unclear on two things:  So, you can't/don't get paid on stock/bond transactions, right?  Cause this would go through, say Fidelity, and you would just have limited POA, right?

Also, the VAs...can you/do you receive commission on these?  If so, how?  For instance, if you like the Protective Annuity, do you just have them open up the account directly with Protective and then protective sends you a commission?

Thanks again for your elaborate and informative posts.

EDJ to RIA,

Also, what consulting attorneys or compliance consultants did you use when setting up your RIA?  In all, how long would you say it took you from the point where you said, "I'm forming my RIA" until you were actually legally in business as an RIA?  Any more info you care to mention on the actual logistics of setting up the RIA is greatly appreciated.  I'm becoming more convinced each day that this is the route for me.  The only thing that scares me a bit is the compliance oversight issues...just begin to worry if this would not consume a lot of my time.

Thanks.

[quote=ManDate]

EDJ to RIA,

Also, what consulting attorneys or compliance consultants did you use when setting up your RIA?  In all, how long would you say it took you from the point where you said, "I'm forming my RIA" until you were actually legally in business as an RIA?  Any more info you care to mention on the actual logistics of setting up the RIA is greatly appreciated.  I'm becoming more convinced each day that this is the route for me.  The only thing that scares me a bit is the compliance oversight issues...just begin to worry if this would not consume a lot of my time.

Thanks.

Every time I see the screen name "ManDate" I have to surpress a Beavis and Butthead snicker....call me juvenlie....

Well Joe da, it appears you have the cultural literacy to jump in and put your stamp on 'most anything ... and you laugh at your own jokes.

( Sorry, couldn't resist takin' a jab at your apparent good old boy now ranting intellectual character).

[quote=tenthtee]

Every time I see the screen name “ManDate” I have to surpress a Beavis and Butthead snicker…call me juvenlie…

Well Joe da, it appears you have the cultural literacy to jump in and put your stamp on 'most anything ... and you laugh at your own jokes.

( Sorry, couldn't resist takin' a jab at your apparent good old boy now ranting intellectual character).

just bumping this topic up…would like tjc or EDJ to IRA to weigh in if possible.

Registration

marketcounsel.com - Attorney is Brian Hamburger - They can set up both the corporate documents, RIA documents, and hold your RIA in a 'quiet' manner until you resign.  Excellent firm.

We started the 15th of March, and were set to go by the end of 23rd of May.  We had an extraordinarily long SEC approval time period (they forgot to TELL us we were approved...).  This involved the SEC filing, LLC document creation, document and client agreement creation, etc.

Annuities - we use the Fidelity no-load annuity.  We 1035 the assets to the Fidelity annuity which has expenses of .75% annually.  Assessing a 1% advisory fee is the way we are compensated.  Total expenses are 1.75% vs. 2.5% on the normal annuity.  Annuity is held on the client statement.

Compliance issues - If you are a solo practice, outsource this.  Really... outsource this.  If you are a two, three person shop, you will be your own compliance officer, and you should still outsource this.  It's not the time-waster that you think it is.  It requires less time than I had thought.

Questions?

C

Im like an onion, man...many layers.......and hey...somebody has to laugh at the jokes!

I love the onion visual, inspired me to ask my boys about Beavis & Butthead, big hole in my cultural literacy. Maybe I'll just rent it and have a couple of martinis for lunch and watch it here on the big screen this afternoon. A lot easier than leaving my b/d and starting an RIA.

Excellent information Captain and thanks for it!!  This board is quite valuable.   One question in regards to Brian, the attorney you used...I know his fees could easily have changed, but do you recall a ballpark figure he charged to do the work setting you up?

Also, do I have to have Fidelity as my RIA custodian or can I just use their annuity in the same manner that you do, even if my custodian was, say, TD Ameritrade?

Btw... I will be a one-man-show at least to start with.  Who do you recommend for outsourcing the compliance to?

Thanks.

Fee Question

I remember the fee clearly... For us the fee was $15,000 in terms of total set up and everything.  I mean everything.  This number will change based on the number of people, and it should work out to be roughly $2,500 per person for set up and legal expenses.  I don't think his fees have changed that much within the past 9 months.

Annuity Question

If you have Fidelity as your RIA, you can use their annuity.  If you do NOT use them as your RIA custodian, I'm not sure if you can.  You will, however, be able to use the myriad of different RIA annuities which exist through a variety of different vendors.. Hartford, Pacific LIfe, blah, blah.....  There are many versions out there, and it clearly offers a choice on behalf of the advisor.  The only issue is being able to report the annuity position on the statement.  Fidelity can price and report on the annuity through their statement.  However, you need to check with TD, or Schwab to see whether or not they offer that capability. 

Compliance Question

There are a number of firms which outsource their compliance capabilities.  I have a bunch, but you might check out riaserve.com for starters.  They also have the ability to set up your RIA, and walk you through the process.  They do not, however, have the ability to create your LLC documents, and do not offer legal advice.  Excellent compliance people, however.

C

[quote=tenthtee]

Im like an onion, man…many layers…and hey…somebody has to laugh at the jokes!

I love the onion visual, inspired me to ask my boys about Beavis & Butthead, big hole in my cultural literacy. Maybe I'll just rent it and have a couple of martinis for lunch and watch it here on the big screen this afternoon. A lot easier than leaving my b/d and starting an RIA.

Joe is right, I get a fee for AUM, not from transactions. I do the same as Captain for annuities, either through Fidelity or Vanguard. However, since I’m not with Fidelity RIA, I have POA on the VA and just have to add an additional Excel spreadsheet with the quarterly performance report with the total of all assets.

How are you getting in front of the people you're selling on planning?

Cold calls?  Known personally?  etc.?

Ace

RIA here is another qu for you.  What if you were to become on RIA and you have a lot of C and L share annuities on the books.  WHat do you do with those?

Ace and Malcolm,

I get business from a number of places. I have some former Jones clients who transferred with me and I have a system to get referrals from them. I also do a monthly "workshop" to educate retirees and seniors about pitfalls and hiddend fees. I send out a couple thousand invites a month and usually get 10-30 attendees. I usually get about 70-80% in for an appointment.

I also have partnered with a local accounting firm to come in a couple of times a month at two different locations to do reviews for their clients. I don't charge for my time, but I also don't have to set up the appointments.

I also teach a class each spring and fall at our local community college and get a lot of appointments from that.

I think the one thing I've learned is there's no silver bullet with prospecting. I try to do a number of things that I enjoy and don't spend any time doing things I hate, like cold-calling. You just have to find out for yourself what you're good at and what you like. Also, I've learned that you can't do something one time and make a judgement about it. You need to commit to something for at least 6 months (I think) before you can write it off. Just my opinion...

Tommy

Sorry Malcolm, I forgot to answer your question.

I can hold C shares and other classes, but it doesn't make sense for the client. My custodian keeps all 12b-1 fees, so I'd have to charge my fee on top of that. I usually will just move someone into the A-share or go to no-loads or ETFs. As an RIA you get a "load-waiver" so you get A-share expenses without charging the front load.

Part of my story to clients is that I can save them money including my fees, so lots of time I'll show my fee, say .70%, plus the ETF fee of .09-.25% and that they're getting a good portfolio AND ongoing advice for less that their expense ratio before. Plus no up-front, no surrender, tax-efficient, blah, blah, blah. It seems to be pretty compelling. That's just the way I set up MY business...

If the’re annuities, I 1035 them into no-load annuities and charge my fee separately, like out of another mutual fund account. Or you can bill them directly.

Hey Captain,

I am having trouble finding these RIA annuities that you are referencing in your posts.  I found a RIA annuity at PacLife called the Odyssey but you need to be affiliated with a B/D to sell it.  I told them that doesn't makes sense but they say that's the way it is.

Are you familiar with any RIA annuities which offers living benefits that don't require a B/D affiliation?

Thanks for sharing your wisdom.

JC

JC -



That’s strange… I only work through Fidelity, but did check into your

question, and yes… it looks like you are right. I listened to the Pac Life

person and they said ‘we have an RIA product…’, and they went on with

their sales pitch. Now that I read their press release (I’ve given you the

web address below), it says that you have to be affiliated with a BD in

order to sell their product.



I think you are correct in saying ‘it doesn’t make sense’, but, their product

is clearly marketed to the Raymond James-types, who are providing RIA

services, with their reps existing as Registered Investment Advisory

Representitives rather than the full-on private RIAs who have NO

affiliation with a BD.



Sorry for the confusion, but I’ll check on this further. We’ve had so many

wholesalers on our office that don’t have a clue what the difference is

between the RIAR, RIA and independent BD relationships that exist within

our business.



I’ll be back next week with additional information. I’d like to know

myself.



Thanks,



C

This board is horrible. No way to go back and edit/delete a post.



Web address:



http://www.pacificlife.com/Channel/News/Older+Press+Releases /010815



Sorry.



C

Fellow RIAs,

I just started my RIA and was wondering about custodians.  Does Schwab, Fidelity, TD Waterhouse, etc. require a minimum amount of assets for a RIA to custody with them? 

It seems all these guys are pushing guys in the B/D world to go RIA and they have all these programs to help you transition so I would assume they would take on new RIAs, but I have heard somewhere that they may require a min. asset level to custody with them.

If that is the case, what custody companies do you guys know that will require low or no minimums?

[quote=NoBD]

Fellow RIAs,

I just started my RIA and was wondering about custodians.  Does Schwab, Fidelity, TD Waterhouse, etc. require a minimum amount of assets for a RIA to custody with them? 

It seems all these guys are pushing guys in the B/D world to go RIA and they have all these programs to help you transition so I would assume they would take on new RIAs, but I have heard somewhere that they may require a min. asset level to custody with them.

If that is the case, what custody companies do you guys know that will require low or no minimums?

I’m not sure there is a hard and fast rule to this question.



When we were going through our due dilligence process, we noted one

RIA through Fidelity who only had $4 million AUM.



I’ve heard that they may have minimums, but have yet to see them turn

someone away. Fidelity is more agressive in terms of business

development than Schwab, and may be more open to a newer RIA.



I know that Schwab and Fidelity most likely would be more strict in terms

of enforcing a minimum. However, TD Waterhouse is new in the RIA

game and may be much more open to a new RIA. I’d try them.



I’d urge you to Call Schwab, Fidelity, and TD to find out what they’d be

willing to take.



Good luck.



C

Fiserv ISS and Shareholders Service Group have no mimimums.

Captain

From where or whom are you buying you bonds?

[quote=forge1]

Captain

From where or whom are you buying you bonds?

No BD and Forge1,

I started with Ameritrade before the merger with TD and there was no minimum. They do also have a big inventory of Bonds.

I would look into Fidelity as Captain suggested since they have a bigger selection of products including 401ks.

[quote=bcm48]I would look into Fidelity as Captain suggested since they
have a bigger selection of products including 401ks[/quote]

Also more name recognition with clients.