Fair RIA Payouts? ... New RIA Equity Stake?

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Feb 24, 2009 5:04 am

2 former FA’s who went into portfolio management, but considering opening an RIA in a new area with a client target we think is under-served.  We’d be starting from scratch, but we are veterans at this process.  He came to me with the idea, and is fronting the startup capital.  He wants me to join him and can guarantee me a draw of $40,000 the first year (that’s a very significant amount less than I make now).  He wants me for business development, as well as my knowledge in investment management, structural planning, financial operations and regulatory compliance.

  2 questions, if I'm not fronting initial startup capital  ...   - What's fair payout % for joining a startup RIA?   - Would you demand an equity stake or option to buy an equity stake?  What % stake should I want to have in this firm if I take this risk?      
Feb 24, 2009 10:29 am

I would say a "wirehouse-like" payout is at least fair to start.  Say in the range of 35-50%.  Beyond that, I would say some equity stake or profit sharing based on how much business you bring in relative to the partnership (not necessarily proportionate, but the more you bring in, the higher your equity stake).  At some point, you could "buy-in" for an equal share, and then the two of you just share in profits rather than payouts.

Just a thought.  Lots of variations of this.
Feb 24, 2009 12:23 pm

Thanks to those of you with the maturity to respond with intelligent insights.  Others who choose not to waste everyone else's time.

Feb 24, 2009 5:27 pm

haha, i agree with ice.  if he is refusing to offer ownership and it is something you really want and feel your knowledge/expertise deserve so, start your own ria.  only way it makes no sense is if you refuse to take the risk he is, yet want the opportunity of ownership if it does in fact succeed. 
he obviously wants an employee, not a partner, period.

Feb 24, 2009 7:01 pm

Ice, you are the reason why forums like this do not work.  Instead of providing useful advice on negotiations, you respond with some kind of name calling reflective of a person who is bitter about their career at a wirehouse, or heck, maybe you are still there.  Instead of providing intelligent insights, you provide little to no value.

  Have you ever managed money for big foundations or college endowments?  Any had any clients worth $200 million, much less even held a meeting with them and their advisory board?  Ever work in private equity structuring M&A transactions?  Before you spew out your wise remarks, perhaps you should qualify your own intelligence.  Otherwise, others may think you built your business selling annuities and insurance policies to 70 year old grandmothers.  That would be my presumption based upon the intelligence of your comments ... but then again, no offense, and good luck either way.  
Feb 24, 2009 7:12 pm

Forums like this do work.  If you are able to ignore his name-calling, you would find in his post a good idea:  start your own RIA.  You are clearly partnered up with someone willing to do more than put some capital in, then get you to work slave wages to make it go.

Here’s another idea:  join an existing RIA as an IAR, get a good feel for how the back office operation works, bring your assets over, then, when the time is right, go on your own.  If you’re clever, you can use a firm like Ameritrade or Schwab, and when it’s time to jump, you don’t even need to do an ACAT–just get the client to sign a new account form.  You’d be able to get your licenses at your leisure, and build up the capital you would need to get going, without having to do a split with a guy who would be, for all intents and purposes, your boss.

Feb 24, 2009 11:46 pm

Thank you.  I appreciate the advice, seriously. 

  It helps a lot to hear from people who have been through this experience before and can forsee all the pitfalls in the business model involving:   - owner and employee - majority owner and minority owner - true 50/50 partnership   As you all know, business relationships can deteriorate when there is vast inequity in the decision making process or in income.  So thank you for your input.
Feb 26, 2009 4:04 pm

Please give me a call. 415.956.9990. I am a former MD with ML and now
recruit the best advisors in the US. I know most everything that is
going on out there with the independents.

Feb 27, 2009 9:11 pm

I think that the key issue here is one of compensation. Presumably you won’t be expected to immediately start generating several hundred thousand dollars of gross, so the salary+comp (under any scenario) is going to be laughable for someone who isn’t straight out of college regardless of the payout. Heck, I pay the junior assistant on my team considerably more than that (deserves every penny, though).

  You have to wonder how they would expect you to live (except from savings) on that kind of compensation if you're somewhere other than Kansas City or Flint! My starting base salary at a wirehouse eight years ago (my first real job) was $10k more than that, and I was getting benefits that are likely superior to what you would expect at a 4 person startup. A starting private banker at, lets say... some second/third tier outfit like Sun trust... would get (I assume) north of $100k. How are you supposed to buy clothes that wouldn't look cheap? How are you supposed to pay the valet? Hell, how are you supposed to afford rat poison for your basement efficiency if you live in a big city?   Listen - If you have the experience you describe, that salary offer should be an INSULT. You would easily make 2x that much as ****ing SA at ML PBIM. If you have investment management and trading skills you could start a hedge fund, charge your 2/20 and go beg any one of the $200mm relationships you have to give you 1% of their assets to manage and make more money! Think about that - you would make more with your $2mm hedge fund! Christ; if everyone who failed out of my "cornerside brokerage" training program makes than $100k selling annuities at credit unions in strip malls, a person with so much UHNW experience should have no problem securing a job thay pays more than that.   You should be paid a salary that is equal to your experience and (what you've indicated are some) very high level contacts. If you are, as you describe, so experienced in this area, then you should be paid equal to your performance in a support capacity and something equivalent to what you made elsewhere. What would be appropriate, is that they offer you partnership, and at that point you would stop getting a salary, but instead dividends. So, whatever you make now (and you said that's much, much more), you should make at your new job. Until you're a partner - you're an expense. And you get what you pay for. Come to think of it, you should get paid more - given the fact that you're leaving an UHNW stable position with internal advancement opportunities (after all, you've said that you're a regular presenter to UHNW clients) for a startup.   In fact, why do you want to leave?