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Picking An RIA

Picking An RIA

Equity ownership, referrals, custom products, turnkey service offerings. These are just a few of the things to consider when choosing a firm

When selecting an RIA to call home, you want a snug fit. Most RIA firms position themselves as wealth managers, and will tout the depth of their relationships with clients, their expertise at plan implementation, their excellent service. But of course, there are many essential differences between one firm and the next so do some comparison shopping and find out how they stack up. Here are a few things to keep in mind.

Equity ownership: In lieu of signing bonuses, many RIA's offer equity ownership to advisors who can bring with them more than $100 million of assets under management, but the deals vary widely. Sally, a West-Coast wirehouse advisor with trailing 12 months production of approximately $2 million and $280 million of assets under management, recently chose to leave her traditional brokerage to join Hightower Advisors, an RIA with $15 billion in AUM that is 25 percent advisor owned. Sally was offered 80 percent of her trailing 12 months production in equity, or a $1.6 million stake in the firm, as well as cash compensation. This is on the generous side, however. Most firms offer the option to grow into an equity stake over time instead, sometimes starting with a smaller stake upfront. For example, another wirehouse advisor, who generates $3 million in production and manages $400 million in assets, recently joined an RIA with $1.4 billion in AUM. The RIA will give him a 60 percent “payout,” plus a 2 percent equity stake in the firm, equivalent to approximately 25 percent of his trailing 12 months production, or $750,000 in equity. That stake will grow according to the growth of his own business. It is useful to keep in mind that most RIAs are valued at 5 times operating profit.

Referrals: Some RIAs also offer referral programs through custodian firms like Schwab, Fidelity and Pershing. Advisors will want to find out how many referrals the firm typically gets, how the custodian determines which RIAs get referrals, what the close rate is for the referral program, the quality and average account size of the referrals, and how the RIA goes about distributing those referrals. Some RIAs get a substantial amount of business from these programs. For example, one RIA in Florida closed $60 million in new business during the first six months of this year from Fidelity referrals.

Product selection: Some RIAs, such as MidAtlantic Capital Group, offer advisors the flexibility to create their own customized products, like in-house fund of funds. This option will only be appealing to those advisors who have discretionary control over some client assets. The best way for an advisor to evaluate such offerings is to describe one's clients and their goals to the RIA principals, and ask them to prepare a hypothetical portfolio.

Turnkey solutions: A number of high quality RIA's, like Spire Investment Partners and Concert Wealth Management, will allow advisors to plug into their infrastructure, selecting either an a la carte menu or a package of services, including back office and compliance support, customer service, asset allocation modeling, billing, research, rebalancing, and performance reporting. One former wirehouse team with $3.5 million in production, which joined an independent b/d two years ago, recently decided they were in over their heads. They are now considering signing on with RIA Spire Investment Partners. They will retain their brand name, building and staff. But Spire is acting like a consultancy, helping them to decide whether offloading the payroll, compliance and performance reporting would allow them to cut down their 11 person staff and reduce costs.

Culture and branding: Because RIA firms are so small and the work environment so close knit, knowing something about the culture and branding of the firm is essential and perhaps the best way to do that is to learn about the backgrounds of the principals. Their past work and life experience will shape the philosophy and focus of the firm. In fact, probably 90 percent of choosing an RIA is falling in love with the principals.

Hybrid business: Traditionally, RIA's offered fee-based models only. But today, many RIA's also do commission business (12b-1 fees, security based lending, individual stock selection, etc.). The three major custodians (Fidelity, Pershing and Schwab) offer hybrid solutions, allowing their associated firms to form their own b/ds or to create partnerships with “friendly” b/ds for a small cost.

Writer's BIO:

Mindy Diamond
founded Chester, N.J.-based Diamond Consultants, which specializes in retail brokerage and banking recruiting.

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