Independent paths for advisers managing more than $500 million

It’s not unusual for advisers to hit a point where they start wondering whether their current firm is still the right partner for their business. Perhaps they’re sensing their goals are no longer well-aligned with the firm. Or they crave greater freedom, flexibility and control in how they serve clients and grow the business. Or they begin to look more closely at the value they’re receiving in exchange for 50%-plus of their revenue. Or they feel a strong pull toward the opportunity to become business owners and build an enterprise based on their specific goals and vision. Or any combination of the above.

This inquisitive, forward-thinking mindset has driven a wave of advisers toward the independent space, which has responded by growing to include a wide variety of options for advisers at just about every asset level.

Yet it’s those who have made their mark in the brokerage world, building strong businesses that manage $500 million or more in assets, that have the widest range of options — for a variety of reasons. First, these practices have developed the scale to reinvest in the business while maintaining a healthy margin. They also have a well-developed team designed to handle non-revenue generating functions so advisers can focus on growth. Plus, they’ve built the type of practice where the long-term M&A valuation of their business dramatically exceeds the value they could extract from a retire-in-place program or transition check from another W-2 firm.

For some, the solution is to deal with “the devil they know” and barter with their firm for better payouts and services. Or they may opt to make a lateral move to another wirehouse, where they can take advantage of a recruiting deal on the way in.

Alternatively, many find that employee models offer diminishing returns beyond the $500 million AUM mark and are more attracted to the prospect of taking control of how revenue is generated — and building a business that’s focused on driving enterprise value.

It’s this group that most often opts for independence — the registered investment adviser model, in particular.

While many may think the RIA path is a singular one, there are actually four to consider:

1. SUPPORTED INDEPENDENCE: JOINING AN ESTABLISHED RIA PLATFORM

These are multibillion-dollar organizations built to offer the support that a large team at a wirehouse may have become accustomed to — services such as on-staff tax professionals, legal support and financial planners. On the investment side, many of these firms leverage their scalability and “true open architecture” to offer access to direct private investments and top industry money managers, and enable advisers to advise, report and even bill on assets held away. Additionally, these firms have tenured transition teams, project managers and attorneys at the ready to support your legal and administrative transition to independence.

While joining a supported platform comes with a bevy of scaffolding and support, what you may sacrifice is the complete autonomy and control of running your own RIA with your own ADV. This can potentially cause conflict if you’re running a unique business that the parent firm is unable to support, and that needs to be uncovered in the due diligence process.

For the advisory team looking for a robust platform, multicustodial options, like-minded culture and a seat at the table with a successful organization while also maintaining the ability to outsource day-to-day CEO functions, partnering with an existing RIA is a smart choice.

2. SUPPORTED INDEPENDENCE: LAUNCHING AN RIA WITH A SERVICE PROVIDER

This version of supported independence allows an advisory team to launch an RIA with their own ADV, achieving complete autonomy and control of their business while still leveraging the resources of industry-leading strategic partners. While the managing partners assume 100% equity and control of their RIA, they employ the resources of industry-leading compliance, HR, benefits, legal, billing and investments, as well as an elite transition team, all located under one roof.

This model, which was hardly on the radar 10 years ago, has since become one of the most popular avenues for the adviser who wants to wear the CEO hat but outsource many of the others. The $500-million-plus teams often find that the economics of this model make more sense than do their $250 million counterparts, due to the size and scale of their business.

That said, leveraging the services of the industry’s best doesn’t come cheap: Engaging a high-level service provider will require both an initial capital investment by the transitioning team as well as the ongoing basis-point charge. It’s up to the adviser to equate the value they receive to the initial and ongoing costs.

3. M&A PARTNERS

Most who see the title “M&A Partners” might initially think they’re “selling” their practice; this is a frequent misconception. Yes, many M&A partners are strategic buyers, but likewise, many are often strategic partners.

Advisory practices in this space can unlock significant capital via a liquidity event and are provided access to the best resources and referral networks in the industry. The advisers who thrive here usually are approaching succession or require capital to buy out a retiring partner, are looking for a strategic partner to assist with sub-acquisitions and recruitment, or are interested in taking chips off the table given record-high valuations.

The M&A avenue for advisers looking for independence is vast — from minority investors who acquire 10%–30% of an adviser’s practice but enable the business to retain autonomy and its own RIA, to mergers where equity is the primary currency in a transaction, to full integrators (in which you fold into their firm) and aggregators (who buy your firm and offer infrastructure, while you maintain your brand).

While no two solutions are created the same, many strategic M&A partners embrace what made the advisory practice so successful in the first place — including investment philosophy, branding and firm goals. But any sale of equity must be weighed against parting with upside potential and future optionality.

[More: The RIA roll-up market has seen a decade of explosion]

4. LAUNCHING AN RIA FIRM DIRECTLY WITH A CUSTODIAN

While a direct RIA launch can be made at every asset level, it becomes exceptionally attractive for those at or above the $500 million AUM level. With a 100% initial payout, these teams can allocate their resources how they best see fit. The millions of dollars once paid in haircuts and fees now become margin the team can reinvest in the business.

Economics aside, the RIA model allows these hyper-entrepreneurial advisers to take full autonomy and control of their practice, answering only to the clients and the regulators at the SEC. Additionally, the RIA marketplace offers a deep bench of third-party service providers that advisers can leverage to outsource specific functions (like compliance, money management, planning and taxes), so they can focus on other tasks they’re better equipped for.

While it’s true that a direct launch of an RIA will likely offer more favorable economics than leveraging a service provider, the trade-off for advisers is the need to expend additional human capital, not just toward the transition but in building out the practice from a regulatory, technology, HR and administrative perspective, as well as the ongoing work of running the RIA.

As of 2021, the RIA model is still the fastest-growing segment in the industry. That said, an important consideration before taking the plunge into the RIA world is knowing your risk appetite and your motivation to work on a financial advisory practice as much as working in one.

In the end, it’s in-depth research, due diligence, and an honest evaluation of what you are trying to solve for that will be the driving force on whether any version of “independence” is right for you — and the business goals you are looking to achieve.

[More: Avoiding the post-transition blues]

Joshua Tomolak is a senior consultant at Diamond Consultants.