RIA Transition: A Simple How-To Guide

Are you considering a break-away move to start your own practice? Transitioning to independence as an advisor can be a big and rewarding move. However, it’s easy to feel overwhelmed if you aren’t sure where to start in the transition process. Building a new firm requires establishing a workflow, managing client relationships, maintaining compliance, and overseeing complex business details.

This quick guide to transitioning as an RIA offers a few things you need to know as you make the move toward independence.

What is a Registered Investment Advisor (RIA)?

A registered investment advisor (RIA) is a firm or individual that is registered with the U.S. Securities and Exchange Commission (SEC) or a state securities regulator to provide investment advice to clients. RIAs are required to meet certain educational and experience requirements, and they must adhere to a fiduciary duty to their clients. This means that RIAs must always act in their clients' best interests, and they must recommend investments that are selected for the client's individual needs and goals.

Advisors that break away from a larger practice to form their own registered advisory firms are considered independent RIAs. Independent RIAs may associate with an independent broker-dealer, particular for any commission business they may have. Financial advisors can provide advice on topics that range from retirement and estate planning to insurance and tax strategies, and other client focused topics.

Becoming a business owner as an independent advisor doesn’t mean you have to do it alone. Advisors that own their practices as independent RIAs may choose to bring on additional partners and staff to scale their firm and support increased AUM.

How Do RIAs Differ from Other Types of Financial Advisors? 

There are a number of ways that RIAs differ from other types of financial advisors.

• Standards 
  RIAs have different standards of care rules and must act in the best interest of their clients, following a fiduciary standard. Broker-dealers and registered reps are required to recommend products that are “suitable”. While broker-dealers are not subject to the fiduciary standard under federal law, state law may impose a fiduciary standard. Please check with your Legal and Compliance consultants for further guidance.
• Earnings
  RIAs are primarily fee-based providers that base their rates on advisory services. RIAs are paid a fee by their clients, typically on a percentage of assets under management (AUM). This means that their income is tied to the performance of their clients' investments.
  
  Representatives of Broker-dealers, on the other hand, are generally paid commissions on the products they sell to their clients. This means that their income is not directly tied to the performance of their clients' investments. As a result, the Representatives may recommend products that generate higher commissions, as opposed to lower cost alternatives.

• Transparency
   RIAs are required to provide their clients with a copy of their Form ADV, which is a disclosure document that provides information about the RIA's business practices, fees, and conflicts of interest.
• Level of Choice
  RIAs can typically choose from a wider range of investment products and services tailored to the specific needs of each client. Broker-dealers, on the other hand, often limit the products and services offered. This can make it difficult for Representatives to find the full range of products for the needs of their clients.

Here is a table that summarizes some key differences between RIAs and broker-dealers:

What Are the Benefits of Becoming an Independent RIA? 

Studies show that the main driver for financial advisors who are considering becoming RIAs is the freedom it provides; independent advisors can build the practice they want, control the technology they use, decide on the products they recommend, and have no limitations on earning potential. Additionally, you may want to control your firm’s culture, create value by building your own practice, select your team, make a call on service providers, and eliminate sales quotas. 

While there are many benefits, there are also many considerations associated with becoming an RIA. Making the move towards independence usually means an increased burden as you take on the numerous details of your business. However, to improve services and support business growth, RIAs can use custodians and other service providers to help them manage their clients’ assets and keep up with their needs.

How to Choose an RIA Custodian 

Choosing an RIA custodian is one of the most important decisions an RIA can make. Primarily, a RIA’s custodian serves as an independent third-party holding client assets. Well-established custodians may also provide other technologies and service support, such as reporting, CRM integration, billing, and more.

5 Transition Steps to Becoming an RIA 

In 2021, 41% of advisors considered breaking away to form an independent RIA. Before making this move, you should have a plan in place. Here are five best practices you want to follow during your transition:

Step 1. Determine Your RIA Business Model 

Do you want to own your own RIA, become an Investment Adviser Representative (IAR) of a corporate RIA, or conduct business as a hybrid adviser that offers both fee-based advisory services and commission-based sales? Each option has its benefits and limitations. You must decide what works best for you. 

If you are breaking away toward an independent RIA model, you need to define your practice goals, create a value proposition, and decide on the pricing structure you want to use. Creating a clear business plan is a crucial part of success because it helps you plan ahead, prepare for potential challenges, and measure achievement.

Step 2. Understand Licenses and Compliance

To form an RIA, you must pass the Series 65 exam and register with the SEC or state authorities, depending on the amount of money you manage. You must also file Form ADV, which is a disclosure document that is also shared with clients.

People often want an advisor that can offer a wide variety of financial services, including things like wealth management, financial planning, succession planning, ESG investing advice, and tax strategies. You may want to earn additional credentials or certifications that broaden your expertise and help attract a larger client base looking for those services, such as the Certified Financial Planner® (CFP®) or Chartered Financial Analyst (CFA) designation.

For compliance firms, seek compliance consultant firms that help register you as an RIA and also prepare you with the needed compliance policies and procedures to start your firm, like RIA in a Box, FCI, or Foreside (now, ACA). Ask your AssetMark consultant about AssetMark’s discount.

Step 3. Research Your Business Partners and Vendors 

If you choose to establish your own firm, you’ll need to replicate the platforms, technologies, and services usually provided by a broker-dealer. Fortunately, there are many vendors out there to choose from. However, lots of choices also mean a lot of research on your part to ensure you partner with the right firm for you and your business. 

You need a reliable and responsive provider that can help you find the right back-office solutions for your business and support your client accounts. Importantly, work with specialists that will guide you through the process and provide you with the comprehensive support you need for a successful transition.

Step 4. Be Financially Prepared for the Transition

Launching an RIA, like any new business, can be an expensive undertaking. One of the top reasons most new businesses fail is because of cash flow issues. Roughly 82% of failing businesses cite cash flow issues as a reason for their demise. You can’t pay your creditors, vendor bills, platform subscriptions, or make payroll if you don’t have money on hand—even if your business is profitable.

You must also be prepared upfront to see your personal income decrease at first as you and your clients acclimate to your new business model. If necessary, consider partnering with another advisor or seeking out investment capital before you run into money problems.

Step 5. Consider Outsourcing for Third-Party Support

Like all entrepreneurs, you’ll soon find that time is your most valuable—and limited—asset. There are many moving parts to becoming an RIA, which can make it difficult to juggle every task on your own. The key to success is working alongside specialists who can support the areas of business you don’t want to manage or don’t have the experience needed to cover efficiently. 

You want to bring on specialists that understand the challenges associated with establishing your RIA. Rather than hiring full-time employees to cover every task you want to offload, firms can outsource specific tasks to a third-party vendor. Choose a team with the expertise that serves RIAs every day and is familiar with the “dos and don’ts” of the industry to save you time, money, and stress.

How to Streamline Your Transition

There are no shortcuts to building a sustainable, successful business. However, you can (and should) streamline the process with these helpful tips.

Tip 1. Make a Plan

It’s tempting to want to jump in and get started, but the importance of planning can’t be emphasized enough. As you set out to build a successful RIA, it’s important to have a well-thought-out business plan that includes your ultimate goals and the steps you need to take to achieve those objectives. 

Tip 2. Be Flexible

You can’t be so set on your plans that you lose the ability to adapt. While your plan serves as a blueprint, it’s also a living document that will grow as you do and shift as needed. You must be prepared to pivot should economic, market, or other conditions change your plans. Flexibility is key to a smooth transition.

Tip 3. Understand Your Audience

Don’t forget that your business is dependent on your clients. They are perhaps the most important element of your business. When you transition, they are transitioning too. Have a client communication and marketing plan in place to explain what is happening, why, and when. Also, be sure to give clients plenty of advance notice should any documentation need to be signed/returned. 

Tip 4. Align Your Team

Identify all key stakeholders who are impacted by this change. Ensure your staff is adequately trained to respond to client questions and concerns. You need to get the buy-in from your team or you will experience a rocky transition and your clients will receive poor service.

Tip 5. Get Transition Support

From marketing to technologies, compliance, and more, transitioning to an RIA can be complicated. But, with the right support, it’s the start of an exciting journey for you and your clients. You don’t have to approach your transition—or your ongoing business needs—alone.

If you are looking to streamline the process, your best option is to leverage the support of vendors that have already helped thousands of advisors like you achieve their business visions. Working with a firm like AssetMark that has served RIAs for decades and provides access to investment management options, compliance support, technologies, operational tools, and guidance you’ll need as you build your RIA. 

Seeking out support during your transition helps ensure your business is delivering high-quality service and you have enough time to do what you do best. Talk with AssetMark’s team to find out more.