While current M&A trends might suggest breakaway advisors should always form their own RIA, going IAR continues to be a better solution in many instances
With record-breaking M&A consolidation and financial advisors in motion all year, this is a good time to pause and reflect. Specifically, it’s worth taking the time to determine whether the assumptions that many industry pundits seem to take for granted about what works best for financial advisors thinking of their next move are factually supportable – And which assumptions fall more under the category of myths and half-truths.
For year-end myth-busting purposes, perhaps the single biggest myth that has been accelerating in popularity is the belief that starting one’s own RIA is aways the best path for breakaway advisors who are leaving wirehouses.
It’s not surprising this point of view would be in vogue, given the constant headlines about independent RIAs getting snapped up at high valuations under the current industry M&A frenzy
The brutal reality, however, is that not every independent RIA takes off, and there are all too many RIAs that wind up stagnating, trapped in a cycle of escalating “DIY” costs and complexities.
For these independent financial advisor businesses, it’s very clear that they would have been far better served as investment advisory representatives (IARs) on a larger RIA platform from the outset.
Going IAR Versus RIA: A Matter of Value
There may not be a better time for breakaway advisors to go the affiliation route, and it’s a matter of value: With RIA platforms becoming more sophisticated in the services and technology they offer, RIA execs are growing more open to accommodating whatever needs advisors have, and the firms themselves commanding more scale and financial resources.
Additionally, “value” should be defined in part by how much time a financial advisor can spend doing revenue-generative, client-facing work, versus being pinned down with rising operational and administrative complexities under one’s own RIA.
After all, the heads of small RIAs typically spend a significant part of their time dealing with the “alphabet soup” – ADV, SEC, CCO, CMO, CTO, COO and CEO to name a few common acronyms.
Do You Need to Wear So Many Hats?
While it’s not impossible for particularly entrepreneurial RIA leaders to handle all these aspects of a new breakaway practice, they should ask themselves whether wearing all the hats truly adds value for the business, or if their time and energy would be better spent elsewhere.
In contrast, being an IAR on a larger RIA’s platform allows advisors to offload much of the burden of running the business to someone with more resources, manpower and bandwidth. Every practice’s situation is different, but it may be well worth a roughly 10-point fee to an RIA to have those bases covered.
And there aren’t just operational advantages to being part of a larger RIA. Having a well-resourced, experienced partner at your back can come in handy in emergencies too. It can be a scary prospect, for example, to imagine facing an SEC audit or cybersecurity event on your own.
Meanwhile, it also makes sense to have an ally in strategic planning, whether advisors are looking to expand through M&A or seeking a succession partner when it comes time to retire. An IAR can benefit from the expertise of a well-established RIA to navigate their strategic path, wherever it takes them.
At Your Service
It’s key to not lose sight of how this all boils down. As an IAR, you’re the customer and RIAs are there to serve you.
The RIA doesn’t take over the IAR’s business. All the RIA’s offerings to IARs are created because their advisors have told them that they need help with asset management, real estate, technology, HR, benefits, practice management and the like. Maybe they have specific requests like help creating equity plans or more broad requests like help with M&A.
The question then becomes how you try to tackle it all on your own. Do you reinvent the wheel? Source and invest in your own staff? Or do you partner with someone who has it figured out?
In the end, it’s a big decision, but one that becomes a little easier knowing all the factors in play.
One-size-fits-all isn’t a great approach for financial advisors to adopt in how they serve their clients. The same applies in thinking beyond the default “having your own RIA always works best” position for wirehouse breakaways seeking to aggressively grow their newly independent businesses.Charles Shapiro is a founding partner and chief development officer for Stratos Wealth Partners, a partner-run wealth and financial management firm that specializes in comprehensive financial planning and wealth management services.