Ask Brad: Do RIAs Have to Pay for Their Own Compliance?

This is the first installment of a new, regular column to answer questions from advisors who are considering transitioning to an RIA model. To submit your question, please email Brad Wales here.

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This question is not only one of the most frequent questions I get from advisors, but it is also one of my favorites. That begs the question, how could anything related to compliance be considered a favorite?!

I enjoy answering it because doing so corrects a common misconception held by advisors regarding the RIA model.

Bottom line, yes, RIAs need to pay for their own compliance. The cost of this is measured in thousands of dollars, not hundreds of dollars.

But, if you are in a broker/dealer environment (whether as an employee or independent contractor), you are already paying for compliance! Not only that, but you are also likely paying for more compliance than you need.

Let’s tackle each of those.

Suppose you are affiliated with one of the traditional employee broker/dealer models (or indie-BD for that matter). In that case, you receive a “payout” on the fees and commissions you generate. Let's assume you generate $1million in historical gross revenues (a.k.a., T12), and, as a result, you receive a “payout” of 40%. Now, whether you receive that entire stated 40% or not is a question for another day. For now, though, we’ll assume you are.

From your $1million in gross, you receive a net of $400,000. Or put differently, you are generating $1 million for yourself. From that, though, you are then essentially writing a check to your firm for $600,000 per year for the services it provides.

That $600,000 “bill” you are paying each year is presented to you as a bundled all-inclusive bill, not as an itemized bill. If it were the latter, what would appear on that bill is a portion of your $600,000 annual fee going towards the cost of compliance the firm provides for you.