# Ask Brad: The Math Problem Brokers Can't Solve

#### Membership required

Membership is now required to use this feature. To learn more:

View Membership BenefitsAdvisor Perspectives *welcomes guest contributions. The views presented here do not necessarily represent those of* Advisor Perspectives.

*This is the latest installment of a new, regular column to answer questions from advisors who are considering transitioning to an RIA model. To see Brad’s previous articles, click **here**. To submit your question, please email Brad **here**.*

One of the oft-spoken traditions in financial planning circles is to tout the financial benefits of skipping the daily Starbucks and investing the difference instead.

Skip the daily $7 double-chocolate, nutty caramel, easy on the whip, extra tall latte, and you too can retire rich!

Perhaps entirely overplayed, there is some rationale to this advice. The $7 per day, for 20+ years, earning a reasonable rate of return, will add up to a significant part of an investor’s nest egg.

Remember that $7 a day is touted as a meaningful enough dollar amount that it should cause an investor to adjust their behavior.

Even though the 20+ year math will add up to a meaningful return for the investor, some folks will still scoff at the idea that a “mere” $7 a day is enough to cause them to change course in life.

What if instead, though, that fancy latte cost $986?

Would you, day after day, roll into Starbucks and plunk down $986 for that tasty goodness? Or would such an amount cause you to give up your latte habit and change course? There must be a better or cheaper option to satisfy your daily cravings?

With this backdrop in mind, I want to share a math formula I often discuss with advisors. This is for anyone considering transitioning their practice to the RIA model or is already working through those steps but is struggling to reach the finish line.

While this math works for independent broker/dealer advisors as well, it is extra meaningful for wirehouse-type advisors. No matter which model you are in, though, pull out your calculator and play along.

I am routinely asked what level of bottom-line income an advisor/team can expect to earn if they transition their practice to the RIA model? The short answer is a reasonably run, reasonably sized RIA can expect to net 60-70% of their gross fees before owners’ compensation.

The longer answer involves diving deeper into what constitutes a reasonably run, reasonably sized RIA, and why some RIAs fall along different ends of the income spectrum. For today’s discussion, though, we will consider the often-achieved results of 60-70%. Or, more simplified, we’ll split the difference and assume 65% net.

Let’s consider a wirehouse-affiliated advisor producing $2 million in fee-based revenues. The payout grid level for an advisor of that size generally comes in at around 47%.

As I regularly remind advisors, your true payout is probably something less than the stated grid rate. After you factor in all the ways the compensation plan deducts from the grid (ever wonder why comp plans are usually 20+ pages long?!), your payout is assuredly less, often meaningfully less. But in the spirit of playing nice in the sandbox, I will look past all of that and assume you are netting 47%.

Now, here comes the formula. As the title of this article suggests, it will be quite depressing to some of you. Perhaps turn away now and enjoy the rest of your day.

For those still calculator-ready, let's proceed.

With our $2 million advisor in mind, we can punch into our calculator:

- $2,000,000 X (.65-.47) / 365

Or broken down in pieces:

- $2,000,000 in production.
- Multiplied by the difference in possible net take-home between the current wirehouse model (47%) and what is often achieved in the RIA model (65%).
- Divided by 365 days in a year.

As our trusty calculators show, this comes to the mentioned $986. Or 141 lattes per day!

More bluntly: Every day you tell yourself you should learn more about the RIA model, but do not get around to taking the next steps in doing so, it costs you $986 *per day*!

Now to be sure, the above calculation is assuming a $2 million producing advisor, receiving a 47% grid payout currently (again, most likely overstated), and who will achieve a 65% take-home as an RIA. Each advisor situation is unique, but I challenge you to take out a calculator and punch in your own applicable numbers to see what your “daily run rate” is costing you as well.

The RIA model is not a fit for everyone. Perhaps you are one of the folks for whom, upon exploring further, it turns out to not be a good fit for you and your practice. For those for whom it will prove to be a fit, and who do ultimately make the transition, every day that passes in which you don’t take at least some initial time to learn more about how the model works and what it would look like for your practice, is a day possibly costing you $986.

If you choose not to take my above advice, next time you’re going through the Starbucks drive-thru, after you pay for your own latte, pick up the tab for the next 140 people behind you as well. And oh yeah, then come back the next day and do it all over again. And the day after that. After then the next day again after that. And on and on we go…

*Brad Wales is the founder of **Transition To RIA**, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about WHY and HOW to transition their practice to the RIA model. Brad utilizes his nearly 20 years of industry experience, including direct RIA related roles in compliance, finance and business development to provide independent advice regarding how advisors can benefit from the advantages of the RIA model.*

#### Membership required

Membership is now required to use this feature. To learn more:

View Membership Benefits