Ask Brad: What Minimum AUM Do You Need to be Your Own RIA?

I was recently on a conference panel, and, sure enough, this exact question came up.

If you hear this question asked many times you will hear a lot of different answers. I respect those varying points of view. No one gains from an echo chamber of group speak.

What I do find discouraging, though, is when the answer is guided by the agenda of the person answering it. This is fine if you are transparent about it and acknowledge how it could influence your guidance.

For example, imagine you were to ask a custodian’s business development team member this question. As with most custodians, it probably has a minimum AUM commitment needed to be able to enter into a new custodial agreement.

Let’s hypothetically say that minimum is $50 million. Above $50 million, you can start your own RIA and use them as your custodian. Below $50 million, the only way it can bring you on its platform is to guide you towards a “tuck in” opportunity with an existing RIA on their platform.

If you have less than $50 million, and you ask them if that is large enough to start your own RIA, any guesses what their answer is almost assured to be?

I won’t just pick on custodians, though.

Just as there are some wonderful custodial options, there are also wonderful “tuck-in” firms that can be a great solution provider for advisors.

Those tuck-in firms are in the business of attracting advisors to join their platforms. Hence, consider how they, too, can be conflicted when presented with our prior question.

It doesn’t matter if you have $50 million, $250 million, or $500 million in assets. If you ask such a firm if you’re big enough to start your own RIA (which they won’t benefit from), or join an existing RIA (theirs!), again, any guesses on what their answer will be?

While an extreme example, I’ve heard an RIA give the guidance that any advisor with less than $1 billion should only be considering joining an existing firm! $1 billion!?!

Some amazing professionals at custodians and RIAs alike are a wealth of knowledge and can give you invaluable guidance on the RIA model. This is not at all a slight on them. I was in such a role myself at one point in my career.

Instead, it is an acknowledgment that, while digesting someone’s guidance, you need to consider a possible subconscious agenda steering their answer.

(By the way, I’m not over here in a glass house throwing stones. I addressed my own potential biases in a prior article, Stop Asking If You Need A Haircut.)

How do I answer this question?

Just as a parent can’t name their favorite child (unless they have only one – see above), I don’t attempt to give a specific dollar amount answer either.

Instead, I help advisors understand all the variables that go into such a question. Some are tangible; some are intangible.

What is the regulatory minimum required to have your own RIA? $0. You can start your own RIA with no assets, both initially and in the future.

What is the minimum AUM needed to use a custodian? It depends. Some will establish a custodial relationship with an RIA currently with $0 in assets; others have specific asset commitment minimums. Some are as high as $100 million.

What is the minimum AUM to tuck into an existing RIA? It depends. Some solutions allow for low minimums to start. Others have minimums that run into the hundreds of millions.

What is the minimum AUM to work with technology providers? It depends. Some have outright minimums (based on either assets or number of accounts), while others essentially establish a floor by making their pricing so prohibitive for smaller firms that it drives them away.

What is the minimum AUM needed to be a profitable RIA? It depends. There are plenty of <$100 million RIAs substantially more profitable than firms many times their size. It depends on how you structure your service offering and the expense drivers to deliver it.

Is there a certain size where it no longer makes sense to consider a tuck-in option? It depends. What is the value proposition of the tuck-in firm, what do they charge for their services, and how does it compare to other available alternatives? Numerous large advisors/teams have found tremendous satisfaction with a tuck-in route.

I could go on and on with more questions/answers.

My point is that there is no black-and-white answer. I am not dodging the question. There are too many variables specific to each advisor/team that needs to be considered first before you can determine whether starting your own RIA or tucking into an existing one is the better path to take.

If someone gives you a definitive dollar answer to this question without providing any context, raise your hand and ask them who their favorite child is.

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.

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