This is the latest installment of a 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.
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Some observers assume I tell everyone that they should go down the RIA path.
That is not the case.
For many advisors, the advantages of the RIA model are far superior to what they have available to them, making a transition to it in their best interest.
For other advisors, it is the opposite.
My reputation, and by extension, the success of my firm, is contingent on my willingness to explain both the pros and cons of the RIA model and where appropriate, say when it’s not a good fit.
While each advisor situation is unique, the following are examples of when remaining in the wirehouse model can make sense.
You do not want to wear the hat of both practitioner and business owner
While there is an expansive ecosystem of solution providers to support advisors in the RIA model, there is invariably more responsibility involved than in working for a wirehouse.
Wearing the hat of a business owner can be emotional and stressful, yet also very rewarding. Are you someone willing and able to take on the added challenges, both tangible and intangible?
Some advisors are capable of an entrepreneurial route yet simply have no desire to do so.
I recall meeting once with a wirehouse advisor who, if he moved to the RIA model, would likely realize an approximately 50% increase to his take-home income, and come close to tripling the after-tax enterprise value of his practice, all while gaining far more flexibility.
Yet to him, he was already earning a very respectable income, enjoyed the lifestyle he had, and was content staying as-is regardless of the significant upsides he could achieve. I respect that.
You’re currently in an active internal “sunset” transition plan or are on the receiving end of a sunset succession
While each firm has its proprietary names, “sunset” plans are where a wirehouse advisor enters a coordinated succession plan with another (often younger) advisor at the same firm.
Such plans are the easier succession path. It does not involve transitioning your practice to a new model or firm. In return for the easier glide path, you are paid a below-market rate value for your practice and are subject to potentially costly taxation on the proceeds. It is a path chosen by many wirehouse advisors.
If you have formally entered one of these succession plans, it is generally advisable to see it through to fruition. Diverting to a different path, while not impossible, is far more challenging.
Likewise, if you have been on the receiving end of one of these internal succession plans (i.e., you were the advisor gaining the additional clients), breaking away to a more independent path is considerably more difficult.
While each firm’s arrangement is unique, you more than likely signed an agreement as part of the succession plan that further restricted your ability to one day leave the firm. This is an often-overlooked attribute of such plans, as they can significantly handicap the receiving advisor’s future optionality.
You have significant accrued deferred compensation and are near the end of your career
Deferred compensation is, by design, meant to deter you from leaving your firm. Such “golden handcuffs” are common in wirehouse compensation plans.
As for why this can be a challenge for late-career advisors, consider the analogy of refinancing your mortgage to a lower interest rate.
Anyone that has done such a refinance knows there are closing costs involved. It is common practice to calculate the point that future interest savings will recoup the upfront costs.
If it would take three years to recoup the upfront costs, and you only plan to remain in your house another three years, a refinance is not rational.
If, however, you plan to remain in your house for another 10 years, the long-term aggregate savings well exceeds the initial upfront “investment” of closing costs.
Consider your deferred comp in the same way.
Transitioning from a wirehouse firm to an RIA model usually results in a meaningful increase to your annual bottom-line income, plus increases the valuation of your practice.
However, losing your deferred comp “closing costs” might put you in a hole on the front-end. Given enough time, though, the aggregate economics of the RIA model generally far exceed the status quo wirehouse path.
But you need enough time to reach the breakeven point and the rewards of the accretive upside that follows.
The math for an advisor only one or two years from retirement can be challenging to make work. Thus, staying put is the likely best path.
These prior examples are not an exhaustive list. They are meant to demonstrate scenarios where remaining at a wirehouse can be the more advantageous path to take.
Each advisor’s situation is unique. Explore your options further to understand how different pathways will affect you.
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.
Read more articles by Brad Wales
This is the latest installment of a 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.
