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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In a prior article, I noted the importance of owning the real estate you use for your office.
A parallel is whether you own your advisory practice or are simply renting it.
Conventional wisdom says you should never rent a home for 20 years; you should own your home.
Yet do you really own your practice?
I can’t recall who said it (as I would give attribution), but I once heard someone describe working at a traditional W2 wirehouse-type firm as renting a practice, whereas being independent is owning your practice.
An apartment renter is provided with a unit, a set of appliances, sometimes utilities, etc. If something breaks, it is not their responsibility. The landlord bears the cost and effort to fix it. This convenience for the renter can be attractive but comes at a cost. The renter is limited in how they can decorate or remodel; they must play by the apartment complex's rules, never build equity, etc.
A wirehouse advisor faces these same constraints.
The wirehouse firm provides its advisors with technology, an office, benefits, etc. Most everything is provided for the advisor. If something breaks, it is not the advisor’s responsibility.
Like with renting, it is “easier” for an advisor to be with a wirehouse firm.
This convenience comes at a cost. The wirehouse advisor is limited in how they can market their services, what technology and resources they can use, the firm’s policies they must obey, etc.
Renting might be easier, but is it better?
Having your own independent practice is like owning – more responsibility, more headaches to deal with. But it comes with significantly more flexibility, better economics, and satisfaction.
Consider a homeowner. They must manage the landscaping, make repairs, perform routine maintenance, and figure out insurance coverage. Renters are responsible for none of that. Yet, conventional wisdom is that owning is far superior to renting. The upsides of owning far outweigh the additional responsibilities.
Advisors who tell their clients the virtues of owning their own home should consider if they own their practice. Why are they not considering ownership if they are taking the easier “renter” route with their practice?
As becoming a first-time home buyer is daunting, so is moving to an independent model. However, there is an entire ecosystem supporting independent advisors. Like real estate agents, mortgage brokers, interior designers, etc., for homeowners, there is no shortage of experts to help advisors evaluate, transition to, and successfully manage their own independent practice.
The long-term renter looks back and ponders how things would be if they had owned their home. Would they have been more satisfied? How much equity would they have built? How might they have made their home more their own? They no longer appreciate the broken dishwasher from years prior that was not their responsibility to fix. Instead, they ponder the lost opportunity.
The simpler path for advisors is to stay with a captive firm that provides everything. But alas, there is no free lunch. Everything comes at a cost.
Do you fear looking back at your career one day and asking yourself “what if” you had made a move to independence?
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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