Key considerations when going RIA

I'm Shauna Mace, Head of Practice Management, and I'm here with Gabe Garcia, Head of RIA Experience. We've both worked at and with advisory firms who have navigated the transition to become fully independent RIAs. In this conversation, we'll review key considerations to make to successfully become a fully independent RIA. We'll focus in three key areas to help you design, build, and make the transition. So, Gabe, when you're making a transition like this, it can be daunting if you don't have a plan. So when you're designing your plan, what are those important components that you wanna make sure you include?

Yeah, great question. So there's a lot of aspects to thinking about launching your own entrepreneurial independent RIA firm. First and foremost, many have done this before you. So there's a proven path that has been explored and perfected, quite frankly, to help advisors such as yourselves pursue the fiduciary independent business model. But as you begin to think and contemplate around going independent, I always like to talk to firms and suggest that they follow this three-step process. First, think about your business aspirations. Second, think about your personal professional aspirations, what you like to do every day. And then personal aspirations, what do you want your work-life balance to be, your family balance, personal goals that you have outside of the professional workplace that you want to achieve? And that begins to help frame how you're gonna construct your business and the culture, the ethos, the unwritten rules around operating your business.

Are there specific aspects, when you think about the business itself, are there specific aspects when you're designing you wanna make sure you think through and have a plan for before you start to build?

Yeah, absolutely. And I'll lay this out in five components. First, you wanna think about strategy. This aligns back to the business, professional, personal aspirations exercise. So what is the strategy for your business going forward, not just in the immediate launch but long term, three, five years? What do you want to build? Second is the structure to support that strategy. And structure has many aspects, right, the organizational structure, the technology structure, the client experience, structure, et cetera. Then, probably one of the most important components, how do you activate your strategy and your structure, is your people. What do you need? Who do you need and in what roles? Then your processes, right, one of the things you wanna do is run an efficient, productive business. So what are the processes to deliver the client experience as well as the operational experience within your organization? And then lastly, profits, as an independent entrepreneurial business owner, it's a for-profit business. So how do you price your services? What do those services look like? And what is the appropriate pricing commensurate with the cost to deliver those services?

Okay, so you have a blueprint, you have your design, you have clarity on the business, the components what you wanna get out of it professionally, personally. You're starting to build now. What are those key building blocks in order to actually construct the RIA?

Yeah, it's kinda like building a home, to use that analogy, right? There's the foundation that supports everything else. If you don't have a strong foundation, then you have, you know, risk long term of the house crumbling, so to speak. So first is thinking about the entity creation, right? You need to consider whether you wanna be an LLC or an S corp. Most firms in the RIA industry are LLCs, but there are a substantial number that are S corps, both with their pros and cons. Then there is the registration of the entity, right? Whether it's a state-registered or an SEC-registered RIA that you are launching, you need to go through that process and all the aspects that come with it, right, getting a tax ID number, creating operating agreements, employment contracts, if that's a component of your organization, depending on staffing size, and then beginning to explore the infrastructure that supports the business. One is the office infrastructure, right? So you need office space. What's the decor? What's the vibe? What's the feel? What do you want people to feel when they walk into your space that's congruent with your vision and your brand? So that's one element. There's the technology infrastructure to deliver the client experience and the investments and financial health and wellness deliverables that you have within the organization. So those are the building blocks that set the foundation for all of the other things which are the actual execution and the engagement with clients and centers of influence in your community.

Do you have any tips or advice on how firms do that well? Do they bring in a team? Do they bring in partners when they're looking to build?

Absolutely, you know, complexity and size always has a indirect relationship to the types of resources that you're gonna tap into., There are wonderful, wonderful resources that exist in the marketplace for RIAs who are looking at launching their own firm. I always suggest to firms that the first decision they should make is their custodial partner, not because I am trying to promote the custodial aspect more than any other aspect as more valuable or important, but custodians such, as SEI, typically have tremendous resources to help you with project planning, thinking about external parties that you need support from, such as, how do you deal with real estate and IT infrastructure? How do you deal with insurance, whether it's cybersecurity or E&O or liability insurance? And who are the right partners that you can be introduced to that have worked with other RIAs in the past, whether it's consultants that can help you with the operational and HR functions of the organization or, equally if not more important, compliance resources. How do you set up your policies and procedures? How do you make sure that you have the right processes in place to follow the regulatory infrastructure for your business as well as stay current with changes? So I think custodians do a great job of bringing expertise both within their organization that's there at your disposal but also connectivity to the community of resources that you'll need to execute on some of those aspects.

Got it, so you have your blueprint. You have your design. You have your components. You're actually building. You have your crew, and maybe you're bringing in some subcontractors who are your experts. You have your materials, your resources. When you think about how you figure out who does what, how should you think about what you do internally versus what you actually outsource?

Yeah, great question, and what I'll say is that, you know, the old, it's not a sprint, it's a marathon. There are a lot of decisions that need to be made up front to launch, and then there are other decisions that as your business evolves, your client experience, the size of your team, the roles that you need to support some of the capabilities and services that you deliver will inform that structure. But I think it's always great to start back to that business, professional, personal sort of exercise and think about, what is the business going to look like in three or five years? And what I mean by that is, what is your ideal client? What are the services and capabilities that you want to be known for? And what are the resources and talent that you need to deliver and execute on those capabilities? So even though it might be a small business to begin with, begin, you know, with your first step as you aim to end. And what I mean by that is think about roles. What is your role, if you're the founder or founders within the organization? Who's the CEO? Who's the CIO? Is your primary role as an advisor? Or is your primary role in some sort of management capacity? What are the service relationships that you need underneath to support the client experience and the operational processes? So begin to think about organizational structure and job descriptions as well as incentive plans.

That's great, great advice. So we're building now. That's the hardest part of building is kind of having a realistic expectation on how long it's gonna take. So what advice would you give around how long you'd estimate something like this taking from, you know, start, where you're actually starting to create the legal entity, to finish, where you've actually gone through the transition?

Yeah, great question. We get asked this all the time. I will say, it can go as quickly or as patiently as you wish. So let me work from the end state to the beginning state, and depending on where you are in your process, you can kind of look at a timeline. So let's call the end state 90% of your clients and assets have transitioned, and they're at your chosen custodian, and you're operating the business day-to-day. That usually happens within 90 days from the initiation of the transition. So once you start dropping accounts and ACATS to your custodial partner, that usually takes about 90 days, typically. You always have a few stragglers that extend it, and, you know, unforeseen circumstances for a particular family may delay one or two, but that's the success we see. So think 90 days, 90% of your assets from the initiation of the transition process. Now, to get to the transition process, again, working backwards, we'll need to, you know, collect client information to pre-populate the new account forms, set up the ACATS, communications that need to be put into that your investment advisor agreement with your clients, your ADV, all of those things. That process can be as expedient, depending on your level of engagement and resources to do that, as expedient as 30 days. Typically, we see that taking, you know, 60 to 90 days just because, you know, the patience, you're still working or employed at another organization, the confidentiality needs, et cetera. That all happens after you have registered your RIA, you've created the legal entity, you have created the operating agreements, you have created your investment advisor agreements, and thought about your pricing and client experience. That can be as quick, again, 30 days to 60 days. So from making the decision to, you know, having assets and accounts open and working within your new RIA, at the outside, in the typical transition, you're looking at six to eight months. We have done transitions recently, beginning to end in 45 days. So it really depends on your urgency, your need, and the level of of resources that you commit to making the transition. The longer part of this is getting to that point where you've decided to set up your own RIA and create the legal entity for it. That is an emotional and a professional exercise that can take sometimes years, sometimes months.

So when you're ready, six to eight months total, but there's a series of steps that are clear, and there is a process to do this. So when you're ready, when it's go time, you can go pretty quick if you're, if you want.

Absolutely. And as I mentioned, to reinforce it, we've recently did a transition beginning to end in 45 days. So it really depends on your energy, commitment, and urgency around transitioning to the independent RIA model.

So in your experience, are there any tips you have to make sure the transition is smooth, maybe things to avoid, lessons learned, just to make sure nothing slows you down or gets in the way?

Yeah, you know, preparation is key. Abdication is not something that you can do. Delegation is something you should do. And what I mean by that is that there are consultants and experts in the industry to help you with various aspects that we touched upon, and also great resources within your custodians, vis-a-vis Shauna and her team within practice management, to help you think about client experience, strategy, communications, long-term vision, technology stack, and how you deliver those things, to help you expedite this process but feel like you're making informed decisions with history of other transitions that have occurred, to help make your path smoother. And what I mean by all of this is going independent doesn't mean going it alone. This is a great community of professionals in the industry, very collegial. You'll find experts, but you'll also find other RIAs in the industry who are excited to help share their insights and their experiences to help you through this process. So don't abdicate, do delegate, lean on resources, and know what your non-negotiables are.

Great advice. Any last thoughts, key takeaway that you would wanna make sure that our audience thinks about and remembers as they maybe look forward to starting their own RIA?

Yeah, I would say that this is an experience that I've probably had with several hundred firms over the course of my career. And to date, not one firm has ever said, "I wish I hadn't done this." It's been quite the opposite: "I wish I had done it sooner." If you have that desire for greater control to building the culture in alignment with your vision and your professional aspirations, and to have greater ability to communicate and deliver the outcomes for your clients within the compliance constraints, compliance procedures that are appropriate for your business, this is a very exciting industry to be a part of. And there's great rewards both for your clients, for your staff, and for yourself personally in building your own entrepreneurial organization.

So I'm gonna ask you another question around, specifically, when you're making the transition, what are important things to keep in mind as you're communicating to your clients? How do you... And what should you be thinking about and doing in order to get as many of those ideal clients who you want to take this journey with you to come with you?

Yeah, great question. So let me start with why people might be contemplating this decision, and I'm gonna borrow this from a great friend of mine, the four Cs, right? Someone is typically struggling with culture, control, compliance, and compensation, some combination or all of those. And obviously, at the end of the day, you can run the models and understand your sort of direct income and the long-term value of the organization with respect to equity in the marketplace. But some combination of those four Cs or all of them are driving the motivation, and, by extension, all of those things inform the client experience. So when you're talking to clients, you wanna make sure that this is not just about you and your business and some sort of economic proposition which enhances your wealth. All of that has been proven over history to be the case. And those are underlying components that make the effort worthwhile. But at the end of the day, how does the client experience improve? What additional resources and capabilities will they be able to access? What will you be able to do that you can't do today within the organization that you may be employed by that improves the outcomes for your clients? So communicating, not too early, privacy and confidentiality is key, but at the appropriate time with your clients, what's in it for them, to use that phrase, is critically important. And as we think about strategy and structure, what are you building that enhances those outcomes? The last point I'll make is most firms when they launch are happily surprised with the overwhelming support and advocacy from their clients that they've served so well for years and decades at you being an entrepreneur and want to support you in every way. So a lot of times, there's fear. Will clients follow? Will my previous firm make it hard on me? If you do it correctly, there shouldn't be any obstacles other than reaching out and engaging with your clients. And advocacy from your clients is something that people are happily surprised by.

Yeah, we've seen the research that client relationships are typically centered around a trusting relationship and partnership, and they want what's best for you as well as what's best for them. So that makes sense. What about a team's perspective? So your team, if you have a team, are there any best practices or tips that you should be thinking about and communicating along this journey with your staff?

Yeah, excuse me, there are many aspects. If I take the proposition that somebody looking to launch their RIA is coming from a captive employee or 1099 type of a relationship, there are defined career paths and pay grades and incentives and performance reviews that give structure but may not reward your employees and the talent in the way that they want. The ability to build your firm and create the culture you want creates enthusiasm for for your team members. And you should think about them this way. You're gonna need them through this process, and you're gonna need them post the transition to continue to engage with clients. So think about defining your organizational structure. What are the roles that they're going to do? Maybe it's an opportunity to expand somebody's responsibilities, but the architecture of the organization you're at didn't allow you to create career mobility for them. Maybe they were in a service role, and they wanna be more of a paraplanner. Maybe they have aspirations to be an advisor, and this is an opportunity to begin to introduce them into relationships in a different way. Maybe you have different components of your organization that you need to support, that somebody has expertise or a proclivity and interest in doing. So think about the organizational structure, then think about the people that are gonna fit those roles as opposed to, Shauna, what do you wanna do in creating a role for Shauna? That will create long-term fulfillment and joy and career pathing. But that's a a component that's very important if there's more than just two of you launching a business.

So it sounds like you have to be clear on what's in it for you, the owner, what's in it for you, the client, and what's in it for you, the team and the staff.

Absolutely.

And hopefully, it's a win-win-win across the board.

Absolutely, that's the optimal outcome, and we see that happen in almost all cases. And we're here at SEI to support you through that with some of the great resources that Shauna and her team have to deliver in helping you create that optimal scenario.

Well thank you, Gabe, for this Cliff Notes run-through of what are the key components to design, build, and make the transition to become a fully independent RIA. And I hope you remember that while there are lots of moving parts when it comes to making this transition, don't let the logistics scare you. Thousands of advisors make this transition every year to the RIA model. So stay focused on why you're making the move, like Gabe said, and the benefits to your client and your team. And, of course, at SEI, we're here to support you. We have a number of resources to help support many business transitions. Going RIA is just one of them, and we would love to help you.