Recently, Bruce Kelly of InvestmentNews published “Advisers, shoot for $100 million in AUM before going indie“. The article summarized a virtual conference panel that InvestmentNews RIA Summit held where the message from most panelists seemed to have suggested that investments advisers starting their business with less than $100 million under management would be better served not starting their own business. I want to dispel that notion.
State Registered RIAs By the Numbers
As of December 31, 2020, there were approximately 17,454 state-registered investment advisers. In almost all cases, these investment advisers manage less than $100 million in assets. In New York, registration with the U.S. Securities and Exchange Commission becomes mandatory where an investment adviser manages more than $25 million in assets. Even with this weird regulatory wrinkle, New York still has 828 state-registered investment advisers, which is the fourth most among all the states. These numbers were down just a tick from the December 31, 2019 figures when there were 17,533 state-registered investment advisers and 845 New York registered advisers. If we interviewed all of these businesses, I would imagine the vast majority of them would tell you that they were happy with their decision to start their own business.
The Economics
Let’s consider a financial advisor with a book of business of $50 million charging 1% on all of their client business. They are contemplating (i) starting their own investment adviser, (ii) transitioning their book of business to a corporate investment adviser, and (iii) remaining with a wirehouse. The example assumes they would be entitled to count all of their revenue towards their production figures, but as we know, some wirehouses do not give credit for smaller accounts. This example also doesn’t consider the retention bonuses and other golden handcuffs that wirehouses pay, but now you can see where that pot of money is created. Lastly, this example assumes that the Corporate RIA and the Wirehouse will bear salaries for an administrative person, but sometimes those expenses are split between the financial advisor and the firm.
| Independent RIA | Corporate RIA (85%) | Wirehouse (58%) | |
| Advisory Fee Revenue | $500,000 | $500,000 | $500,000 |
| Expenses | ($15,000) – registration and compliance costs, entity formation, insurance | ||
| ($5,000-$150,000) other overhead expenses | |||
| Take home | $335,000-$480,000 (W-2 AND K-1) | $425,000 (1099 or W-2) | $290,000 (W-2) |
The reason why the independent investment adviser’s expense range varies so much is because it single-handedly controls its expenses. It can determine whether to hire an assistant, whether and where to maintain a physical office, what technology to use. These expenses can vary quite a bit, but as the example shows, this is where the economic outcomes really turn.
I’d also note that there are creative tax planning benefits that arise through ownership that generally are not available at a Wirehouse or Corporate RIA. We may also see Congress repeal the ability of financial advisors to receive income as independent contractors, so ownership income might be that much more beneficial.
Regulatory Issues
Investment advisers with less than $100 million under management at the time of registration generally must register with one or more state securities authorities as opposed to the SEC (with the exception of New York, as discussed above). If an investment adviser will have clients or places of business in multiple states, it might require registering with more than one state securities authority. This can increase registration costs, slow down the registration process, and potentially create some additional compliance work.
An investment adviser that is registered with a state is subject to various compliance requirements. At a minimum, they will need to prepare and maintain Form ADV. Many state securities laws also require the maintenance of written policies and procedures designed to prevent and detect violations of applicable law. For simpler investment advisers, neither of these requirements is overly burdensome and both can be outsourced to experienced professionals. I personally do not believe in skimping with either Form ADV or policies and procedures as I have seen more than enough instances where doing so has caused later deficiencies and regulatory issues.
There are also a number of growing investment advice business models that don’t contemplate having ANY assets under management. These include financial planning and advice firms where investment advisers don’t manage any assets on an ongoing basis. I have spoken to a number of these firms and they appear to be doing quite well.
In any event, a relatively simple investment adviser does not require a full-time, dedicated compliance officer. I have seen many smaller organizations where a founder or client-facing adviser wears the compliance hat, and as long as (i) he or she is willing to put in the effort, (ii) has some available time each month or quarter, and (iii) has some resources for compliance , there is no reason that these organizations can’t be successful.
Anecdotes
There are so many examples of investment advisers with less than $100 million under management that are successful. If you asked their founders whether they are happy, content, or fulfilled, I am guessing you would get a lot of positive feedback. In fact, I can count on one hand the number of investment advisers that I have worked with over the years that have intentionally gone back to working for another business (excluding as part of a succession plan). Below are just a few stories from people who weighed in on Twitter about their own personal stories of success in starting their businesses with less than $100 million. Would love to see more success stories in the comments.
Conclusion
Next time you hear an industry professional, a consultant, or a headhunter tell you that the line of demarcation for successfully launching an investment adviser is $100 million, I would simply encourage you to review your personal wants and needs. If they can best be accomplished at a Wirehouse or Corporate RIA, then that is what I would recommend. If they can best be accomplished by starting your own investment adviser, I’ll be available to help you through that process. If you need an introduction or recommendation of a Wirehouse or Corporate RIA that might best fit your situation, I could also probably help out with that too.
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