In a world where RIAs are not only dominating industry headlines but capturing the attention of both the M&A market and end investors, super-OSJ groups that lack an RIA of their own are increasingly having doubts about the long-term growth potential of their current business model—especially as they cast an eye towards their faster-growing counterparts who are operating as independent RIA and hybrid RIA firms.
As I meet with leaders of super-OSJ groups across the country, I’m commonly asked about whether it makes sense for them to go form their own RIA. My answer is almost always yes—with the caveat that it’s close to impossible to sustain one’s own RIA without the requisite size and scale.
As a rule of thumb, a super-OSJ group should have at least $250 million in advisory assets to even begin to consider making that type of move, and more realistically, the group should enjoy over $1 billion in advisory assets. Anything less than that makes it very difficult to absorb the fixed costs and risks that are inherent to running an RIA, including everything from hiring a chief compliance officer to investing in the latest technology tools and systems.
For these larger super-OSJ groups, however, the hybrid RIA course is a far more realistic hill to climb. Here are some of the potential benefits to consider.
• Increased Profitability. A Super-OSJ, for example, overseeing $1 billion in advisory assets on a corporate RIA platform could pay as much as 15 basis points to its broker. If this group had its own RIA instead, it could cut out most of that expense, which could yield over $1 million in additional profit or more annually. In the short term, that would immediately allow the firm to absorb the costs of its transition more easily, while in the long run putting it on a path to greater profitability.
• Greater Enterprise Value. It’s not hard to figure out that wider profit margins produce more cash flow, driving up the value of the enterprise. Add in the fact that RIAs provide predictable, recurring revenues, and it’s no wonder that today’s M&A market is putting a premium on RIA and hybrid RIA firms. Sure, super-OSJs generate their fair share of recurring revenues as well, but not on the same level—and, as such, they are not typically accorded as much market value.
• Improved Recruiting and Retention. Having an RIA could offer a super-OSJ more flexibility when discussing fees and services with potential recruits. Moreover, it makes it easier to pursue deals with owners of smaller RIAs who have established businesses but no longer want the responsibility of manning their own shops, preferring instead to operate as an IAR under an independent RIA. Indeed, the number of advisors seeking to drop their FINRA registrations and sever ties with their broker-dealer is on the rise. This trend is putting a further strain on some super-OSJs, which would have a much better chance to retain these advisors going forward were they to have their own RIA platform.
• Greater Strategic and Operational Flexibility. Aside from more profit potential, greater business freedom and flexibility is perhaps the biggest benefit of setting up an RIA for super-OSJ groups. This added leeway can result in additional products and services (like a wide range of TAMPs that increase efficiency), the ability to provide equity compensation to junior advisors (which boosts recruiting and retention) or more marketing latitude (standalone RIAs can tout their performance publicly, unlike those under a corporate umbrella). More broadly, an RIA gives super-OSJ leaders a better opportunity to confront the general decline of commission-based business.
To be very clear, there’s nothing happening right now that absolutely requires super-OSJs, even those with outsized advisory assets, to set up their own RIA. And fundamentally changing an operating model of a large organization is no doubt a tall task.
What’s more, every office has its own long-term goals, with many deciding with good reason that it makes sense to stick with their broker-dealer’s corporate RIA in order to leverage the broker-dealer’s back office and other resources, while the super-OSJ focuses on building out advisor-facing elements of its organization.
With all that said, large super-OSJs without their own RIA increasingly need to consider the risks of decelerating growth and irrelevance over the long run with the status quo, and the extent to which such risks directly apply to them. If there are serious questions about their current trajectory, super-OSJ groups owe it to themselves and their advisors to objectively evaluate the growth opportunities that could result from establishing their own RIA.
Jeff Nash is founder and CEO of BridgeMark Strategies, a leading strategic consultancy and advisor transitions firm for the independent wealth management space. He is also a partner and co-founder of Ignition Point Partners, a consultancy that works with financial firm executives to improve their recruiting and acquisition efforts.