As appealing as the path to a registered investment advisor (RIA) practice may be, it’s a transition that requires careful consideration, detailed planning and a structured, strategic approach that leaves nothing to chance. By preparing well in advance, and seeking out expert guidance along the way, you’ll be better able to avoid conflicts with your previous employer, retain your best clients and hit the ground running with minimal income gaps or execution issues.
While the RIA certification process itself may only take a few months, most industry professionals recommend you start preparing your transition six to 12 months ahead of time. Here are nine important considerations to keep in mind as you contemplate making your move.
1. Determine your business structure. You’ll want to consider how you’ll structure your new business, as an S corporation, for example, or a limited liability corporation (LLC). You’ll also need to consider where you’ll domicile your business, either in your home state or in a state like Delaware, which offers certain legal advantages. These choices may have tax or regulatory implications, and it will be important to seek out qualified legal and tax advice before you finalize any decisions.
You’ll need to do some research on specific RIA filing requirements. As a general rule, firms that manage less than $100 million in AUM only need register with their state authority, while those with higher AUM are required to file with the SEC. However, it is important to confirm the requirements for your particular state and situation.
2. Estimate income needs and potential expenses. As part of your strategic planning, consider the financial aspects of having your own RIA practice. What kind of compensation will you need to meet your income needs, both short- and long-term? What kind of resources do you currently have to help you weather a downturn in your income as you build your business?
You’ll also want to work out a rudimentary budget, estimating both short-term costs associated with starting your practice, as well as recurring monthly expenses. Once you have an idea of your income needs, expenses and prospective payout ratio, you’ll have a better idea of what kind of AUM base you’ll require to meet your income needs.
Start-up costs for transitioning RIAs may range from around $7,000 to $15,000, depending on the size of your client base, your choice of technology platform and other factors. The good news is that most of these expenses are one-time fees, and your overall expense ratios may decline as you grow your AUM and establish economies of scale. Moreover, because you’ll have more control over your selection of vendors, RIAs have found their marketing, technology and compliance costs tend to be lower over the long term, as compared to the recurring fees they have historically paid out to their broker-dealer firm for the same services.