This article is the first in a series of articles geared to helping advisors establish an independent RIA practice.
You have built a successful business as a broker in a broker/dealer or wirehouse environment and now you want to become independent. Whatever the motivating reasons - more freedom in your lifestyle, choosing investments from a larger universe, providing better service to your clients, or getting away from the sales driven model to the advice driven model - where do you begin?
You can join an independent broker/dealer that provides back office support or you can sign on as a Registered Independent Advisor with a custodian. Examples of independent broker/dealers are Commonwealth Financial Network and Raymond James. These firms take at least 5% of your business as a fee for providing back office support and may charge additional fees. If you don’t want to pay a fee and be affiliated with a broker/dealer you can custody your client’s assets at a custodian, such as Charles Schwab, Fidelity, or TD Ameritrade. These custodians do not charge a percent of your assets, so you do not pay them anything directly. They charge fees based on transactions and other small services. . They also provide back office support, but in a more limited way than through an independent broker/dealer. Some custodians, such as Schwab Institutional, offer financing to wirehouse brokers who are transitioning to an independent model.
Earlier this year I left a successful boutique high net worth wealth management firm, after spending the last two and half years as the COO and CCO building the firm. It was my second experience growing a firm from a few employees, a handful of clients, and $25 million in AUM (assets under management) to 8-10 employees, 60-100 clients and $300 to $700 million in AUM. I know it can be done. With the right people, technology and processes in place, you can become independent and autonomous.
The following is a short list of areas that need to be addressed:
- Compliance and regulation
- Setting up the office
- Hiring the right people
- Agreements and contracts
- Software systems
- Workflow processes
Careful planning and strong support make the transition go smoothly. The primary thing is to set expectations. This isn’t a quick process. The end result will be a practice you created; your clients will receive the benefit of lower fees and a broader range of investments. Above are several areas to be addressed, and this article focuses on choosing your custodian.
Take a good look at what services a custodian brings to the relationship. Here are important questions to ask when choosing a custodian.
- What is their pricing model? Pricing is based on the amount of assets you are bringing to the custodian or the amount you anticipate bringing within a specific time range. Custodians will also take into consideration the number of mutual fund, equity and fixed income trades. Many mutual funds that have no transaction fees. Pricing for the mutual funds that do have a fee ranges from $24 to 40 per trade. Equity transaction fees range from $8 to $20 per trade. Fees for fixed income trades average around $2-3 per bond. There is also asset based pricing, although this tends to be more costly than the transaction based pricing. All custodians charge small fees for services such as wires, check reorders and custody of alternative investments. A discussion with the business development person is a must to achieve the best pricing for your clients.
- Is the technology in place that will allow you to access the investment data efficiently and easily, so that you can report on your client’s assets comprehensively? Custodians are putting forth an effort to make reporting of assets not held with them as easy as the assets that are held with them. Most custodians have the ability to report on some held away assets. If you want to position yourself as a trusted advisor, you must provide comprehensive reporting. Clients may have retirement accounts, trust funds, mutual funds, separate accounts with different custodians, limited partnerships and hedge funds. Below are links to the top three custodian’s reporting solution for asset aggregation:
- If your custodian does not support asset consolidation in one report, third party solutions can be used, but they typically need some additional in-house resources. Fidelity has introduced Wealth Central which will combine a CRM, portfolio management and financial planning into one integrated platform.
- Does the custodian offer due diligence support for investments and money managers? All three custodians above have professionals on staff to address all types of assets and all have access to a variety of mutual funds and separate account managers. The links below will take you to the custodian’s discussion on their research and investment vehicles that are available.
- How accessible, knowledgeable, and reliable is their staff? Your first contact with a custodian will be with the business development or salesperson, who is responsible for adding new business. Once you have signed on, you will be assigned a relationship or account manager (RM). Your RM is responsible for making sure you are happy, growing your business, and not looking to move assets away. Your RM is your primary point of contact and it is important to have a well developed working relationship with him or her, as it can make or break your day to day operations.
- How reliable and easy to use is their website? Custodians have put a lot of resources into updating their web capabilities. You can perform most of your day to day transactions, including trading, without ever talking to someone or writing up a request. Through the custodian’s web site, you can perform wire transfers, journal transfers, check requests, as well as many other functions.
Finding the custodian that is right for you takes time. You may want to use more than one custodian for ease of transferring assets, to get the services from more than one source, or to give your clients a choice. Meet the people that will service your firm, from the regional vice president to the person who processes the wire requests. Meet with the business development person to negotiate the best pricing for your clients. Talk to the technology professionals and discuss how you can best leverage their technology offerings and how it will integrate with third party software. Your custodian needs to be your partner, so make sure you can work with them in all areas.
Karla Paxton is an independent consultant with a practice that helps investment advisors with their transition to an independent RIA model. She can be reached at .
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