Making the Leap to Independence May Pose Challenge for New RIA’s

Posted on January 13th, 2016 at 5:17 PM
Making the Leap to Independence May Pose Challenge for New RIA’s

From the Desk of Jim Eccleston at Eccleston Law LLC:

For financial advisors today, the choice to move to a RIA model requires significant planning and foresight. Unexpected expenses and overestimated revenues lead many new RIA’s into a challenging first year alone.

In order to understand the challenges facing new RIA’s it is important to understand completely the meaning of independence in this context. Unlike investment advisors attached to large wire houses like Merrill Lynch or independent broker dealers like LPL Financial, independent  RIA’s must absorb the costs of custody, compliance, and technology completely. By comparison the wire houses and independent broker dealers are paid of compensation and impose controls to cover those procedures. So while the RIA’s no longer have to share the spoils with managing firms, they must assume the expenses that firms covered. The cost of doing business are often (and should be) a great point of concern among advisors switching to the independent model.

On the top of the concerns regarding expenses, new RIA’s frequently miss the mark on revenue projections. In the first six months of operation, revenues often are not completely up to pre-transition levels. And when firms estimate rent and maintenance fees on the basis of revenues, the problems associated with over-projection multiply.

The largest chunk of revenue in the RIA firms assigned to cover expenses is associated with employees.  InvestmentNews estimates that professional / staff compensation and benefits make up about 75% of an RIA’s cost. As the firms continue to grow and expand the costs increase. Additionally, office space and technology and other expenses require both time and money that place a burden on the new RIA’s.

The largest burden for new RIA’s according to InvestmentNews survey data is regulatory costs. In an industry that is so heavily regulated, advisors are forced to devote significant resources to custody and compliance.  Depending on the size of the firm, the financial models being used, compliance cost can vary substantially among new RIAs. In some cases advisors underestimate compliance cost by thousands of dollars. Advisors making the transition to an independent RIA need to fully grasp the nature of independence and specifically the new costs that are attached. Hiring a consultant and a securities lawyer is the first step for those who don’t like surprises.

The attorneys of Eccleston Law LLC represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 65 years in delivering the highest quality legal services. If you are in need of legal services, contact us to schedule a one-on-one consultation today. 

Related Attorneys: James J. Eccleston

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Fantastic news!!!!  Your professionalism, support and expertise were greatly appreciated.  You made a difficult situation much more bearable.

Marci M.


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