A lot of advisors think they’ll take home more money if they run their own RIA. At surface level, this makes sense. But after having worked with hundreds of advisors over the past 13 years, I can tell you advisors who run their own RIAs usually don’t make more money. Shocking, I know. Let’s talk about why this career path isn’t as lucrative as you may think—and an alternative option you can take instead. 

The Hidden Costs Of Running Your Own Firm

When you become an independent RIA, you’re suddenly responsible for every single part of your business—think marketing, accounting, vendor and technology decisions, platform management, and more. 

The actual cost of starting your own RIA varies depending on the size of your firm and number of clients, but generally, here are 11 costs you’ll have to cover: (1)

1. Entity formation. Your firm will most likely be classified as an LLC or S corporation depending on your income—and both have initial and annual fees you’ll have to cover.
2. RIA compliance. Most advisors hire a compliance consultant to help them register their RIA and stay in good graces with regulators. At WorthPointe, we pay about $60,000 a year for our consultant.  
3. RIA firm and IAR regulatory fees. These state fees are charged annually and vary based on where your firm is located. 
4. Errors and omissions (E&O) insurance. This insurance protects your firm from any claims, allegations, or liabilities that may be made against it.
5. Marketing and advertising. Good marketing that generates leads is expensive. That’s why most advisors hire a digital marketing agency to design and launch their website, create their content, and manage their brand for them. On top of that, you may also want to set aside money for networking lunches, client dinners, and seminars depending on your target audience.
6. Technology. You’ll need a whole host of platforms to run your new business. Some common ones include financial planning software, an accounting management system, client relationship management (CRM) tool, client billing invoicing system, cloud document storage service, social media compliance archiving provider, and client presentations and portfolio analytics software.
7. Professional service group fees. If you want to be affiliated with a certain group of financial advisors, you may need to join a network and pay annual dues to maintain membership. 
8. Office space. This cost will vary based on your location and needs. You could get by with working virtually from home or you could end up needing a fancy office downtown. 
9. Support costs. These costs include the day-to-day expenses it takes to run a business, such as salaries for administrative staff, cleaning services, supplies, overhead, and so on. 
10. Opportunity costs. How many new clients are you missing out on because you are busy with the day to day operations of the business? 
11. Administrative HR costs. If you have employees, you’ll also pay for workers’ compensation, payroll services, and other HR-related costs.

You Need Scale For Profits

As you can see from the list above, the costs associated with starting your own RIA can add up quickly. Studies show that independent RIAs don’t usually start tipping the income scale in their favor until they have at least $200 million in AUM; and that’s only if they’ve efficiently managed expenses and operational costs. (2)

If your expenses aren’t under control, you could need even more assets before you turn a profit. Plus, no matter how big you get, you’ll always need to be focused on minimizing operational drag, so you can maintain the scale you’ve created. It’s a delicate dance.

What’s An Alternative Option? 

Believe it or not, you don’t have to start your own RIA to take your financial advisory career to the next level. There are ensemble firms out there—like WorthPointe—that give passionate financial advisors the flexibility and freedom they crave without having to deal with the risks of starting your own firm. If you’d like to learn more about why financial advisors love working with WorthPointe, contact us today at (800) 620-4232 or email us at info@wpwm.com. 

About WorthPointe

WorthPointe is a financial planning firm based in San Diego, Austin, Dallas-Fort Worth, and Jackson, WY. We provide a home for CERTIFIED FINANCIAL PLANNER® so they can enjoy their independence while also focusing on what’s most important: people. Our centralized operations team takes the burden of running the business off your back, handling compliance and HR, bookkeeping, billing, and trading, so you can use your time to serve your clients. Our firm is at the forefront of the industry, providing you with support, connection, growth, and a healthy work/life balance so you can achieve all your professional and personal goals. Learn more about becoming a partner with WorthPointe and leaving your employee days behind here.

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(1) https://www.kitces.com/blog/steps-to-start-your-own-independent-ria/

(2) https://www.fa-mag.com/news/what-s-your-ria-tipping-point-15020.html?issue=213