The Pros and Cons of Starting Your Own Financial Advisory Firm or RIA
As a financial advisor working at a large brokerage or insurance firm, you may have considered striking out on your own to launch an independent registered investment advisor (RIA) firm. The RIA model offers many potential benefits, including greater autonomy, flexibility, and income potential compared to working as an employee advisor. However, starting your own firm is not a decision to take lightly, as it also comes with significant challenges and risks. In this post, we'll take an in-depth look at the key pros and cons of going independent as a financial advisor to help you determine if it's the right path for your career.
The Pros of Starting Your Own RIA
1. Flexibility and control
One of the biggest draws of the RIA model is the level of flexibility and control it provides. As the owner of your own firm, you have the freedom to decide which clients you want to work with, what services you will offer, how you will charge for your services, and what technology and investment solutions to use17. You're not beholden to the limited offerings or strict protocols of a large firm.
This flexibility allows you to truly tailor your practice to your strengths and your clients' needs. If you want to specialize in serving a particular niche, such as tech entrepreneurs or airline pilots, you can build your entire business model around that16. You can select the technology tools that work best for your practice and are not forced to use your firm's legacy systems. The RIA structure gives you the autonomy to run your business the way you think is best.
2. Ability to act as a fiduciary
Another major benefit of the RIA model is that it allows you to serve as a fiduciary for your clients. Registered investment advisors are legally required to always act in their clients' best interests, while broker-dealer advisors are only held to a less-stringent suitability standard11.
Operating as a fiduciary can help differentiate your firm and build deeper trust with clients who are seeking unbiased, transparent advice. A 2019 study by Personal Capital found that 57% of U.S. adults incorrectly believe that all financial advisors are legally required to always act in their clients' best interests2. As an independent RIA, you can clearly demonstrate your commitment to putting your clients first.
3. Open architecture and no proprietary products
As an RIA, you have access to a virtually unlimited range of investment solutions and are not pressured to sell any particular proprietary products17. You can shop the entire market to find the solutions that are best suited for each individual client, without any conflicts of interest.
In contrast, advisors at broker-dealers and insurance companies are often heavily incentivized to sell their firm's own high-fee mutual funds, annuities, and other products, even if they may not be the optimal choice for the client11. The open architecture of the RIA model frees you from these pressures and allows you to be a true advocate for your clients.
4. Potential for higher payouts
RIAs typically operate under a fee-based model, charging clients an ongoing percentage of assets under management or a flat retainer fee. This can be more lucrative than working under a broker-dealer's commission-based model, where payouts on product sales can be as low as 30% to 40%17.
As an RIA, you get to keep 100% of the revenue you generate, minus any technology, compliance and platform fees. Experts estimate that payouts under the RIA model can be 20-30% higher compared to a broker-dealer3. Of course, higher payouts are not guaranteed as an RIA, since you're responsible for all your own costs. But the economics of the model create the potential to earn significantly more if you're able to grow your client base and revenue.
5. Easier path to acquisitions and mergers
The RIA model can make it easier to acquire other advisory practices or merge your firm with a like-minded peer. Acquiring a book of business under a broker-dealer can be difficult because the client relationships and revenue technically belong to the BD, not the individual advisor17.
As an RIA, you own your book of business outright. This makes your firm more valuable and easier to sell or merge. According to consulting firm FA Insight, RIA firms command 29% higher valuations than their broker-dealer counterparts3. If your long-term goal is to grow through M&A or position your firm for an eventual sale, the RIA route is often more attractive
The Cons of Starting Your Own RIA
1. Significant startup costs and time investment
Starting an RIA from scratch requires a meaningful upfront investment of both time and money. You'll need to form a legal business entity, register with the SEC or state securities regulators, find office space, purchase technology and software, and create marketing materials - all before you can even start serving clients5.
Experts estimate that startup costs for a new RIA can range from $10,000 to over $100,000, depending on the size and complexity of the practice19. You may need to take out a business loan or tap your personal savings to get up and running. You'll also need to budget significant time to navigate the legal and compliance requirements of setting up an RIA.
2. Compliance and regulatory responsibilities
As an RIA, you're responsible for all aspects of compliance with securities laws and regulations. This includes developing a compliance program, maintaining proper books and records, providing disclosures to clients, and submitting to periodic regulatory audits19.
The SEC has ramped up its enforcement efforts in recent years, conducting more frequent exams of RIAs. In 2021, the SEC examined 16% of RIAs, up from 15% in 202012. Failure to meet your compliance obligations can result in fines, penalties, and reputational damage.
While larger RIAs can afford to hire a full-time chief compliance officer, most small firms need to either outsource this function to a compliance consultant or handle it themselves, which can be time-consuming and stressful. A 2021 survey by the Investment Adviser Association found that 67% of RIAs with less than $1 billion in AUM cite "compliance obligations" as one of their top business challenges8.
3. Lack of built-in support and resources
As an independent RIA, you don't have access to the same back-office support, technology, and other resources that advisors at large firms enjoy. You're responsible for handling everything from client service to investment management to operations17. This can be overwhelming, especially in the early years when you're trying to get your business off the ground.
You may need to outsource certain functions, such as portfolio management, financial planning, or marketing, which can be costly. A 2020 Schwab study found that 71% of RIAs outsource at least one function, with the most commonly outsourced areas being investment management, compliance, and technology6. Building out a reliable network of service providers takes time and due diligence.
4. Pressure to be a jack-of-all-trades
As a solo RIA, you wear many hats beyond just providing financial advice. You're the chief investment officer, chief marketing officer, head of business development, chief technology officer, and chief compliance officer all rolled into one14. It can be challenging to juggle all these responsibilities and excel in each area.
The risk is that you spread yourself too thin and don't deliver the level of service your clients expect. In a 2022 Kitces Research study, 61% of independent RIAs said that "finding the time to get everything done" is their top challenge7. Unless you have the budget to hire staff or outsource, you may find yourself working long hours and struggling to maintain a healthy work-life balance.
5. Difficulty attracting new clients
One of the biggest challenges of starting your own RIA is building a client base from scratch. You no longer have access to the referral network and brand recognition that comes with being part of a large firm. You need to create your own marketing strategy to attract prospects and convert them into clients16.
This can be a daunting task, especially if you don't have prior experience with business development. A 2022 study by Dimensional Fund Advisors found that "acquiring new clients" is the #1 challenge cited by RIAs, with 81% saying it's a major concern4. Many advisors struggle in the early years to generate enough new business to sustain their practice.
To be successful as an RIA, you need to be proactive about marketing your firm through a combination of networking, referrals, thought leadership, and digital strategies. This requires a significant and ongoing time investment. It may take several years of consistent effort to build a critical mass of clients.
Is Starting an RIA Right For You?
There's no one-size-fits-all answer to whether going independent as an RIA is the right choice. It depends on your unique goals, risk tolerance, and vision for your practice.
Starting an RIA can be incredibly rewarding if you're entrepreneurial, have a strong marketing mindset, and want the freedom to serve clients on your own terms. The RIA model offers the potential for higher income, greater flexibility, and the ability to build a valuable enterprise.
However, the risks and challenges of RIA ownership are significant. You need to be prepared for the costs, compliance burdens, and business development responsibilities that come with being your own boss. Many advisors underestimate how much time and effort is required to get a new RIA firm off the ground.
Before making the leap to independence, it's critical to do your due diligence and weigh the pros and cons carefully. Talk to other advisors who have made the transition to an RIA to learn from their experiences. Consider starting with a hybrid RIA model to test the waters before going fully independent. And make sure you have a solid business plan and the financial runway to support yourself during the startup phase.
If you decide that the RIA path is right for you, there are many resources available to support you. Custodians like Schwab and Fidelity offer comprehensive platforms for RIAs, including technology, compliance support, and practice management consulting6. Industry groups like the National Association of Personal Financial Advisors (NAPFA) and XY Planning Network provide education, networking opportunities, and best practices for RIA owners11. And a growing ecosystem of service providers can help fill in gaps in your capabilities.
Starting an RIA is not a decision to take lightly, but for the right advisor, it can be an incredibly fulfilling way to build a successful practice on your own terms. By weighing the pros and cons carefully and being realistic about the challenges involved, you can chart a path to independence that aligns with your unique goals and values.
Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.
Savvy Wealth Inc. is a technology company. Savvy Advisors, Inc. is an SEC registered investment advisor. For purposes of this article, Savvy Wealth and Savvy Advisors together are referred to as “Savvy”. All advisory services are offered through Savvy Advisors, while technology is offered through Savvy Wealth. The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors.
