Reaching $250 Million In AUM Unlocks More Options For Advisors

When an advisor’s assets under management hit $250 million, their options expand from those that were available to them when their AUM fell below that threshold. Along with more options, come more challenges. Such advisors may face increased, updated, and more complex technology needs for their growing business, while tasks pertaining to compliance and operations consume more of their time. 

Luckily, those advisors have more choices available to them today than at any time in the past. As $250 million AUM meets or surpasses the minimum requirements for most major firms, those advisors now have access to boutique broker-dealers, all major custodians, and service providers that will allow the advisors to launch an RIA while supporting them in regard to the operational and technological challenges that they face with their growing business.

W-2 To 1099 Transitions Within A Current Broker-Dealer

At the $250 AUM level, advisors who have been registered as W-2 employees with traditional broker-dealers may be able to remain with the same firm while changing their status to 1099 independent contractors. Wells Fargo, Raymond James, and Ameriprise are among the firms that now allow such transitions. 

The advantages to undergoing such a transition while remaining within the same firm include avoiding the disruption and potential attrition involved with changing broker-dealers, gaining more autonomy, and owning one’s own business. With a substantial increase in payout, from approximately 45% for a traditional employee to 85% to 90% as an independent contractor, the advisor will reap the financial benefit quickly, even when factoring in their additional business costs and increased expenses.

While an advisor may wish to remain with the same firm and transition from employee to independent contractor, it is in the firm’s interest for advisors to remain employees, as the firm’s profit is much greater in such arrangements. As a result, firms may make efforts to dissuade advisors from going independent. Additionally, any existing issues that the advisor is experiencing in regard to the firm are not alleviated by such a transition. Further, the option to monetize a practice through a lucrative transition is unavailable to advisors who remain with the same firm.

Independent Broker-Dealer Affiliations

When an advisor does want to monetize through a transition deal, they may consider registering with an independent broker-dealer. Typically, the advisor is offered between 30% and 50% of the prior year’s revenue as transition assistance. Certain platforms even offer in excess of 100% of that revenue. Their AUM level makes advisors at this level viable recruits for such entities. The independent broker-dealer will facilitate operations by providing compliance services, practice management consulting, and technology for the advisor’s business.

Generally, advisors who are 1099 contractors with broker-dealers have legal ownership of their book of business and client data. With such ownership, advisors benefit from easier transitions and more lucrative valuations of their business. At the same time, the advisors are limited to using the broker-dealers’ technology, as well as the broker-dealers’ custodial and vendor offerings — advisors do not have access to the whole of the market in these arrangements.

Affiliating With An Established RIA

Advisors who set their sights on executive roles, rather than roles in operations or compliance, may elect to join an established registered investment adviser (RIA) firm — either directly as an independent contractor or with the leverage of an associated broker-dealer. 

As with an independent broker-dealer affiliation, affiliating with an established RIA also provides the staff, technology, and compliance of an established business. Primarily fee-based advisors are allowed pricing and optionality transparency, as well. The advisor has the flexibility to focus on the parts of the business that they are most interested in pursuing, while the RIA takes care of compliance, operations, etc.

Some RIA firms provide services to help advisors accommodate and attract high-net-worth clients, such as having tax professionals on staff, providing legal support, and providing financial planners. Additionally, the platform may allow more access to direct private deals and the technology that facilitates advisors reporting and advising their clients on assets held outside of the firm.

While such arrangements are more costly for the advisor, they often offer the solutions that a higher AUM and more independent advisory practice necessitate. Further, should the advisor hope to start their own RIA in the future, they gain the option of leaving assets with the current custodian upon moving their business, and they will have the option of adding additional custodians, as well. 

Launching an RIA With a Custodian

Launching one’s own RIA firm directly with a custodian provides the best fit for those seeking the most autonomy and independence. With $250 million AUM, the advisor should have access to every major custodian, as well as the option to leverage several custodians. Advisors have control over the costs of an RIA, which are fixed, and they are responsible for all aspects of their business. Outside of common costs, such as compliance, technology, insurance, etc., the advisor has the flexibility to choose how they want their resources allocated. They can concentrate on the aspects with which they would like to spend their time and outsource the others. 

When deciding which path to pursue, advisors should consider where they would like to place their focus and which issues they are seeking to solve. Conducting thorough research and due diligence will allow the advisor to determine whether an option will meet their needs while also providing the level of freedom and type of opportunities that they desire.

AdvisorLaw offers custom setup and registration, as well as ongoing compliance services for registered investment advisor (RIA) firms. Our compliance teams include both attorneys and Certified Securities Compliance Professionals (CSCPs). Our registration package takes your RIA firm from concept to fully-functioning business.

For a complimentary consultation, please contact us.

Courtney Raymond
Director of RIA Services

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