Written by James M. Esler on 9-2-2018

Before reading the following, please keep in mind the evolution of investment advisory as a practice from the first stock exchanges to today. 

As an RIA, we are similar to a ‘farmer’s market’ for investments – you know we are organic and potentially better for you then commercial brands such as banks. RIA’s do not have the budgets to be at the end cap of the figurative ‘investment Wal-Mart’. The advertising budgets that larger non-RIA firms have keep their inventory flowing off the shelves. However, founders of RIA’s generally choose to form an RIA for a variety of reasons, which might not only reflect their higher standards, but also those of customers. A utopian advisory firm would be started with the following ideals:

  1. To work with people that the IA wants to work with.
    1. Colleagues
    2. Analysts
    3. Referral partners and vendors – Can explore enhanced execution by choosing broker-dealers. 
    4. Clients – some prospects are off-limits to IA’s at large firms.
    5. While possible to have a structure at a large firm that will help you succeed in the long term, such a structure takes decades to create, and only the top quintile make it that far with large firms.
    6. An RIA can easily select staff as well as clients. Larger firms will prevent an IA from hiring a staff that they have not vetted, which is very important if the IA does not know how to properly vet hires or delegate tasks. 
  2. Other services distract the investment advisor – this is a very slippery slope. 
    1. To own significant positions requires immense continuous research and skill. The IA must develop a ‘circle of confidence’.
    2. Can advise clients in other areas, but because there is no fee rendered for the advice, the client knows that:
      1. The advice is sincere when it is given
      2. The advisor is not going to focus on anything but investment results.
      3. The advisor will not attempt to continuously cross-sell the client on products outside of investments.
  3. Your investment advisor does not have autonomy to make decisions for you. Why? Large firms believe having large teams of people servicing clients is preferred.
    1. You may be represented by analysts that you haven’t met. In this case, you really are taking a HUGE leap of faith.
    2. The job duties of your investment advisor are blurred, since your IA is not predominately advising your investments.
  4. Better margins for the advisor.
    1. Revenue for an advisor at a large firm is about half of their overall fee with no choice to IA. This covers overhead expenses provided to IA.
    2. The IA can reduce many costs under her own volition and scale costs only when necessary. 
  5. Varied fee structures for clients
    1. Larger firms have mandated, tiered fee structures based on their research of what clients prefer. This allows for very easy record keeping.
    2. RIA’s can create multiple fee structures and allow the client to decide which they prefer. For example, the client might pay a flat fee based on total assets (“AUM”) and/or performance based fees (similar to profit shares).
  6. Less restrictions on how and where the IA can invest.
    1. Various exchanges
    2. Various types of assets, including commodities, foreign exchange, debt securities, alternative assets.
  7. Less restrictions on services provided to client.
    1. Business consulting, M&A
    2.  Best execution practices for Broker-dealers. This is an important point since the RIA can negotiate soft dollars with the broker dealer.
    3. Financial Planning and fiduciary services. 
  8. Less KYC requirements (less overall regulation)
    1. Fiduciary rule is optional at this time. Some larger firms adopted some aspects and left others. 
  9. No Sales goals. In most businesses, there are those in sales and those in product development. The personality types are very different between the two. For the vast majority of financial professionals, they are salespeople, which may or may not be a preference. Evaluating personality types for larger firms is very cost intensive. 
  10. IA has experience running a business, which is critical if she should help others invest in business. May also improve relationships with people connected with the organization.


*Disclosure – Our firm is a Registered Investment Advisor

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La Jolla, CA 92037

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