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RIA Tuck-Ins: Independence Made Even Easier

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If there is a constant in the investment advisory landscape, it’s change. And few things are changing faster than the independent sphere.

The move toward independence shows no signs of slowing down, and in fact is gaining momentum: A 2012 Charles Schwab survey of advisors at major financial firms is revealing:

  • 76% expect a continued increase in the number of advisors becoming independent registered investment advisors (RIAs).
  • 51% say that they find the idea of being an RIA appealing.
  • 65% of those under the age of 40 find the idea of becoming an RIA appealing, compared to 43% of those age 40 .

Those numbers are significant, but the top three benefits cited are even more eye-opening. They include:

  • The potential for larger income (56%).
  • The freedom that comes with running their own business (52%).
  • The ability to place a higher priority on client service and communications (51%).

Success will only breed more movement as wirehouse advisors are encouraged by the accomplishments of their peers. But finding the concept of being an independent RIA appealing and actually making the move are two very different things. Some advisor teams considering independence are daunted by the idea of going it alone and worried about the hurdles of starting a new business – which are legitimate concerns.
At Dynasty, the first question we always ask someone contemplating independence is "Are you truly an entrepreneur?" Going independent requires an entrepreneurial mind-set and a strong desire to own your own business. At the same time it requires understanding that owning a business means handling myriad administrative details and decisions regarding staffing, bill paying, real estate, marketing, etc. Owning your own business has tremendous benefits, but also represents a tremendous time commitment.

But there is an attractive alternative to becoming an independent RIA; that is to become a ‘tuck-in’ to an RIA. A tuck-in describes a scenario where a financial advisor or advisor team joins an existing, established RIA.

Tucking in to the Benefits

At Dynasty Financial Partners, we are seeing strong momentum in the tuck-in trend from two sides: The most recent teams that we have launched into independence have purposefully structured themselves for expansion and are planning on adding multiple tuck-ins; and we are seeing a large number of inquiries from teams requesting information specifically about becoming tuck-ins.

No wonder – it’s almost all upside. For those advisors committed to leaving a large financial firm – whether seeking better technology, access to open architecture or institutional investment opportunities – without the headaches of running an independent business, a tuck-in may make sense. Basically, you have the benefits of independence while leveraging a successful advisor’s infrastructure and groundwork. And the risks associated with tuck-ins joining an established, successful RIA with a strong balance sheet are often less than going solo.

Financially speaking, the majority of advisors earn more compensation as a tuck-in than they do at a wirehouse because of the increased payout.

Advisor teams choose the tuck-in model for a variety of reasons:

  • They don’t want to deal with the day to day operations of running a business.
  • They just want to serve their clients at an independent firm and not handle administrative issues.
  • Already-independent RIAs decide that they don’t want to handle the business operations anymore and opt to become a tuck-in.

For an established RIA, a tuck-in can be an efficient way of expanding a business in terms of capabilities or geography. Tuck-ins can also provide a solution for business succession issues by providing a bench of talent. At Dynasty, consulting on, structuring, and financing our advisory firms who are executing a part of their growth strategies by taking advantage of tuck in opportunities is a rapidly growing business for us.  For them, tuck-ins are (typically) structured in one of two ways:

  • An advisor either receives an upfront paout and a percentage of the trailing revenue.
  • They earn equity in the new firm over time with asset and revenue hurdles.

By tucking into an existing RIA, an advisor or team can focus on the macro: transition, stabilization and vertical initiatives, rather than the micro: benefits, pay-roll, real estate and all of the other aspects of running a business that will distract from their desired service model. As part of an RIA that is already an institutional “client of the street”, they’ll benefit from getting the best price and execution on every financial solution their clients may need.
According to Risk Paradigm Group (RPg) CEO Dave Gatti, "An advisor or team that tucks-in to RPg will immediately benefit from our state-of-the-art platform, but still has room to customize their technology needs without disrupting their business."

For advisors or teams considering independence, the most important element of a successful tuck-in is a good cultural fit with the existing established firm. A tuck-in brings to mind the old Wall Street partnerships where partners stuck together through thick or thin. You want to ensure that you are comfortable and that there is full trust on both sides.

To those considering becoming a tuck-in, the first step is to get educated about the process of going independent. (Link to FAQ article)

Other resources to leverage are your local business development officers at custodians or an expert executive search firm that has deep experience in RIA market.  Dynasty works with advisors to make introductions to these resource partners or answer questions advisors have about finding or becoming a tuck-in advisor.

Are you considering the move to independence? Curious or just have general questions? Let me know at shirlpenney@dynastyfinancialpartners.com and I'll address those in future articles.

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