Breakaway 101: Pros and Cons of Breaking Away from Your Wirehouse

Thinking about starting your own RIA firm? True, there are plenty of advantages to being a business owner, but there are disadvantages to think about, too. If you’re on the verge on what could be a life-changing decision, it’s important to stay open minded. Here are a few pros and cons of breaking away from your wirehouse for you to consider.

Pro: Own your own business

Starting your own RIA firm gives you the opportunity to build value in an asset (i.e., your business) that you can ultimately sell. Unlike a wirehouse, your ultimate exit from the business can yield you long term capital gains income versus ordinary income subject to all the withholdings of payroll. You can build value AND save on taxes!

What’s more, as the owner of the RIA firm, you become your own boss. You get to make decisions about your firm’s employee benefits, hours of operation, culture, and dress code. You get to choose your clients and set asset minimums. And you get to determine which technology platforms will allow you to best serve your clients—no more having to use workarounds on your wirehouse’s systems.

Pro: Meet your clients’ needs

A wirehouse can be limited in the types of investments it offers. Some wirehouses may even push certain investments. On the other hand, RIA firms have access to a much wider range of investments. This frees you to determine which investments are truly right for your clients.

Pro: Increase your personal income (eventually)

The 40:35:25 rule states that 40% of a firm’s gross billings goes to its advisors, 35% goes to overhead, and 25% goes to profits. At wirehouses, advisors are typically limited to 35%–55% of gross billings. As an RIA firm owner, however, you could take home as much as 65% of gross billings.

Con: Manage upfront costs

You can’t simply snap your fingers and start an RIA firm. You must take care of everything from setting up a legal entity to creating a website. Of course, these activities have costs associated with them and you may not recoup them right away. Your clients won’t transition over immediately; typically, this process takes 3–6 months, which means your revenues could be limited throughout your first year.

Con: Own your own business

There are two sides of the coin when it comes to owning your own business. Yes, you get to call all the shots. You also must spend your time worrying about administrative duties, such as hiring employees, paying bills, managing your accounting, and dealing with vendors. If you’re not careful, these types of tasks can take you away from the revenue-generating activities that result in growth.

Need a sounding board?

If you’re thinking of opening your own RIA firm, we can help. Our advisors can walk you through the pros and cons while advising you on critical details like entity selection, accounting, and cash flow. To keep you focused on revenue-generating activities when you’re up and running, we offer fractional CFO services tailored to you. If you’d like to discuss how we can help you create value in your RIA firm, contact us today.