How to Start an RIA Without Eating Cat Food
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The financial stress from starting a new advisory firm is no joke, and it sets up outcomes that are potentially disastrous for everyone involved. Here are six ideas for how to start an RIA firm today without living in poverty and having to eat cat food.
By the way, there are now two formerly stray cats living in my apartment with me, Antonio, and our four kids under seven years old.
Wasn’t my idea!
It used to be a zoo figuratively – and now it is literally. All I need is a parrot to make it complete chaos.
Now on to the article!
Sick of new advisors being exploited
Before I get into the six ideas, I have something to meow about and as usual I don’t care who disagrees with me.
I’m sick of the younger generation of financial advisors getting exploited by the wirehouse and insurance company training programs. Let’s be real; the training programs in this industry are a relic from Ferris Bueller's Day Off.
There is no modern, decent way that gives the thoughtful new advisors a fair shot to succeed. Instead, it’s a hazing contest as antiquated as the Eisenhower administration and whoever does the best keg stand wins.
If anyone reading this is running one of those programs, you should be ashamed of yourself for taking advantage of less aware (usually younger) people just so you could afford to golf at the country club. If I ever run into any of you, I’m going to tell you exactly what I think.
The exodus of talent causes shortage of successors
Grinding the next generation of talent creates a skill gap that impacts the veteran advisors as well. Do you ever wonder why nobody can find a successor to take over their business, leaving them with no better choice to exit their business than to sell to a private equity-funded (yikes!) “aggregator”?
Our industry eats its own young.
Years ago, being a stockbroker was an honorable profession. Now it’s the job you settle for when you can’t get recruited by the FAANGs.
If I were a newly minted grad with a high GPA, I could go work at the Googleplex with the volleyball court, massages, and yoga classes, six figures and even some equity options. Or I could cold call at the wirehouses (actually Merrill just did away with cold calling) for $2,000 a month and eat cat food.
Which one would you pick?
All the 50+ year-old advisors are throwing up their arms saying:
- How come I can’t find a suitable replacement to run my firm?
- Hey, where are all the smart 30-year old advisors to buy me out?
- Why isn’t anyone else skilled enough to treat my clients the way I want them to be treated?
Take a ride to Mountain View if you want to find them. If you don’t believe me, look at te average Google recruit and compare them to any one of the advisors in the wirehouse XYZ training program.
Six steps to starting an RIA firm without becoming poverty stricken
- Establish multiple payment methods
Be an RIA firm and in your legal structure/ADV set up different options such as paying AUM fees, hourly, or a flat fee. This will allow you to “incubate” clients who want to try you out with a small project before committing the whole enchilada.
It also allows you to get paid a flat fee for doing a preliminary analysis. I’m not a fan of advisors doing free work for prospects; it devalues you.
Estimate what you want a value of an hour of your time to be worth right when you start up. Map out how much of each type of engagement (hourly, flat, AUM, etc) to get the practice you want.
- Became an enrolled agent
Tax is a specialty, and it is one of the most potent skills an advisor can have. People trust a tax professional way more than a financial advisor, and they’ll ask for tax advice before investing advice.
Being an enrolled agent will create an income stream that is complementary to your business. Plus, when you handle their taxes, you get a view of their total picture as a segue into the planning and investments.
If taxes aren’t your thing, another income-buffering idea is to teach finance classes to HR or tax professionals for continuing education credit. You’ll make an impression as a credible resource without being known first as an advisor (who nobody wants to talk to).
- Create your own financial plan
Don’t just jump into a zero-income scenario like Tarzan and hope for the best. Making your own financial plan will make you to empathize with your clients. You can even show your prospects this plan to demonstrate that you eat your own cooking.
- Create a ridiculously differentiated offering that appeals to only a few
I talked to two people yesterday who told me they want to strike out with their own RIA firm. When I asked them how they were going to be different, they had no clue.
You’re starting from zero and have nothing to lose. The industry doesn’t need another average, bland, trying-to-please-everyone advisor. Go to the extreme of deliberately refusing to deliver anything but the highest of value to a select few – and charge a premium for that advice.
Differentiate like crazy.
Yes, this will mean you will have to say “no” at a time when you need the money. This is something that 0.0000075% of advisors will do. Everyone hates saying “no” to the shekel, and that is precisely why you should!
Make yourself ridiculously different. If your friends laugh at you when you tell them this, that means you did it right.
Example, “I only work with people who”:
- Graduated in the top 3% of their high school class
- Are earning in the top 1% of income earners in the US
- Have four kids
- Rescue cats
- Don’t have a single shred of paper in their house
- Have a perfect credit score
- Worship Ariana Huffington
- Played chess on their high school team
Get obsessed with how these people live and create an offering that caters to their every idiosyncratic need.
Is this going to make things hard?
Hard because you’ll have to turn away a lot of people. But remember, you’re an enrolled ggent or teaching finance classes, so you’re not eating cat food. Don’t be in a senseless rush to mediocrity – take your time and deliberately move towards superiority!
It’ll be easier in the long run because once this type of buyer finds you, you’ll click easily. There will be lots of referrals once you get underway because you’re “that person” and nobody else does what you do.
- Make it exclusive
Advisors love to hedge their differentiation away by loading up their practices with clients who don’t fit into their target market. Do the opposite; be selective to an extreme and don’t just take whoever you can get.
Get 40-50 clients who pay you $10,000-15,000 a year and be done.
- No more selling
- No more being on a treadmill with Pershing about how they lost the ACAT forms
- No employees (weeeelll, maybe one)
- Low overhead and higher margins
- Deeper relationships with clients
- More time to innovate and improve efficiency of processes
- Higher focus on what clients need
- You can create a tight knit community of clients
Write this on your website:
We limit capacity exclusively and there are only a few spots available to qualified candidates. If you are interested, please apply by filling out this questionnaire.
(They don’t want to fill it out? Too bad. Bye!)
- Get a good mentor
Don’t just go with some pompous schmuck who is a “top producer.” Those people are the antithesis of what you want to be. Use LinkedIn and find someone who has their head screwed on straight. You’ll have to cut through a lot of the garbage, but you can get somebody good.
If you’re starting up a firm and want to learn how to use two-sentence LinkedIn messages to get new clients, read my ebook.
Join my membership, which is an affordable way to learn LinkedIn.
P.S. Their names are Sunshine and Moonshine.
Sara Grillo, CFA, is a marketing consultant who helps investment management, financial planning, and RIA firms fight the tendency to scatter meaningless clichés on their prospects and bore them as a result. Prior to launching her own firm, she was a financial advisor.