RIA vs. IBD: Which Option Is Right for You?

4. Do I want to use an RIA service provider or launch my RIA directly with a custodian?

The advantage that an RIA service provider offers is a team of industry veterans that guide breakaway advisors on every aspect of launching an RIA — including technology and custody choices, to replicating investments, building out compliance, HR and benefit programs, negotiating real estate and transitioning assets.

Because service providers charge an ongoing fee and require a multi-year commitment, advisors that utilize them value the expertise and resources they provide and believe the affiliation will ensure not only a seamless transition but also faster growth than they could achieve on their own.

Advisors who don't hire a service provider contract directly with all of the vendors needed to launch an RIA and rely on a custodian as the primary source of expertise and guidance for transition planning, preparation and execution.

This works best for advisors who are highly entrepreneurial, want to be closely involved in every decision and don't want to pay a service provider, but instead are focused on keeping costs low and maximizing take-home economics.

5. How important is an upfront transition check vs. maximizing my ongoing payout?

While the decision to go independent tends to focus on the long-term value of the business, there are short-term financial considerations to review.  Some advisors walk away from unvested deferred compensation; others have notes they need to repay or want assistance in funding the startup costs of an independent business. Different models come with varying amounts of upfront money, so it's important to understand the options.

Advisors who prioritize the upfront monetization often look at IBDs offering top transition deals in the ballpark of 50% or more of an advisor's trailing-12-month production. Alternatively, advisors focused on maximizing take-home economics will launch an RIA directly through a custodian; they get no upfront check, but keep 100% of revenue less any expenses. To help ease the startup costs, custodians provide "benefit dollars" that can be used to reimburse certain specific startup expenses.

It's worth noting that for advisors looking for something in between getting an upfront transition check and maximizing their ongoing payout — that is, to go the RIA route and also get an upfront check — there are RIA platform models. These provide a turnkey technology, investment and support offering along with the potential for upfront money in the 40%-50% range of trailing-12-month-production.

Of course, there are tradeoffs. Although IBDs and RIA Platforms offer larger upfront checks, payouts in these models tend to be lower and net take-home economics are usually less than what an advisor could achieve by directly launching an RIA. Therefore, you must determine what's most important: the upfront transition check or the ability to maximize take-home economics.

Overall, the decision to change firms or models is one of the most important decisions you'll make. In the independent space in particular — where models seem to be born almost daily — it's even more important to be thoughtful and strategic in your decision-making process.

Taking the time to understand your business and goals early on will help guide you toward the model that is right for you.

Wendy Leung is a senior consultant with Diamond Consultants, where she works with high-achieving advisors who run complex and successful businesses. She regularly counsels advisors transitioning between wirehouses and regional firms to move to independence and is a regular contributor to Diamond's blog for financial advisors. Earlier in her career, Wendy spent 15 years in finance working with several major banks after she completed an MBA at NYU's Stern School of Business and a BA at Colgate University.