Brad Wales (00:00)
folks just assume they won't be better off in the RA model. They they assume the economics aren't necessarily gonna be better. They assume whatever flexibility there is is not something they need. But but oftentimes again they they don't even realize how.
how it would be different to have that judgment.
But you'll see out there in the marketplace articles come out in the industry press, that they left their firm and they clearly did something stupid.
it has come over so far that you you s you hear these success stories about, you know, folks starting up an RA, working with a custodian, and within, you know, twenty, thirty days they've already moved ninety percent of the practice. That that just wasn't really the tail twenty years ago,
Max Holvik, CFA (00:59)
Welcome to Profit and Practice. I'm excited to introduce today's special guest, Brad Wales. He's the founder of Transition to RIA, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about why and how to transition their practice to the registered investment advisor model, the RIA model. Brad utilizes his 20 plus years of industry experience, including direct RIA-related roles in compliance.
Finance and business development to provide independent advice regarding how advisors can benefit from the advantages of the RIA model. He also runs a successful podcast with more than one hundred and fifty episodes. If you're not listening to his podcast yet, I recommend checking out the Transition to RIA podcast. So with that in mind, welcome to the show, Brad. It's a pleasure to have you.
Brad Wales (01:53)
No, appreciate those kind words and a nice nice intro there and and and congrats with the launch of your own podcast. I appreciate the ability to be one of the first episodes here. So thank you very much for having me on.
Max Holvik, CFA (02:05)
Thank you. It's honor to have you here. And I I think it's no secret that I'm a a big believer in having a core focus and and focusing on a niche. And I I really like what you're doing. And on that note, what what made you decide to build a practice around advisors transitioning to the RA model?
Brad Wales (02:25)
Yeah, appreciate that. And we we spoth certainly particularly the names of our firms have have an affinity to a niche offering there in the marketplace. So as as mine says, transition to RIA, you know, I help financial advisors, you know, consider a possible pathway into the RA model and if it's a fit for them, help them navigate that process. And and kind of the backstory behind it, I'm I'm now coming up on 25 years in the industry, but when I launched the firm about six years ago.
I just saw a need in the marketplace for just you know completely independent advice that can help financial advisors and teams again look at the model, understand the model, figure out all the steps and how to navigate into it. And I just didn't feel there's any kind of third-party independent source doing that. and as the wave and and trend continues to migrate of advisors leaving the warehouses, the broker dealers.
To the RAA model. It continues to be the fastest growing channel in the industry. You know, I saw that as an opportunity. And then on a personal professional level, the bulk of my career, come again, coming up on 25 years in the wealth management industry, has been focused on the RAA model.
Max Holvik, CFA (03:39)
No, thank you. I'm yeah, I'm sure you've seen a lot of a lot of things over the years. I'm excited to start digging into that a little bit more. And kicking it off, one question I have here is what is the biggest misconceptions that advisors have about going independence?
Brad Wales (03:55)
Yeah, I love I love the question, and I would almost say it's it's hard to pick what the biggest is, but I I would certainly acknowledge, and then and then maybe I'll maybe I'll take a crack at the the biggest, is kind of like anything in life, until and if you're exposed to something, it's easy to have misconceptions that you might not even be aware that that you have. And so it is a common scenario where advisors or teams have perhaps only ever been in one.
affiliation model their entire career and oftentimes maybe even not only one affiliation model but one firm their entire careers and so they know that pathway quite well but understandably that whole trajectory has not prepared them to understand how any of the other pathways in the model work. And so as a result, there are a lot of instances where there are misconceptions for those those types of advisors about what the RA model would look like for their practice. And those are
Oftentimes those misconceptions are oftentimes a result of kind of voices that are surrounding them on in their affiliation model that don't want them to leave the firm they're at or the channel they're at. And so there's these voices that plant things in their mind about how you know the the RA model you'll just be buried doing compliance or the economics aren't as good or the technology's not as good, and and and they're and it re it creates all these misconceptions.
But again, generally you have to ask yourself if you're if you're one of those advisors and you hear something perhaps negative about the RA model or any other affiliation channel, okay, ask yourself is that factual? Is that correct? And might the person that's saying it have either an ulterior motive to be suggesting those things because they don't want you to leave your particular firm? or is that person themselves just hasn't ever been in, perhaps in this example, the RE model? So
They think they know the answer and they themselves don't know the answer either. So I I would just acknowledge a lot of misconceptions about it. and and I guess the the biggest biggest one, which is just kind of a macro thing, is is folks just assume they won't be better off in the RA model. They they assume the economics aren't necessarily gonna be better. They assume whatever flexibility there is is not something they need. But but oftentimes again they they don't even realize how.
how it would be different to have that judgment. So I would just counsel advisors and teams again, careful. If you have any assumptions, they very well might be misconceptions going into it.
Max Holvik, CFA (06:31)
And
one thing that I see, and and I know you talk a lot about this on your podcast too, is that there's ne really not one RIA model. It's it's so many iterations and so many it comes in so many functions and so many flavors. So how do you typically tackle that in terms of understanding going from one place to another when there are so many iterations and varieties of the RIA model,
Brad Wales (06:56)
So there are, as I say, multiple pathways into the model. And then within each of those pathways, there's, as I often say, multiple different flavors of that. So I'll give you an example. One of the pathways, which is not the only pathway, but one of the pathways is to potentially join an RIA.
To put it simply, there's three main pathways, one of them being perhaps to join an RIA. And when I walk folks through those three pathways and I bring up this idea of joining an RIA, sometimes I'll hear their the the rebuttal to that will be, well, I don't want to sell my practice. And so what that's what that person's referring to is they think that, if you're gonna join an RAA, you have to sell your practice to that RA. And that
Flavor does exist. There are some RAs out there that that is their value proposition that if you were to join their RAA, you would be selling their practice. And for particularly advisors near the end of their career track, that can be very appealing. And there's reasons they end up joining those RAs, but that is only one flavor. If there's all different kinds of flavors, there's more traditional W-2 flavors, there's
1099 flavors that you retain 100% ownership, you use your own brands, your 1099, control your local expenses. And so the the point is, and this goes back to the misconceptions, is if you think, I would never join an RAA for some particular reason, well, well, maybe that is a valid reason that the join an RA path is not going to be a fit for you. But is it perhaps just because you're not aware that there's all these different flavors as well?
And so what I try to do is help you know my advise your clients understand the three main pathways. They all have pros and cons. There is no golden goose, just like staying at whatever firm you're at now has pros and cons. So I try to help folks understand how they're different, what the pros and cons are, and then and then you know, again, within each of those buckets, often there's different flavors to further choose from. So it's just a very
educational process before you need to get all in the weeds of specific vendors to be using and that sort of thing. It's important to at least first understand how these models work to begin with.
Max Holvik, CFA (09:07)
Gotcha. And do you see any typical motivations for moving to the REA world and and any potential, I guess, trigger moments that that makes the the advisors actually want to do this rather than just hypothetically thinking about it?
Brad Wales (09:22)
Yeah, so a thing I've I've done for years and years and and I have hundreds of conversations each year. So you can do the math of of how many total conversations this would encompass. I generally when I'm on my on a first conversation with with a new advisor or team, I I generally start that conversation by saying, Hey, what has motivated you to be having the conversation with me about learning more about the RIA model? And so I've heard that answer articulated in in many
different ways.
But generally, no matter how it's articulated, the the answers and the motivations generally fall into one of two buckets. And most advisors have both of these buckets. So the first one is economics, so a desire for better economics than they have now. And sometimes that's to do higher in current day income. Sometimes that's to have a higher enterprise value for when they eventually sell their practice.
The ability to grow the practice faster, which will result in higher income, the better taxation that comes with it. So it's different motivations just within the economic bucket. And then the other main bucket is a desire for more flexibility with their practice. So that could be more flexibility with how they can market and brand their practice. It could be with the services they can offer their clients, more flexibility with the investment solutions they can use. and there's a lot that drives that. And interestingly, when I ask that question.
Usually the first answer that comes out falls in that flexibility bucket. and there's a lot of motivations there, like I gave just a few examples. And then as the conversation continues, it it often also goes into the economic bucket. But just I don't know if that's because no one wants to come right out as the first thing they say is to say, I want to make higher income. but just as a kind of a data point, usually flexibility is what comes up first in that conversation. But
Ever everything eventually evolves to economics as well as as part of the conversation.
Max Holvik, CFA (11:20)
And
and have you seen any change there as as the valuation multiples of businesses have gone up in the space, or has it been pretty stable?
Brad Wales (11:29)
the valuations I think over, you know, there's no telling what they will be in five, 10, 15, 20 years. I I don't doubt that they will fluctuate some, but what is historically held consistent, and I don't see this changing, is that the valuations in the RAA model for your eventual succession are typically always
Better than they are if you were to go through after what's referred to as a sunset program at one of these traditional broker dealer firms. and that's for for two main things. And and most folks only think of the first one. First is the enterprise value you're attributed to go through the sunset program at perhaps your large broker dealer. And you you want to compare that to, well, if I was in the RAA model, what would the marketplace put on a valuation of my firm under that model? And again, historically.
That is always more advantageous on the RA side of the house. But then just as important, which a lot of people don't think about, is the taxation of that, the the income you receive for your practice. Generally, in those sunset programs, you're taxed at traditional income tax rates. Over on the RAA side, if you do a traditional MA type event, you can generally get, and Max, this is certainly more your world than mine, more of the proceeds captured with.
with the lower capital gains tax rates than income tax rates. So a lot of motivations to be making
that move. Even if valuations go up, down slightly on on both sides of that scenario, I don't see it changing where it's I think it will always be more advantageous than the RA side.
Max Holvik, CFA (13:04)
Thank
you. That's that's interesting. and and what do you see as the biggest surprise advisors run into during a a transition?
Brad Wales (13:15)
yeah, good good question. I think there's a lot of surprises in the sense that there's a lot of unknowns, which is again back to your question of why did I start this business? It's it's not that I'm any smarter than any of the people I'm helping, but I've just had the luxury of spending the bulk of my career learning about this one thing, and I can have the luxury of spending most all of my time just on this one thing, paying attention to it. So
The reality is as a result, there are a lot of unknowns of how you solve for certain things that need to be handled in the RA model that perhaps you don't need to deal with, you know, currently in that that traditional broker dealer world. So I I'd I'd say it's a mix. And again, it just comes back to as an advisor, is don't don't make any of those, you know, assumptions unless you've fully educated yourself on what it would not only look like generically in the RA model, but specifically for your
practice and every practice has a different profile.
Max Holvik, CFA (14:16)
Gotcha, gotcha. And and I guess some somewhat related to that, do you see any common mistakes that advisors do during the switch
Brad Wales (14:24)
Yeah, and and and that's usually where the mistakes come from is that simply not aware to ask certain questions or to take certain steps. And so obviously if an advisor was aware of something that would be be a mistake, that they pr hopefully try to avoid it. But but again, oftentimes it's that the the classic you you don't even know the questions you should be asking in this process. I I'll give you an example that you kind of see in the news from time to time that
One of the pieces, there's a there's a lot of pieces, a lot of steps involved in again, even you know, considering the RA model, and then if it is a fit, navigating all the the parts involved in making the transition. But one of those pieces is in most every circumstance, it does make sense to get legal advice on how to successfully depart your current firm. And so
You can map out everything going forward and and and go through all these steps and have a well-laid plan. But if you don't successfully depart your current firm, or or that trips you up from a legal perspective, you're you're gonna have problems. So from a biggest mistake, want advisors that just think, I I don't need that. And in as I said, in almost every instance, you should get that advice because even if you think, I'm I'm independent, I'm at an independent broker dealer.
Well, there are still little things that could trip you up. There's there's privacy policies, reg SP, there's rules about what data you can or can't take. Perhaps you do have some sort of restricted stock units or deferred comp of some sort. And maybe you think you understand how that would work if you left and that that you'd think you're able to keep it, but but maybe there's some element there you're not even realizing and you're gonna lose it, and you you need and want to.
Put that into your calculation of making this move. So I always suggested in every conversation I have, it's not necessarily the first thing that comes up, but as part of this process is say, hey, you do need to get this legal advice. There's some wonderful specialized attorneys that do this, happy to give people referrals to help you connect with these folks. But the a mistake, I even if I say it, even if I implore people to do it, sometimes, sometimes folks still don't want to do it. And it's generally in the name of
saving a little money and and and I get it. I I always joke it's always easy for me to spend someone else's money to say, hey, go hire this attorney for a few thousand dollars and get advice. But when your entire career is on the line and the entire, you know, trajectory of your practice going forward, it's it's it's very foolish to not spend the money to do it correctly. And if and if you're not willing to take that step, you just probably shouldn't be doing this at all. Unfortunately I still see it. I'm I'm generally good enough of
Convincing people and hammering them long enough that they that they take the advice. But you'll see out there in the marketplace articles come out in the industry press, and you know, it's it's folks I wasn't necessarily involved in that they left their firm and they clearly did something stupid. You always I always read those articles to try to, you know, learn if there's anything to learn from it. And sure enough, they did something stupid on the way out the door, taking client information or how they went about leaving. And had they just got
good legal advice and followed that legal advice, two, two parts to that, they likely could have avoided a lot of lot of those issues and and headaches, but yet you you see it happen. So I I wouldn't say that's clearly a mistake for folks that that trip themselves up when they when they don't need to be tripping themselves.
Max Holvik, CFA (18:02)
I see. And I imagine there's a also a big mental switch from going, particularly from a W two role where you're used to having a lot of these support functions behind you, including legal, to now being a business owner,
Brad Wales (18:18)
Yeah, and well, it definitely is. And it and it's as I say often, the RA model, the independent model is is not for every advisor. I'm not I'm not the RAA guy that just suggests, everyone should be going RAA. It's not a fit for everyone. Now it is a f a fit for I would say most, if if they if they look into it and where it's where it makes sense, but it's not a fit for everyone. And and one of the reasons it's not a fit, it's you as you alluded to is
If you are a financial advisor or a traditional large broker dealer model, you are a financial advisor. You're a practitioner of the craft. That is the main hat, the main role you are wearing. If you go into the RAA model, for instance, starting your own RAA or you join an RAA on a 1099 basis, you are, of course, still that practitioner as a financial advisor, but you are now also a business owner.
And there's more responsibilities that come with being a business owner. Now, in return for those additional responsibilities, the upside can be tremendous again back from an economic standpoint, flexibility standpoint. But it is what it is. There's more responsibilities that that come with being a business owner. And there's just many folks that either are are not able to or not willing to handle those additional responsibilities. And that's fine, and they are better off.
where they are now and and can continue to have a very nice career and a very something to be proud of as as just the practitioner. But where it's a fit, the the benefits can be extraordinary. But again, that's it just is what it is. That's not, that's not going to be a match for everyone.
Max Holvik, CFA (19:57)
Although they could s also go from a W two at the warehouses to a W two role in the RA world as well. I guess that option is also there for some.
Brad Wales (20:06)
Yeah, that comes back to that flavor. So if you're perhaps gonna join an RIA, there are W-2 RIAs out there. Then then there's I think we're gonna continue to see more and more of them because there's a a realization that there's a lot of folks unhappy at these large traditional firms. But as I just alluded to, a lot of them are not wanting or desiring to go maybe the full independent route, but they do want some of the more flexibility and benefits that come with the RA model. And they are attracted to still a W2 type model.
there are already already offering that and I think we'll continue to see more because as long as there's a demand and the need for it, I think there's gonna be entrepreneurs out there, you know, creating solutions.
Max Holvik, CFA (20:47)
Interesting. Thank you. and I I'd like to take shift the focus to the other side of this basically. as a lot of the audience here are owners and principals of of established RIAs. What do they often get wrong when they're trying to attract a breakaway advisor?
Brad Wales (21:06)
Yeah, that's a gr a great question. I I do get asked that from from time to time by existing RAs
I've seen a lot of value propositions out there in the marketplace, a lot of these different flavors. and quite frankly, you see enough of them. There's some that are very impressive, very good, and some that are arguably aren't. And that's not necessarily
For lack of trying, it's just sometimes harder to compete and if you don't have the scale of a larger s you know solution that as a result can provide more resources. And so to to your question of, you know, someone that an RA out there that does
want to attract advisors perhaps as a new endeavor, or they're saying, hey, how how can we be more successful at this? I generally would suggest, and and back to our our comments at the top about having a niche is to is to have some kind of lane that you are trying to compete in and that you have a have a good chance to become kind of known for that lane. So if you just solely want to say, hey, we're we're going to be a
1099 advisor platform, and we're going to offer some great tech and multiple custodians and some good payouts. Well, guess what? There's a lot of people already doing that, and a lot that are probably a lot larger than you, and you're probably never going to be able to catch up with them. So it's always going to be difficult to compete with them solely for that more kind of broader category. But if you kind of niche down, you might you might be able to get more focused on that. And so I've I've seen some.
Just just to give you an example, an RA that focuses almost exclusively on advisors who have a Vanguard or DFA investment approach with their clients. And so their entire set of resources is built around servicing advisors with that investment approach mindset. And likewise, if that's not you as an advisor, they're not going to be a good resource for you. But when when they come across that particular subset of advisors,
It is impressive what they have built out. And so if I'm an RIA out there and I'm trying to attract advisors, I would just suggest, you know, what what are you known for? Do you have that good message? And saying something as simple as, hey, we we provide great service. Well, guess what? Every RIA says that. That is, that is not a differentiator. You need to have something that's unique, that's gonna resonate with advisors, with you know, centers of influence like myself and you, Max.
You know, what is it that's gonna stay in our mind to say, wow, this would be a great resource for this particular advisor?
Max Holvik, CFA (23:42)
That's a great point. And yeah, I I agree with the the more an issue can be, the more it's you remember it when when the situation pops up versus the more generalist approach. That that makes a lot of sense. And and you you obviously been doing this for for for quite a while and had had hundreds, if not thousands, of conversations on this and and seen a lot. how has transitions changed most the last few years?
Brad Wales (24:06)
Yeah, not I and and I'll show my age. I've you know been observing transitions of different types for 20 plus of my 25 years. And just just kind of a blatant example that gives you the full full run of that. I'm I'm old enough to unfortunately have to admit that there was a time right when you would do a transition as the advisor, you would be
Everything was manual, you know, hard wet signatures on on hard copy paper. And you would be stuffing all of that into FedEx envelopes to send your clients. And in that you'd be including a FedEx return envelope to have it sent back. And that would either go to the home office or or the custodian, or you're even faxing it in to the custodian after it's returned from the client. Those days are behind us. That that right and and and I s I sometimes come across advisors that the last transition they went through.
was under that approach and you know the the the thinking gosh I I I don't know if I could bring myself to do another transition but the reality is it has come significantly more logistically possible or easier since then. So now in most cases everything's done electronically you know docu signs, e signatures, clicking of the mouse. so a lot of
A lot of advisors again, because if they haven't made a transition in three, five, ten, fifteen years, that's the last thing they know. And it is it has come over so far that you you s you hear these success stories about, you know, folks starting up an RA, working with a custodian, and within, you know, twenty, thirty days they've already moved ninety percent of the practice. That that just wasn't really the tail twenty years ago, if nothing else, because it just literally took time to move paperwork around. So
it has absolutely progressed. And I think we're only going to continue to see that, particularly with custodians nowadays. It is a very competitive marketplace. So as one custodian further refines the the ease in which you can open accounts or ACAT over accounts, they are all having to continually build on that technology to stay competitive. And that's ultimately just a wonderful thing for advisors and clients because it continues to make the process easier and easier.
Max Holvik, CFA (26:28)
That's a good point. Yeah, I I I don't want to age myself too much either, but I do remember the days of printouts and faxes and and yeah, we've come a far away since since those days, that's for sure. And
anything that we didn't cover that you wish more advisors understood about transitioning to the RAA world?
Brad Wales (26:48)
I
would just say, and and this kind of echoes some of the comments I've made I know a lot of advisors out there, some of who are literally personal friends of mine, in in again, they've only been at like one firm their entire career, and and that might be a very good firm, and they just
Default to assuming that is the absolute best thing for their practice. And perhaps it is, but they some of these folks have been at those firms for quite a while, 10, 15, 20 years. So to suggest that, you happen to pick the one firm that was good 20 years ago and is still somehow the best option now, the chances of that are very slim. And so I think.
They're just not wanting to to maybe consider how something else looks because they might not like what they learn, because they might learn that there actually is a better path that might be better for their practice and their career and ultimately their family. But after you learn about it, it's you can't unlearn it, right? And so then they will feel either bad not making a change or or they're gonna realize that they are gonna need to make a change. And so
I would just say as an advisor, you you arguably should do that exercise every five years or so, anyways. I mean, the industry continues to evolve so much. You probably should every five years or so. Even if you think you're perfectly content and happy, just step back, talk to some kind of resource. Obviously, I'd be happy to have that conversation with any advisor team that would like to. But but to say, okay, hey, here's where I'm at, here's how my practice looks, here's what I'd like to do with my practice over the
Duration of my career has anything changed, how would a different path look? And the worst that comes out of that is you spend a little of your time and perhaps validate your belief that stay in put is the best path, and you can be rest assured and comfortable that you just continuing on in your in your status quo is best. Or maybe you do learn about something that will be significantly better for you from an income perspective or flexibility perspective or
One day that monetization final step, which for many advisors can be extraordinarily additional amounts of wealth built in that that comes from that. And yet they don't necessarily even know that that exists or they don't know the mechanics of it. I think it's every advisor owes it, owes it to themselves to have that conversation from time to time.
Just like you would tell a prospective client of yours that hasn't looked at their account in five years, and maybe it was a good portfolio that was put together five years ago. Well, the world changes and circumstances change and motivations change. And so it it is worthwhile at least having a conversation. Doesn't hurt, see where it goes. It may or may not turn into a thing, but at least you have more knowledge of.
Max Holvik, CFA (29:42)
No, it's a that's a that's some good points. And and yeah, the the the world of wealth management have definitely changed a lot the last fifteen, twenty years. And I dare to say even the the last few three to five years as well. And it it seems to be rapidly evolving from any kind of angle, whether it's business models or technology and and and and and so on. So thank you. That's that's some some great insights you share there. before we wrap it up, I ask every guest the same question.
What is the best financial advice that you have ever received?
Brad Wales (30:15)
I'd say and I don't know if I heard it from you know a particular person or is just a a slow drum beat and perhaps much to the my wife's
Chagrin, I am a significant diehard saver in life. You you would almost think that I was a depression era baby or grew up in the depression era of just believing you wanna set as much money aside as you can for a cushion. I I try to lower stress in life, and unfortunately, money issues can can cause a lot of stress. And and I I didn't grow up
Poor, but I certainly didn't grow up well off by any means. I was, you know, mid middle, middle income family at best. And somewhere along the line, I don't know exactly when that started or when that got ingrained in me. The the importance of you gotta save for uncertainties, you gotta save for the future. It reduces stress and and all kinds of benefits that come with it. and I would say if if someone was gonna take any financial advice from me, I would say.
That needs to be part of your lifestyle as well. It has it has served me well and and obviously that takes a long time to to build up perhaps some some comfort. You can't just instantly, you know, have have a good amount of savings. But I would say that's probably one of the better life lessons. I'm I'm glad I somehow learned along that.
Max Holvik, CFA (31:44)
Thank you. And and much better to save a little bit too much than too little, I would say. So that's that's great insight and advice. where can people learn more about what you do?
Brad Wales (31:54)
Yeah, happy to happy to chat with folks that would like to learn more about the RA model. the easiest way is to start by going to the website, which is transition2ra.com. the two is T O, so transition2rae.com. as Max, thank you. I appreciate you alluding to at the beginning. I've a podcast over 150 episodes. They're all in in video format as well. I got articles, white papers, vendor profile series that highlight different solution providers. So
Lots of resources you can look at for free. You don't have to sign up for anything to get most all of it. and then to the degree you say, wow, this, you know, either today's conversation or some of the things you might view on the website, you know, resonate with you. There's a contact link at the top of every page, and you can click on that and instantly and easily schedule time to have a one-on-one conversation with me. So happy to have that conversation. But the easiest way is just start out by going to the website. All kinds of resources you can just start looking at right away. And again, transition to RAA.com.
Max Holvik, CFA (32:52)
Thank you, Brad. And we'll make sure to put both your your website and your LinkedIn as well as the the podcast in the show notes so so our audience can can easily find you. So thank you so much for being on the show. It's been a pleasure having you.
folks just assume they won't be better off in the RA model. They they assume the economics aren't necessarily gonna be better. They assume whatever flexibility there is is not something they need. But but oftentimes again they they don't even realize how.
how it would be different to have that judgment.
But you'll see out there in the marketplace articles come out in the industry press, that they left their firm and they clearly did something stupid.
it has come over so far that you you s you hear these success stories about, you know, folks starting up an RA, working with a custodian, and within, you know, twenty, thirty days they've already moved ninety percent of the practice. That that just wasn't really the tail twenty years ago,
Max Holvik, CFA (00:59)
Welcome to Profit and Practice. I'm excited to introduce today's special guest, Brad Wales. He's the founder of Transition to RIA, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about why and how to transition their practice to the registered investment advisor model, the RIA model. Brad utilizes his 20 plus years of industry experience, including direct RIA-related roles in compliance.
Finance and business development to provide independent advice regarding how advisors can benefit from the advantages of the RIA model. He also runs a successful podcast with more than one hundred and fifty episodes. If you're not listening to his podcast yet, I recommend checking out the Transition to RIA podcast. So with that in mind, welcome to the show, Brad. It's a pleasure to have you.
Brad Wales (01:53)
No, appreciate those kind words and a nice nice intro there and and and congrats with the launch of your own podcast. I appreciate the ability to be one of the first episodes here. So thank you very much for having me on.
Max Holvik, CFA (02:05)
Thank you. It's honor to have you here. And I I think it's no secret that I'm a a big believer in having a core focus and and focusing on a niche. And I I really like what you're doing. And on that note, what what made you decide to build a practice around advisors transitioning to the RA model?
Brad Wales (02:25)
Yeah, appreciate that. And we we spoth certainly particularly the names of our firms have have an affinity to a niche offering there in the marketplace. So as as mine says, transition to RIA, you know, I help financial advisors, you know, consider a possible pathway into the RA model and if it's a fit for them, help them navigate that process. And and kind of the backstory behind it, I'm I'm now coming up on 25 years in the industry, but when I launched the firm about six years ago.
I just saw a need in the marketplace for just you know completely independent advice that can help financial advisors and teams again look at the model, understand the model, figure out all the steps and how to navigate into it. And I just didn't feel there's any kind of third-party independent source doing that. and as the wave and and trend continues to migrate of advisors leaving the warehouses, the broker dealers.
To the RAA model. It continues to be the fastest growing channel in the industry. You know, I saw that as an opportunity. And then on a personal professional level, the bulk of my career, come again, coming up on 25 years in the wealth management industry, has been focused on the RAA model.
Max Holvik, CFA (03:39)
No, thank you. I'm yeah, I'm sure you've seen a lot of a lot of things over the years. I'm excited to start digging into that a little bit more. And kicking it off, one question I have here is what is the biggest misconceptions that advisors have about going independence?
Brad Wales (03:55)
Yeah, I love I love the question, and I would almost say it's it's hard to pick what the biggest is, but I I would certainly acknowledge, and then and then maybe I'll maybe I'll take a crack at the the biggest, is kind of like anything in life, until and if you're exposed to something, it's easy to have misconceptions that you might not even be aware that that you have. And so it is a common scenario where advisors or teams have perhaps only ever been in one.
affiliation model their entire career and oftentimes maybe even not only one affiliation model but one firm their entire careers and so they know that pathway quite well but understandably that whole trajectory has not prepared them to understand how any of the other pathways in the model work. And so as a result, there are a lot of instances where there are misconceptions for those those types of advisors about what the RA model would look like for their practice. And those are
Oftentimes those misconceptions are oftentimes a result of kind of voices that are surrounding them on in their affiliation model that don't want them to leave the firm they're at or the channel they're at. And so there's these voices that plant things in their mind about how you know the the RA model you'll just be buried doing compliance or the economics aren't as good or the technology's not as good, and and and they're and it re it creates all these misconceptions.
But again, generally you have to ask yourself if you're if you're one of those advisors and you hear something perhaps negative about the RA model or any other affiliation channel, okay, ask yourself is that factual? Is that correct? And might the person that's saying it have either an ulterior motive to be suggesting those things because they don't want you to leave your particular firm? or is that person themselves just hasn't ever been in, perhaps in this example, the RE model? So
They think they know the answer and they themselves don't know the answer either. So I I would just acknowledge a lot of misconceptions about it. and and I guess the the biggest biggest one, which is just kind of a macro thing, is is folks just assume they won't be better off in the RA model. They they assume the economics aren't necessarily gonna be better. They assume whatever flexibility there is is not something they need. But but oftentimes again they they don't even realize how.
how it would be different to have that judgment. So I would just counsel advisors and teams again, careful. If you have any assumptions, they very well might be misconceptions going into it.
Max Holvik, CFA (06:31)
And
one thing that I see, and and I know you talk a lot about this on your podcast too, is that there's ne really not one RIA model. It's it's so many iterations and so many it comes in so many functions and so many flavors. So how do you typically tackle that in terms of understanding going from one place to another when there are so many iterations and varieties of the RIA model,
Brad Wales (06:56)
So there are, as I say, multiple pathways into the model. And then within each of those pathways, there's, as I often say, multiple different flavors of that. So I'll give you an example. One of the pathways, which is not the only pathway, but one of the pathways is to potentially join an RIA.
To put it simply, there's three main pathways, one of them being perhaps to join an RIA. And when I walk folks through those three pathways and I bring up this idea of joining an RIA, sometimes I'll hear their the the rebuttal to that will be, well, I don't want to sell my practice. And so what that's what that person's referring to is they think that, if you're gonna join an RAA, you have to sell your practice to that RA. And that
Flavor does exist. There are some RAs out there that that is their value proposition that if you were to join their RAA, you would be selling their practice. And for particularly advisors near the end of their career track, that can be very appealing. And there's reasons they end up joining those RAs, but that is only one flavor. If there's all different kinds of flavors, there's more traditional W-2 flavors, there's
1099 flavors that you retain 100% ownership, you use your own brands, your 1099, control your local expenses. And so the the point is, and this goes back to the misconceptions, is if you think, I would never join an RAA for some particular reason, well, well, maybe that is a valid reason that the join an RA path is not going to be a fit for you. But is it perhaps just because you're not aware that there's all these different flavors as well?
And so what I try to do is help you know my advise your clients understand the three main pathways. They all have pros and cons. There is no golden goose, just like staying at whatever firm you're at now has pros and cons. So I try to help folks understand how they're different, what the pros and cons are, and then and then you know, again, within each of those buckets, often there's different flavors to further choose from. So it's just a very
educational process before you need to get all in the weeds of specific vendors to be using and that sort of thing. It's important to at least first understand how these models work to begin with.
Max Holvik, CFA (09:07)
Gotcha. And do you see any typical motivations for moving to the REA world and and any potential, I guess, trigger moments that that makes the the advisors actually want to do this rather than just hypothetically thinking about it?
Brad Wales (09:22)
Yeah, so a thing I've I've done for years and years and and I have hundreds of conversations each year. So you can do the math of of how many total conversations this would encompass. I generally when I'm on my on a first conversation with with a new advisor or team, I I generally start that conversation by saying, Hey, what has motivated you to be having the conversation with me about learning more about the RIA model? And so I've heard that answer articulated in in many
different ways.
But generally, no matter how it's articulated, the the answers and the motivations generally fall into one of two buckets. And most advisors have both of these buckets. So the first one is economics, so a desire for better economics than they have now. And sometimes that's to do higher in current day income. Sometimes that's to have a higher enterprise value for when they eventually sell their practice.
The ability to grow the practice faster, which will result in higher income, the better taxation that comes with it. So it's different motivations just within the economic bucket. And then the other main bucket is a desire for more flexibility with their practice. So that could be more flexibility with how they can market and brand their practice. It could be with the services they can offer their clients, more flexibility with the investment solutions they can use. and there's a lot that drives that. And interestingly, when I ask that question.
Usually the first answer that comes out falls in that flexibility bucket. and there's a lot of motivations there, like I gave just a few examples. And then as the conversation continues, it it often also goes into the economic bucket. But just I don't know if that's because no one wants to come right out as the first thing they say is to say, I want to make higher income. but just as a kind of a data point, usually flexibility is what comes up first in that conversation. But
Ever everything eventually evolves to economics as well as as part of the conversation.
Max Holvik, CFA (11:20)
And
and have you seen any change there as as the valuation multiples of businesses have gone up in the space, or has it been pretty stable?
Brad Wales (11:29)
the valuations I think over, you know, there's no telling what they will be in five, 10, 15, 20 years. I I don't doubt that they will fluctuate some, but what is historically held consistent, and I don't see this changing, is that the valuations in the RAA model for your eventual succession are typically always
Better than they are if you were to go through after what's referred to as a sunset program at one of these traditional broker dealer firms. and that's for for two main things. And and most folks only think of the first one. First is the enterprise value you're attributed to go through the sunset program at perhaps your large broker dealer. And you you want to compare that to, well, if I was in the RAA model, what would the marketplace put on a valuation of my firm under that model? And again, historically.
That is always more advantageous on the RA side of the house. But then just as important, which a lot of people don't think about, is the taxation of that, the the income you receive for your practice. Generally, in those sunset programs, you're taxed at traditional income tax rates. Over on the RAA side, if you do a traditional MA type event, you can generally get, and Max, this is certainly more your world than mine, more of the proceeds captured with.
with the lower capital gains tax rates than income tax rates. So a lot of motivations to be making
that move. Even if valuations go up, down slightly on on both sides of that scenario, I don't see it changing where it's I think it will always be more advantageous than the RA side.
Max Holvik, CFA (13:04)
Thank
you. That's that's interesting. and and what do you see as the biggest surprise advisors run into during a a transition?
Brad Wales (13:15)
yeah, good good question. I think there's a lot of surprises in the sense that there's a lot of unknowns, which is again back to your question of why did I start this business? It's it's not that I'm any smarter than any of the people I'm helping, but I've just had the luxury of spending the bulk of my career learning about this one thing, and I can have the luxury of spending most all of my time just on this one thing, paying attention to it. So
The reality is as a result, there are a lot of unknowns of how you solve for certain things that need to be handled in the RA model that perhaps you don't need to deal with, you know, currently in that that traditional broker dealer world. So I I'd I'd say it's a mix. And again, it just comes back to as an advisor, is don't don't make any of those, you know, assumptions unless you've fully educated yourself on what it would not only look like generically in the RA model, but specifically for your
practice and every practice has a different profile.
Max Holvik, CFA (14:16)
Gotcha, gotcha. And and I guess some somewhat related to that, do you see any common mistakes that advisors do during the switch
Brad Wales (14:24)
Yeah, and and and that's usually where the mistakes come from is that simply not aware to ask certain questions or to take certain steps. And so obviously if an advisor was aware of something that would be be a mistake, that they pr hopefully try to avoid it. But but again, oftentimes it's that the the classic you you don't even know the questions you should be asking in this process. I I'll give you an example that you kind of see in the news from time to time that
One of the pieces, there's a there's a lot of pieces, a lot of steps involved in again, even you know, considering the RA model, and then if it is a fit, navigating all the the parts involved in making the transition. But one of those pieces is in most every circumstance, it does make sense to get legal advice on how to successfully depart your current firm. And so
You can map out everything going forward and and and go through all these steps and have a well-laid plan. But if you don't successfully depart your current firm, or or that trips you up from a legal perspective, you're you're gonna have problems. So from a biggest mistake, want advisors that just think, I I don't need that. And in as I said, in almost every instance, you should get that advice because even if you think, I'm I'm independent, I'm at an independent broker dealer.
Well, there are still little things that could trip you up. There's there's privacy policies, reg SP, there's rules about what data you can or can't take. Perhaps you do have some sort of restricted stock units or deferred comp of some sort. And maybe you think you understand how that would work if you left and that that you'd think you're able to keep it, but but maybe there's some element there you're not even realizing and you're gonna lose it, and you you need and want to.
Put that into your calculation of making this move. So I always suggested in every conversation I have, it's not necessarily the first thing that comes up, but as part of this process is say, hey, you do need to get this legal advice. There's some wonderful specialized attorneys that do this, happy to give people referrals to help you connect with these folks. But the a mistake, I even if I say it, even if I implore people to do it, sometimes, sometimes folks still don't want to do it. And it's generally in the name of
saving a little money and and and I get it. I I always joke it's always easy for me to spend someone else's money to say, hey, go hire this attorney for a few thousand dollars and get advice. But when your entire career is on the line and the entire, you know, trajectory of your practice going forward, it's it's it's very foolish to not spend the money to do it correctly. And if and if you're not willing to take that step, you just probably shouldn't be doing this at all. Unfortunately I still see it. I'm I'm generally good enough of
Convincing people and hammering them long enough that they that they take the advice. But you'll see out there in the marketplace articles come out in the industry press, and you know, it's it's folks I wasn't necessarily involved in that they left their firm and they clearly did something stupid. You always I always read those articles to try to, you know, learn if there's anything to learn from it. And sure enough, they did something stupid on the way out the door, taking client information or how they went about leaving. And had they just got
good legal advice and followed that legal advice, two, two parts to that, they likely could have avoided a lot of lot of those issues and and headaches, but yet you you see it happen. So I I wouldn't say that's clearly a mistake for folks that that trip themselves up when they when they don't need to be tripping themselves.
Max Holvik, CFA (18:02)
I see. And I imagine there's a also a big mental switch from going, particularly from a W two role where you're used to having a lot of these support functions behind you, including legal, to now being a business owner,
Brad Wales (18:18)
Yeah, and well, it definitely is. And it and it's as I say often, the RA model, the independent model is is not for every advisor. I'm not I'm not the RAA guy that just suggests, everyone should be going RAA. It's not a fit for everyone. Now it is a f a fit for I would say most, if if they if they look into it and where it's where it makes sense, but it's not a fit for everyone. And and one of the reasons it's not a fit, it's you as you alluded to is
If you are a financial advisor or a traditional large broker dealer model, you are a financial advisor. You're a practitioner of the craft. That is the main hat, the main role you are wearing. If you go into the RAA model, for instance, starting your own RAA or you join an RAA on a 1099 basis, you are, of course, still that practitioner as a financial advisor, but you are now also a business owner.
And there's more responsibilities that come with being a business owner. Now, in return for those additional responsibilities, the upside can be tremendous again back from an economic standpoint, flexibility standpoint. But it is what it is. There's more responsibilities that that come with being a business owner. And there's just many folks that either are are not able to or not willing to handle those additional responsibilities. And that's fine, and they are better off.
where they are now and and can continue to have a very nice career and a very something to be proud of as as just the practitioner. But where it's a fit, the the benefits can be extraordinary. But again, that's it just is what it is. That's not, that's not going to be a match for everyone.
Max Holvik, CFA (19:57)
Although they could s also go from a W two at the warehouses to a W two role in the RA world as well. I guess that option is also there for some.
Brad Wales (20:06)
Yeah, that comes back to that flavor. So if you're perhaps gonna join an RIA, there are W-2 RIAs out there. Then then there's I think we're gonna continue to see more and more of them because there's a a realization that there's a lot of folks unhappy at these large traditional firms. But as I just alluded to, a lot of them are not wanting or desiring to go maybe the full independent route, but they do want some of the more flexibility and benefits that come with the RA model. And they are attracted to still a W2 type model.
there are already already offering that and I think we'll continue to see more because as long as there's a demand and the need for it, I think there's gonna be entrepreneurs out there, you know, creating solutions.
Max Holvik, CFA (20:47)
Interesting. Thank you. and I I'd like to take shift the focus to the other side of this basically. as a lot of the audience here are owners and principals of of established RIAs. What do they often get wrong when they're trying to attract a breakaway advisor?
Brad Wales (21:06)
Yeah, that's a gr a great question. I I do get asked that from from time to time by existing RAs
I've seen a lot of value propositions out there in the marketplace, a lot of these different flavors. and quite frankly, you see enough of them. There's some that are very impressive, very good, and some that are arguably aren't. And that's not necessarily
For lack of trying, it's just sometimes harder to compete and if you don't have the scale of a larger s you know solution that as a result can provide more resources. And so to to your question of, you know, someone that an RA out there that does
want to attract advisors perhaps as a new endeavor, or they're saying, hey, how how can we be more successful at this? I generally would suggest, and and back to our our comments at the top about having a niche is to is to have some kind of lane that you are trying to compete in and that you have a have a good chance to become kind of known for that lane. So if you just solely want to say, hey, we're we're going to be a
1099 advisor platform, and we're going to offer some great tech and multiple custodians and some good payouts. Well, guess what? There's a lot of people already doing that, and a lot that are probably a lot larger than you, and you're probably never going to be able to catch up with them. So it's always going to be difficult to compete with them solely for that more kind of broader category. But if you kind of niche down, you might you might be able to get more focused on that. And so I've I've seen some.
Just just to give you an example, an RA that focuses almost exclusively on advisors who have a Vanguard or DFA investment approach with their clients. And so their entire set of resources is built around servicing advisors with that investment approach mindset. And likewise, if that's not you as an advisor, they're not going to be a good resource for you. But when when they come across that particular subset of advisors,
It is impressive what they have built out. And so if I'm an RIA out there and I'm trying to attract advisors, I would just suggest, you know, what what are you known for? Do you have that good message? And saying something as simple as, hey, we we provide great service. Well, guess what? Every RIA says that. That is, that is not a differentiator. You need to have something that's unique, that's gonna resonate with advisors, with you know, centers of influence like myself and you, Max.
You know, what is it that's gonna stay in our mind to say, wow, this would be a great resource for this particular advisor?
Max Holvik, CFA (23:42)
That's a great point. And yeah, I I agree with the the more an issue can be, the more it's you remember it when when the situation pops up versus the more generalist approach. That that makes a lot of sense. And and you you obviously been doing this for for for quite a while and had had hundreds, if not thousands, of conversations on this and and seen a lot. how has transitions changed most the last few years?
Brad Wales (24:06)
Yeah, not I and and I'll show my age. I've you know been observing transitions of different types for 20 plus of my 25 years. And just just kind of a blatant example that gives you the full full run of that. I'm I'm old enough to unfortunately have to admit that there was a time right when you would do a transition as the advisor, you would be
Everything was manual, you know, hard wet signatures on on hard copy paper. And you would be stuffing all of that into FedEx envelopes to send your clients. And in that you'd be including a FedEx return envelope to have it sent back. And that would either go to the home office or or the custodian, or you're even faxing it in to the custodian after it's returned from the client. Those days are behind us. That that right and and and I s I sometimes come across advisors that the last transition they went through.
was under that approach and you know the the the thinking gosh I I I don't know if I could bring myself to do another transition but the reality is it has come significantly more logistically possible or easier since then. So now in most cases everything's done electronically you know docu signs, e signatures, clicking of the mouse. so a lot of
A lot of advisors again, because if they haven't made a transition in three, five, ten, fifteen years, that's the last thing they know. And it is it has come over so far that you you s you hear these success stories about, you know, folks starting up an RA, working with a custodian, and within, you know, twenty, thirty days they've already moved ninety percent of the practice. That that just wasn't really the tail twenty years ago, if nothing else, because it just literally took time to move paperwork around. So
it has absolutely progressed. And I think we're only going to continue to see that, particularly with custodians nowadays. It is a very competitive marketplace. So as one custodian further refines the the ease in which you can open accounts or ACAT over accounts, they are all having to continually build on that technology to stay competitive. And that's ultimately just a wonderful thing for advisors and clients because it continues to make the process easier and easier.
Max Holvik, CFA (26:28)
That's a good point. Yeah, I I I don't want to age myself too much either, but I do remember the days of printouts and faxes and and yeah, we've come a far away since since those days, that's for sure. And
anything that we didn't cover that you wish more advisors understood about transitioning to the RAA world?
Brad Wales (26:48)
I
would just say, and and this kind of echoes some of the comments I've made I know a lot of advisors out there, some of who are literally personal friends of mine, in in again, they've only been at like one firm their entire career, and and that might be a very good firm, and they just
Default to assuming that is the absolute best thing for their practice. And perhaps it is, but they some of these folks have been at those firms for quite a while, 10, 15, 20 years. So to suggest that, you happen to pick the one firm that was good 20 years ago and is still somehow the best option now, the chances of that are very slim. And so I think.
They're just not wanting to to maybe consider how something else looks because they might not like what they learn, because they might learn that there actually is a better path that might be better for their practice and their career and ultimately their family. But after you learn about it, it's you can't unlearn it, right? And so then they will feel either bad not making a change or or they're gonna realize that they are gonna need to make a change. And so
I would just say as an advisor, you you arguably should do that exercise every five years or so, anyways. I mean, the industry continues to evolve so much. You probably should every five years or so. Even if you think you're perfectly content and happy, just step back, talk to some kind of resource. Obviously, I'd be happy to have that conversation with any advisor team that would like to. But but to say, okay, hey, here's where I'm at, here's how my practice looks, here's what I'd like to do with my practice over the
Duration of my career has anything changed, how would a different path look? And the worst that comes out of that is you spend a little of your time and perhaps validate your belief that stay in put is the best path, and you can be rest assured and comfortable that you just continuing on in your in your status quo is best. Or maybe you do learn about something that will be significantly better for you from an income perspective or flexibility perspective or
One day that monetization final step, which for many advisors can be extraordinarily additional amounts of wealth built in that that comes from that. And yet they don't necessarily even know that that exists or they don't know the mechanics of it. I think it's every advisor owes it, owes it to themselves to have that conversation from time to time.
Just like you would tell a prospective client of yours that hasn't looked at their account in five years, and maybe it was a good portfolio that was put together five years ago. Well, the world changes and circumstances change and motivations change. And so it it is worthwhile at least having a conversation. Doesn't hurt, see where it goes. It may or may not turn into a thing, but at least you have more knowledge of.
Max Holvik, CFA (29:42)
No, it's a that's a that's some good points. And and yeah, the the the world of wealth management have definitely changed a lot the last fifteen, twenty years. And I dare to say even the the last few three to five years as well. And it it seems to be rapidly evolving from any kind of angle, whether it's business models or technology and and and and and so on. So thank you. That's that's some some great insights you share there. before we wrap it up, I ask every guest the same question.
What is the best financial advice that you have ever received?
Brad Wales (30:15)
I'd say and I don't know if I heard it from you know a particular person or is just a a slow drum beat and perhaps much to the my wife's
Chagrin, I am a significant diehard saver in life. You you would almost think that I was a depression era baby or grew up in the depression era of just believing you wanna set as much money aside as you can for a cushion. I I try to lower stress in life, and unfortunately, money issues can can cause a lot of stress. And and I I didn't grow up
Poor, but I certainly didn't grow up well off by any means. I was, you know, mid middle, middle income family at best. And somewhere along the line, I don't know exactly when that started or when that got ingrained in me. The the importance of you gotta save for uncertainties, you gotta save for the future. It reduces stress and and all kinds of benefits that come with it. and I would say if if someone was gonna take any financial advice from me, I would say.
That needs to be part of your lifestyle as well. It has it has served me well and and obviously that takes a long time to to build up perhaps some some comfort. You can't just instantly, you know, have have a good amount of savings. But I would say that's probably one of the better life lessons. I'm I'm glad I somehow learned along that.
Max Holvik, CFA (31:44)
Thank you. And and much better to save a little bit too much than too little, I would say. So that's that's great insight and advice. where can people learn more about what you do?
Brad Wales (31:54)
Yeah, happy to happy to chat with folks that would like to learn more about the RA model. the easiest way is to start by going to the website, which is transition2ra.com. the two is T O, so transition2rae.com. as Max, thank you. I appreciate you alluding to at the beginning. I've a podcast over 150 episodes. They're all in in video format as well. I got articles, white papers, vendor profile series that highlight different solution providers. So
Lots of resources you can look at for free. You don't have to sign up for anything to get most all of it. and then to the degree you say, wow, this, you know, either today's conversation or some of the things you might view on the website, you know, resonate with you. There's a contact link at the top of every page, and you can click on that and instantly and easily schedule time to have a one-on-one conversation with me. So happy to have that conversation. But the easiest way is just start out by going to the website. All kinds of resources you can just start looking at right away. And again, transition to RAA.com.
Max Holvik, CFA (32:52)
Thank you, Brad. And we'll make sure to put both your your website and your LinkedIn as well as the the podcast in the show notes so so our audience can can easily find you. So thank you so much for being on the show. It's been a pleasure having you.
