Recently, our firm worked with an advisor whose experience went against many of the narratives that broker-dealers promote. The process was illuminating, and this advisor invited me to share his story.
A Silicon valley-based advisor, Palash Islam had a long-standing relationship at a mid-sized BD, which had brought value and relationships he enjoyed.
He came to me seeking options when his firm was soon to be merged into a larger one. Early on in our conversation, I was upfront with the suggestion that Palash should establish his own RIA, as he had over $100 million of assets under management and only a small amount of residual trailing commissions.
During this journey, Palash looked at his current expenses vs. the anticipated expenses at the new firm he was being merged into. We also looked at another firm well known for its advisory focus.
Palash manages his clients’ assets by investing in stocks and bonds on a discretionary basis, so advisory administrative fee expenses were a major issue. Here’s how the numbers worked out based on $1 million of baseline revenue:
Cost Comparison: Broker-Dealer Vs. RIA
|Business Model/||Advisory Administration Fee/||Payout/||Misc. Costs/||Total Revenue/||Cost vs. RIA|
Palash’s firm is based in the San Francisco Bay Area, which hosts a preponderance of wealthy and ultra-wealthy clients in the tech industry.
Given these demographics, I estimated that his elite clientele would be interested in investments geared toward accredited and qualified investors, which would include investments such as hedge funds, REITs, business development corporations, oil & gas partnerships, private equity, etc.
Really in Clients’ Best Interest?
It turns out that the assumptions the industry has led us believe to be true were generally wrong in this case, as Palash explains in these comments:
“One of my favorite quotes from Steve Jobs is, ‘Simplicity is the ultimate sophistication.’ My clients are savvy, educated and smart. They want things simple and transparent.
“Over the years, I have found that the layers of fees, lack of transparency and complicated structures of broker-dealers and various alternative investments are contrary to what I believe the clients want.
“I’m in the business of results to increase our client’s net worth. It seems things are unnecessarily complex in our industry.
“Fundamentally, if there are multiple disclosures to sign which protect the broker dealer and investment company, then is it really in the client’s best interest?”
Weighing Cost and Value
Having done the due diligence on the firm he would be merged into as well as a backup broker dealer, I asked Palash what he thought of the two firm’s value propositions. According to Palash:
“My business is unique because of the multifamily office model. It would have been impossible to build it without the support of my current broker dealer.
“But it’s important to realize that as a smaller broker-dealer in the industry, their size and ability to thoughtfully work through opportunities was a huge advantage. The way it was run insulated me from how the broker-dealer world has changed over the past decade.
“My firm has been called a unicorn within financial services. We have been virtual since 2007 and big enough to be SEC registered while working with a very select clientele.
“In discussing my model, all the broker-dealers agreed that my business revenues were comparable to a branch with multiple advisors, however with a fraction of the typical client base.