Banking for breakaways: What an investment banker to RIAs says you should know

For advisors working in the institutional wirehouse and broker-dealer environments, the decision to break away as an independent RIA isn’t a simple one. In every case, it’s a potentially career- and life-altering maneuver that will require extreme due diligence and planning – which, of course, includes thinking about how to pay for the would-be business.

“It cuts across several different factors,” Harris Baltch, co-head of investment banking at Dynasty Financial Partners, told InvestmentNews in a recent interview. “It’s like any startup business.”

According to Baltch, office space tends to come up as a major bullet point on the list of critical expenses. While some breakaways choose to buy or lease a building, others are fine with a remote work arrangement or renting within a shared coworking office space.

“As a rule of thumb, when we’re doing these P&Ls, we like to think about about 400 square feet per person, give or take, although some people want to stay lean and mean,” he said.

To retain clients, he said new breakaways should also have adequate support staff as the AUM migrates into independence. Depending on the need, that means calculations around salaries should properly account for client service associates, administrative staff, operating officers, and senior and junior advisors.

“Depending on where the advisors are coming from, they may have some capital needs to support their staff,” Baltch said. “Sometimes they may have a deferred note that is payable when they decide to resign, and that needs to get paid off in a timely manner.”

Outside core operations, breakaway advisors also have to determine how they’ll build the marketing, tech, and compliance scaffolding around their practice. Generally, that could involve outsourcing to an RIA platform like Dynasty, or building their own middle office, back office, and tech stack from scratch.

“It really depends on how much time you want to spend working in the business versus on the business, and that can change over time,” Bialtch said. “That weighs into the expenses quite a bit as well.”

‘Sleep-at-night money’

As a rule of thumb, Bialtch said it’s useful to consider having three to four months’ worth of operating expenses to go through a transitionary period. Beyond that, he sees an array of financing options for breakaways to consider, including start-up loans or pre-launch loans (“We like to think of that as ‘sleep-at-night’ money”) to help bankroll their big move.

“Every firm has different terms that come with that, and those terms can evolve as firms grow, mature, and need capital for other things,” Baltch said.

Equity investment options have also been growing in popularity, he said, where an outside backer supports the advisor’s growth by getting a stake in the business. While it trades away some control, some find the arrangement palatable as it creates a sense of comfort from having a capital partner sitting shoulder-to-shoulder with the advisor-owner.

Among more novel hybrid products, Dynasty and other firms offer revenue participation arrangements, where an RIA can give up a percentage of revenue for a period of time in exchange for capital. 

“For firms that are allergic to debt and don’t want to sell equity, that hybrid product can be leveraged in order to access capital,” he said. 

No ‘right size’ to bet on yourself

There’s plenty of room to debate the AUM needed to consider going RIA – do you really need to be a “bilion-dollar breakaway”?

Still, Baltch sees some smaller firms deciding to go it alone with just “a couple of milion dollars under management” as his team reviews Form ADVs. As the latest industry snapshot from the Independent Adviser Association has it, roughly two-thirds of RIAs under the SEC have less than $1 billion in AUM.

“They are fiercely independent do‑it‑yourselfers trying to build a business from literally scratch. That’s versus the wirehouse advisors that look to go independent,” he said. “The way we think about it is that it’s not really about whether there is a ‘right size’ for the advisor. It really comes down to cash flow and whether they are able to make more money in independence.”

Assuming an apples-to-apples comparison, Baltch argues an advisor’s decision to bet on themselves comes down to the amount of cash flow they’d make on the RIA side – including their payout and distributions they’d be entitled to as an equity owner in the long term – versus what they’re currently getting. Aside from their ability to serve clients better as an advisor, they’d also have to estimate the value they can bring to bear as an entrepreneur, which they could potentially monetize, leverage toward recruitment, and use as currency for succession.

“There’s a lot more that goes into it as opposed to asking what the right level of AUM is or whether there is a specific break‑even. Each advisor charges differently and serves their clients differently,” he said. “The true apples‑to‑apples comparison is really around the portability of the book, and comparing the cash flow in independence relative to what you look like in a captive environment.”

From his perch at Dynasty, Baltch also sees a vibrant market for RIA M&A now, with succession concerns and constructive valuations creating plenty of opportunities to explore. And while many approach bankers with their minds already made up, he encourages people to engage ahead of time so they can get to understand the strategic objectives driving a potential sale transaction.

“There can be a founder dilemma where you have a founder looking to exit, but the G2 is really sensitive to who that founder is going to be replaced by. There can be situations where firms are just going separate ways,” he said.

“You don’t want to hire a banker to transact when there’s an issue. You want to build that relationship over time so that the banker really understands the business and the people inside that business.”