WE Family Offices in Family Wealth Report: The RIA Business Model
November 15, 2019
Within the wealth management landscape, there are four distinct UHNW business models: commercial banks, broker-dealers, trust companies and registered investment advisors (RIAs). In a recent article published in Family Wealth Report, WE Family Offices Managing Partners Mel Lagomasino and Michael Zeuner provide a detailed look at the RIA business model.
Lagomasino and Zeuner define an RIA as, “a wealth management firm that is registered with the United States Securities and Exchange Commission as an investment advisor.” Being registered with the SEC requires RIAs to follow the Advisers Act of 1940, which includes a unique and distinct regulatory burden that other business models do not have to follow. This creates a culture within RIAs of putting clients’ interests first with an emphasis on maintaining the utmost transparency.
This distinction is important, but it is often not enough for UHNW families to select this business model. Instead, the most important factor is whether the firm is built on an advisor model (which RIAs fall under) or a provider model. A provider’s main role is to sell or distribute financial products or services to clients for a fee, while an advisor’s main role is to help families determine which financial products, services and providers are best suited for their needs.
While most families do work with multiple providers for different specialties, it can be difficult to get the highest quality products and services, connect all the dots and keep track of it all. That’s where an advisor comes in. Acting as the family’s financial quarterback, advisors understand the “big picture” and help purchase products and services, all while integrating and managing an ecosystem of providers. However, it is important to note that firms are only truly advisors if they only receive fees from families and do not receive incentives from providers.
Once a UHNW family determines that they need an advisor, they need to figure out whether they want an advisor that provides solely investment support or one that provides holistic broad services that include their investments as well as other functions. To determine if the firm is narrowly focused on investment advisory instead of broadly focused on wealth advisory, look at how they charge fees. If the firm is focused on investments, they charge a fee based on a percentage of their assets under management. If the firm is broadly focused, they charge a flat retainer fee.
All in all, while there are a multitude of UHNW business models for families to choose from, there is no right answer for everyone, but understanding the various models is the first step a family must take in finding the option that works best for them.