Comparing Business Models
At a broker-dealer or wirehouse, you don’t pay for tech, real estate, office supplies, legal, or compliance — well, in a sense, you are in the form of a less-than-100% payout rate.
In this section, we’ll compare a wirehouse advisor’s cumulative take-home pay over a 10-year period vs. an RIA. Again, we’ve made some assumptions here to build an oversimplified model to make a directional point — your numbers will be different.
Those assumptions are:
- The advisor at the wirehouse
- has a payout rate of 47%
- has a tax rate of 40%
- manages $100m
- has a compound annual growth rate of 10%
- The RIA
- is using Altruist
- has a payout rate of 100% (before business expenses)
- has a tax rate of 40%
- has a first-year startup cost of $52k and ongoing costs of $35k (taking an average of low and high end for an advisor who is paying for office space but has no employees)
And the areas we’ve oversimplified are:
- We applied an across-the-board 40% tax rate on all revenue (in the RIA’s case, revenue after expenses)
- We have not included additional brokerage fees in the take home payout calculation
- We are assuming a consistent CAGR
- We are not adding headcount alongside growth
Let’s assume the RIA has a similar sized book of business ($95m), but is pursuing a less ambitious growth rate (3%) by only allocating 0.5% of revenue towards marketing. By year 10, this advisor will have taken home more than $1.6M in cumulative pay.
Let’s assume the RIA has a more niche book of business ($80m), and a comparable growth rate (10%) and is using the average 2% of revenue as a marketing budget. By year 10, this advisor will have taken home more than $3.1M in cumulative pay.
Let’s assume the RIA has an extremely niche book of business ($60m vs $100m), which is enabling him or her to achieve a higher growth rate (20%), and to maintain this growth, they are increasing their marketing spend to 3% of revenue. By year 10, this advisor will have taken home more than $5.6M in cumulative pay.
And there’s also the equity to consider
The cumulative take-home pay calculations are just one piece of the puzzle — you’re also building equity in a business. According to M&A consultancy Advisor Growth Strategies, the 2022 median adjusted EBITDA multiple for RIAs was just under 9x! These two factors (in addition to more strategic control and better quality of life) may have something to do with why 4 out of 5 advisors who launch their own RIAs are happier for it.
When you’re ready to launch, we’re here for you.
At Altruist, we strive to make independent financial advice better, more accessible, and more affordable. Our custody solution gives back precious time and capital to RIAs, so you can focus on what matters most: your clients and business.
On one intuitive, integrated platform, advisors can open and fund accounts, trade and rebalance, report, and bill, at a fraction of today’s edging-ever-higher technology costs.
For new firms, existing firms, and advisors planning to make the leap from their wirehouse —the grass really is greener— our dedicated customer support team ensures a smooth transition and exceptional ongoing service.
To see how we’re helping RIAs streamline operations, reduce overhead, and elevate the client experience, book a call with one of our advisor advocates today.
True independence awaits. Book a call with one of our experts today.
In case you missed it, be sure to check out the other articles in our Going Independent series:
- Going Independent: A series dedicated to starting your own RIA
- Going Independent: A guided checklist to forming your own RIA
- Going Independent: Setting up your compliance program
- Going Independent: Let's get back to the (business) basics
- Going Independent: 6 mistakes advisors make on their Form ADV
- Going Independent: How to transition clients to your new firm