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OSJ Mistakes to Avoid When Creating an RIA

Carla McCabe
Aug 7, 2018

Related article: "The OSJ and Enterprise Value"

Making the move from an OSJ to building your own RIA is a very exciting time. But it can be tricky if not approached with the proper mindset and planning. When you’re accustomed to the OSJ world, it’s hard not to follow the same business model. But you won’t realize your firm’s full potential by doing so.

As we’ve discussed before, the traditional OSJ, in and of itself, is technically not a “salable” advisory business at a multiple of cash flow – because it doesn’t own the underlying assets (or advisors); it’s merely providing a compliance and regulatory platform, like a vendor. The following suggestions will enable you to shift your thinking away from this model so you’ll be able to build true enterprise value.

  • Your advisors should be employees of the firm. A W2 model creates an environment where every employee is working for the good of the firm, not the individual. An "eat what you kill" mentality, on the other hand, drives individual performance and fosters an attitude of every-man-for-himself... probably not something you want when building a team.
  • Assets should be owned by the firm, not individuals. Your goal should be to build a cohesive business, not a collection of individual, independent practices. Any assets that are owned by affiliated advisors and not the OSJ can’t be included as the RIA’s assets when valuing the firm (because they can’t be included in a sale). Make sure that all acquired or contributed assets are owned by the firm (TIP: an advisor can join the firm and contribute their book of business for an equivalent amount of equity in the firm).
  • Compensation for your advisors should primarily consist of a salary based on job function. Remember, your objective is to build a firm where everyone is working toward a common, greater goal – that of putting the firm first. Compensating advisors for their individual production defeats this purpose. Instead, write out job descriptions with roles and responsibilities and use market data to determine fair compensation for those functions. As an added incentive, you can offer an individual bonus for new assets that an advisor brings into the firm (though it should be a nominal amount).
  • Think team-based client approach. One of the easiest tricks to creating enterprise value is shifting the focus away from one individual. The enterprise model is built upon the collective talents of multiple individuals with varying areas of expertise in complimentary specialties. Make sure that each of your clients is familiar with their team of advisors and support staff. Businesses lose value when too closely tied to any one individual.
  • Build a firm, not a lifestyle practice. Books/practices that exist under an OSJ are typically more “lifestyle” in nature; and they often bring in a comfortable income to the owner. When creating an enterprise though, it’s important to shed this way of thinking. This means properly investing in the business to create a firm that’s stable, predictable, and profitable. As with previous points, it’s crucial to put the needs of the business first… which sometimes means that principals need to forgo some of their personal income early on.
  • Build for the future, not to solve a need today. Many firms make the mistake of building for the needs of today without considering the long-term ramifications. Work with an attorney and accountant, remembering that your objective is to create a firm with stable and sustainable value that you can perpetuate into the future. Learn about your options for equity and take your time creating the proper structure and mechanism to continue the firm beyond the original owner(s).
  • Create a dedicated executive team. Ideally, your President, CEO, COO, etc. should not be advisors or heavily client-interfacing. The job function of the executive team is to drive vision, strategic leadership, and operations. Adding advisory or rainmaking responsibility to these roles risks the success of the firm (as they’re each full-time jobs already). Additionally, when caught “in” the business, executives can easily lose sight of the big picture and not properly work “on” the business.
  • Get the correct infrastructure in place. Thoroughly vet your options for technology and other systems. Remember, compliance will now be your responsibility, especially for any assets outside a BD. The price tag that accompanies proper technology investments may induce sticker shock, but are an absolute necessity to a) enable your employees to work efficiently, and b) differentiate you from your competitors. Don’t neglect to make the proper investments in your business.

With a little bit of work and careful planning, you can step away from the OSJ model and build an enterprise structure that will ultimately create scale, as well as transferable value.

Related article: "The OSJ and Enterprise Value"

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