RIA Compliance and Practice Management Blog

How Much Does it Cost to Start an RIA Firm?

Posted by RIA in a Box

Jan 15, 2015 9:51:00 AM

Canva - Woman Holding Pen While Using CalculatorWe are frequently asked by advisors what it costs to establish their own registered investment adviser (RIA) firm. The start up costs of an advisory firm will vary based on the size of the firm measured by the total assets under management (AUM), number of clients, and number of advisors / staff members.

In this initial post, we detail the costs for a solo-advisor firm that starts with less than $20 million in AUM. In our experience, we generally find that such advisors can create a new RIA firm for around $9,000 in upfront costs.

Regardless of operating with a sizable or shoe-string budget, the key upfront costs for the new, solo-practitioner firm to consider are:

1. Entity formation

Most solo-advisor RIA firms utilize a S-Corporation (S-Corp) or Limited Liability Corporation (LLC) entity structure. We see most small firms take advantage of one of the many online services that assist with entity creation. A number of our clients have had good success using Incfile.com. Incfile.com's basic package starts at $49. An additional $100-300 should be budgeted for the state entity registration fee.

Choosing a name for your new firm does not have a direct financial cost, but it's definitely worth spending some of your valuable time on. In particular, we generally advise individuals creating a new RIA firm to not name the firm after a principal

Expert Tip: Our research indicates that the LLC structure is nearly twice as popular when compared to traditional corporate structures.

  • Total projected cost: ~$250
2. RIA Registration assistance

We are very confident that hiring a compliance consultant to help navigate the RIA registration process is one of the best investments that an advisor can make. It is a complicated and cumbersome process that varies state by state and it can easily cost you significant valuable time and future regulatory risk. Most solo-advisory firms that work with us will pay around $4,000 in compliance consulting fees. These fees cover the firm and individual representative registration and creation of the compliance documents for a single state.You can view our RIA registration package here.

Expert Tip: The registration process, even if managed as efficiently as possible, can take up to 2-3 months in some states so it's important to begin the registration process early in your firm's formation process.

  • Total projected cost: ~$4,000

3. RIA Firm regulatory fees

Each state charges an initial and annual firm filing fee. The average initial registration fee charged by states is ~$215.

Expert Tip: California, the state with the largest number of RIA firms in the country, only charges an annual firm registration fee of $125. 

  • Total projected cost: ~$215

4. Individual Adviser Representative (IAR) Regulatory Fees

Similarly, nearly every state charges an initial and annual IAR filing fee. The fees charged by most states are less than $100 annually per IAR. In addition, there may be a one-time FINRA processing fee of $10 per new IAR registered.

Expert Tip: The states of Louisiana, Minnesota, New York, and Wyoming do not charge any annual IAR filing fees.

  • Total projected cost: ~$60

5. Individual Adviser Representative (IAR) Exam Fees

An individual associated with an advisory firm, whether in an investment advisory capacity or in an executive, principal or management role is generally required to register as an individual investment adviser representative (IAR). The Series 65 is the qualifying examination set forth in most jurisdictions that an individual must pass before conducting business as an IAR.

There are certain exemptions available for individuals to meet the competency requirement as an IAR in most jurisdictions. These include a combination of a Series 7 and Series 66 exam, or any of the following professional designations: Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), Certified Insurance Counselor (CIC), Certified Insurance Counselor (CIC), Chartered Financial Consultant (ChFC), or Personal Financial Specialist (PFS).

The Series 65 exam is administered by FINRA (Financial Industry Regulatory Authority) and costs $175.

Since passing these examinations is such a crucial part of starting a RIA and becoming an investment adviser representative, it is important to properly prepare and study accordingly. Several reputable companies provide study material to help prepare for the exams.

The average price for the study material including online practice examinations is around $180.

Expert Tip: Be sure to obtain up to date examination prep materials due to evolving laws and regulations that may not be reflected in outdated test guides.

  • Total projected cost (if necessary): ~$355

6. Insurance / Surety bond

Although not always required by the state, we recommend that all new RIA firms always obtain sufficient insurance coverage particularly as it relates to Errors & Omissions (E&O) coverage. E&O insurance, often also referred to as professional liability insurance, can provide liability protection with certain restrictions for mistakes and inadvertent violations of regulatory rules. E&O Insurance can also help protect your firm from liability and the litigation costs associated with allegations related to claims against your firm. The annual premium cost is often tied to the total AUM of the firm. We find most solo-practitioner firms obtain insurance for around $1,200 to $1,800 per year.

In addition, some states require firms to maintain a positive net capital balance or alternatively secure a surety bond. Surety bonds will generally cost around $200-400.

  • Total projected cost: ~$1,800

Expert Tip: Be sure to review all insurance policies in great detail. Unfortunately, many professional liability insurance plans have a number of exclusions.

7. Marketing and advertising

Initially, we find that new RIA firms need to reserve a web domain name, create a logo, order business cards, and create a basic website. Advisors can reserve a domain utilizing a service such as GoDaddy for around $15. In regards to logo creation, we are more frequently seeing new advisory firms utilize a crowdsourcing platform such as 99designs to create a logo. 99design logo design packages start at $299. Vistaprint offers affordable business cards beginning at around $15 for 500. SmarshSites charges $499 to create a basic, compliant website.

Expert Tip: While it's tempting to delay these spends, we believe that a small upfront investment in this category can lead to a very professional image that will pay future dividends.

  • Total projected cost: ~$830

8. Technology

There are a wide array of technology and software solutions available to RIA firms at varying price points. Upfront, an advisor in a small practice generally needs to purchase a new computer and desktop software (e.g. Microsoft Office). A solid new laptop with Microsoft Office along with a scanner/printer combo can be purchased for around $1,000. Most advisor-specific (CRM, portfolio management, financial planning, etc.) and general small business software applications (e.g. QuickBooks Online, email, etc.) do not require large upfront payments and are billed monthly. However, we believe it's safe to budget an additional $500 in upfront costs for software.

Expert Tip: Be sure to download our free infographic that highlights the most popular RIA software systems by category.

  • Total projected cost: ~$1,500

TOTAL PROJECTED COSTS: ~$9,000

It's also important to note that for more budget-conscious advisors, these costs can be significantly reduced by cutting the upfront marketing, advertising, and technology expenses. Some advisors will design their own logos or websites and use an existing personal computer to start. Such cost-saving decisions can bring the total upfront costs to below $6,000. However, it's important to remember that there is tremendous value in making the necessary upfront investment to give your new RIA firm the best chance at future success. 

Be sure to check back soon as we take a closer look at the annual operating costs for small, solo-advisor RIA firms and also provide more details on the costs for starting and operating a multi-advisor RIA firm with varying levels of clients and assets from day one.

Thinking about starting your own RIA firm or need help registering?

Schedule a Registration Consultation

Lexington Compliance and RIA in a Box LLC are not law firms, investment advisory firms, or CPA firms. Lexington Compliance and RIA in a Box LLC do not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

RIA in a Box LLC may have affiliate or partnership marketing arrangements with any or all of the vendors referenced in this blog post. You should always perform your own research and diligence on potential vendors.

Topics: RIA Operations, RIA Compliance, RIA Technology

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