Gui Costin, Founder, Dakota
The RIA channel has been and is one of the fastest growing channels for investment firms to call on, however it can be a painful process if you are doing it for the first time. The pain comes in two categories: 1) Where so I start and who do I call on?; and 2) I have all these assumptions about RIAs, but no one to set me straight and give me good guidance.
Few salespeople have dedicated a career to selling to RIAs and done it successfully. I'll be the first to tell you that it is a difficult channel to understand, break into and stick with. We have been selling to RIAs since 2006, and I personally have been selling to them since 1997. We have raised approximately $6 billion from over 360 RIAs and we meet and talk to more and more on a daily basis.
The RIA channel, despite its difficulties, is a channel we love. There are independent business owners who are all trying to grow and thrive. The leaders, whether the Founders or the CIO's or due diligence analysts all wear a lot of hats and I have a sincere appreciate for what they go through on a daily basis. They also have a significant thirst for new and interesting investment ideas, which is why we all should be calling on them. Below I identify 7 myths or questions investment salespeople have about the RIA channel and answers to those questions.
The RIAs that we call on are independently-owned wealth management firms that use outside managers to create portfolios for clients. Clients’ sizes range from under $1 million to tens of millions to billions, depending upon the size of the firm.
We focus on RIAs that custody assets at Schwab, Fidelity, TD and Pershing. For the purposes of this article, we do not focus any effort on calling RIAs who are affiliated with Independent BDs.
We, generally, call on RIAs above $200 million with an average size of $2.5 billion. While many investment firms place an artificial limit of $1 billion and above, we do not because we understand that there are significant opportunities with RIAs below $1 billion. In some cases, a $600 million RIA will have a larger allocation to an asset class than a $2.4 billion RIA. We, therefore, strongly encourage sales professionals to call on RIAs in the $400M to $1B range.
Currently, we have 1,052 RIAs that are qualified and use outside managers in our database.
First, you need to make sure you are calling on RIAs that use outside managers. Without that knowledge, you will have to do a ton of research work just trying to figure out who to call on, which is very time consuming.
What do I mean by outside managers?
There are 13,500 RIAs registered with the SEC, but the large majority of those firms either management money in-house as an investment manager or are a subsidiary of a bigger and need to be registered for regulatory purposes.
Once you have a list of qualified RIAs to call on, we segment the RIAs in two ways.
First, we simply sort our list from the top to the bottom based on AUM, and then we go down the list. Our goal is to be in a sales cycle with each firm on our list and, over time, when you run the list, you should be able to know where you stand just by eyeballing the list. This is a great way to cover the RIA channel.
The second way we segment is by metro area or city. We define a metro area based on the airport that you fly into, and there could be multiple cities within that metro area. So, you have all the RIAs in the Philadelphia metro area, and the goal, just like the AUM list, is to be in a sales cycle with each RIA in that metro area. Since this post was written in August of 2020 and still in a COVID world, travel is not happening. However, in the pre-COVID days, we would schedule a day in Philadelphia and call all the RIAs to schedule meetings. It’s a great way to segment and cover the RIAs.
This is my favorite question, and we even dedicated a panel to this one question at our New York City Conference in September 2019.
RIAs have very thin research staff members when compared to banks, BDs, consultants and State Pension Funds. The due diligence analysts at RIAs, thus, play many different roles beyond due diligence. On average, they spend only 20% of their time researching investment strategies. So, they do not have a lot of time to do research.
As a result, RIAs count on investment sales professionals to bring them ideas. Most RIAs will tell you that they found out about a strategy because a salesperson called them or emailed them for a meeting. So, YES! RIAs want to be called on to discuss your investment strategy. Now, they cannot take 250 meetings a week, but they want to hear from you. In fact, they count on you calling them and introducing your strategy because they see you as an extension of their research team.
Yes, they are. To think of the RIA Channel as “retail” is a big mistake. In general, the due diligence analysts at RIAs are as sophisticated as any other group, if not more so, when it comes to understanding and picking managers to invest in. Most analysts are CFAs and have deep experience. Because they can invest in almost anything, they see and evaluate a lot of investment opportunities. This depth gets them in front of a lot of interesting ideas, further solidifying their sophistication.
In any given city, there can be a lot of musical chairs between analysts at consultants, foundations, endowments, RIAs, Family Offices, etc. So, the analyst in the seat at an RIA could have just come from a consultant or an endowment. This just further proves the point that this is as institutional an approach to investing as at any other institution.
Most RIAs will invest in alternatives. But to really understand their alternative investment approach, you need to consider their preferred investment vehicles. RIA firms will, in general, use mutual funds and separate accounts as their primary investment vehicles. They, absolutely, will use L.P.s and quarterly tender structures, but on a limited basis.
Why mutual funds primarily? Because it is an easy way to run and manage their business. Schwab and Fidelity, with their robust backend technology, make it very easy for RIAs to trade and manage client portfolios. Non-mutual fund structures are inefficient and time-consuming to manage. So, unless they have a high need and desire to access the investment strategy, they will stick with mutual funds and ETFs.
All that being said, RIAs frequently invest in illiquid and LP-type structures. So, if you market a product that is delivered in those vehicles, you should absolutely be calling on or building relationships with RIAs. In general, the larger the RIA, the more likely they will invest in illiquid structures.
Many RIAs, like many other allocators, have used liquid alternatives as a convenient way to access alternative strategies that are housed in mutual funds or ETFs. The problem with liquid alts is that they have not performed well or according to their mandates, which has raised a lot of concern. That being said, if you have a liquid alt product, RIAs should be one of the main channels you target.
No. No. No. We believe the only artificial line is around $200 million, and even that can be risky.
Many firms we speak with only call on RIAs above $1 billion for some unknown reason. RIAs between $200 million and $1 billion are extremely fruitful. Here’s why:
So, yes, we strongly recommend calling on RIAs below $1 billion in AUM.
We have always felt that investors eventually want to meet the wizard, the one managing the money. So it’s not mandatory, but you will eventually want to get the PM on the phone. One of the greatest assets an RIA can have with their clients is to be able to say “Well, I just got off the phone with Susan, the lead PM on our small cap value strategy, and this is what she said about the market.” Access to a PM is a big deal for RIAs. So, if you have a PM who is willing to do calls, then this is a great use of time.