By: Gui Costin
Even if you’re new to the RIA channel, you likely already know that it’s one of the fastest-growing channels in the industry, making it an incredibly attractive channel for investment firms to call on.
However, RIAs can also be incredibly difficult to break into if you’re doing it for the first time. You might be wondering where to start and who to call on, and if any of the things you’ve heard about RIAs over the years are actually true.
We’ve all been there.
At Dakota, we’ve been fundraising and calling on RIAs since 2006, and have raised over $35 billion in that time. We know firsthand how difficult the RIA channel can be. And, we know that very few salespeople have dedicated a career to selling to RIAs successfully. I'll be the first to tell you that it is a difficult channel to understand, break into, and stick with.
However, the RIA channel, despite its difficulties, is one that we love. The space is full of independent business owners who are all trying to grow and thrive. The true RIA leaders, whether they’re the founder, the CIO, or due diligence analysts, all wear a lot of hats. They have a significant thirst for new and interesting investment ideas, which is why we all should be calling on them.
In this article, we’ll cover the seven questions investment salespeople have about the RIA channels so that you have all the answers and information needed to start calling on the right people, faster.
The RIAs that we recommend calling 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.
At Dakota, we focus on RIAs that custody assets at Schwab, Fidelity, TD, and Pershing. For the purposes of this article, we do not focus 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 believe this is necessary, 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. Therefore, don’t be discouraged from calling 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 can be very time-consuming.
First, let’s take a step back.
There are 13,500 RIAs registered with the SEC, but the large majority of those firms either manage money in-house as an investment manager, or are a subsidiary of a bigger company and need to be registered for regulatory purposes. An outside manager is a third-party adviser that may help an individual investor access more sophisticated institutional investment strategies.
Once you have a list of qualified RIAs to call on, we recommend segmenting the RIAs in two ways.
1. Sort the list from the top to the bottom based on AUM, and then go down the list and start reaching out, with the goal of being in a sales cycle with each firm on our list.
2. Segment is by metro area or city. Define a metro area based on the airport that you fly into, knowing that 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.
Of course, travel is not currently happening, but prior to COVID, we would schedule a day in each city and call all the RIAs to schedule meetings. Segmenting by city is a great way to cover the RIAs in a particular area.
The staff members at RIAs tend to be stretched very then, especially when compared to banks, BDs, consultants, and State Pension Funds. The due diligence analysts at RIAs play many different roles beyond just 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 ideas to them. 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. And while they cannot take hundreds of meetings per week, they do want to hear from you. In fact, they count on investment sales professionals calling them and introducing their strategy and have come to think of this as an extension of their research team.
Yes, they are. Many people tend to think of the RIA Channel as “retail,” which we believe is a big mistake.
In general, the due diligence analysts at RIAs are as sophisticated as any other group, if not more so, especially when it comes to understanding and picking managers to invest in.
Most analysts are CFAs with years of 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 is a lot of movement between analysts at consultants, foundations, endowments, RIAs, Family Offices, etc. meaning the analyst currently working at an RIA could have just come from a consultant or an endowment.
Most RIAs will invest in alternatives. However, to really understand their alternative investment approach, you need to consider their preferred investment vehicles. RIA firms will typically use mutual funds and separate accounts as their primary investment vehicles. They will also use L.P.s and quarterly tender structures, but on a more limited basis.
Why do they primarily use mutual funds?
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.
With that being said, however, RIAs will also 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.
Finally, 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 alternatives is that they have not performed well or according to their mandates, which has raised a lot of concern. However, despite those concerns, if you have a liquid alternative product, RIAs should still be one of the channels you target.
The short answer is no. Like we touched on above, 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, however, RIAs between $200 million and $1 billion are extremely fruitful. These RIAs are successful for a few reasons:
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 while it’s not mandatory, you will eventually want to get the Portfolio Manager 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.
When you’re new to any channel, knowing what to say in addition to who to call on is what matters most. While allocators at RIAs sometimes rely on managers coming to them, they also have limited time for meetings and phone calls.
However, we also know that researching these things takes a lot of valuable time from your sales team.
Don’t waste anyone’s time by calling on the wrong people.
To make sure you’re reaching out to RIAs that are the right fit for your team, having the most up-to-date and accurate contact information is key.
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