Bank Ownership of a Registered Investment Advisory Firm

Financial Institutions are increasing expressing an interest in buying or forming a registered investment advisor (RIA). There are many good reasons why a financial institution may benefit from having an affiliated RIA. However, failure to consider the specific details can result in a myriad of otherwise avoidable problems. As with all new business initiatives that are considered by a financial institution, the starting point is a combination of strategic planning and risk assessment. Both the strategic planning and the risk assessment are affected by whether the bank:

a) Has a Trust Department and the strengths and weakness of that department

b) Has a current non-deposit investment product (NDIP) program and the strengths and weaknesses of that program.

This leads to a decision as to whether the bank will buy or form an RIA. The risk assessment must consider the reality that the regulatory scheme applicable to RIA’s is entirely separate and distinct from banking regulation.

A key business driver for financial institutions considering an affiliated RIA is the prospect of full control of the business activity. Unfortunately, full control leads to full financial, regulatory and civil liability for the unique business activity of the RIA.

The first step toward an affiliated RIA must be a strategic discussion, which has a sharp focus on the question: What are you trying to “solve for” by buying or starting an RIA? This question will identify your strategic goals. You must start with a focus on your strategic goals. It is common for a bank to identify more than one strategic goal. If you already own an RIA or are already in the process of building or buying an RIA, revisiting this strategic discussion will support the quality and effectiveness of your actions.
Now that you have decided what you are trying to solve for, you can now evaluate common business models. Not all RIAs are the same – they are as diverse as the individuals that staff them. In forming an RIA, you have the ability to establish the business model and shape the skills and culture. However, when purchasing an RIA the business model, the skills of the personnel and the culture of the organization are already established and need to be considered.

Each RIA has a unique group of individuals who perform the management, sales, investment management, administrative and operations functions of the firm. To the extent the RIA has been sufficiently successful in order to garner your interest as an acquisition target, it is the personnel of the RIA that have made that success possible. Failure to consider the talents of the RIA’s personnel, the organizational culture of the firm and the expected ability of the RIA’s personnel to meld into the bank and or holding companies culture is a common and frequently disastrous mistake. Put another way, the people may matter more in both the short and long run than the current AUM and current profitability of the RIA.