Why Owning Your IT Hardware Could Save Your RIA Money – RIA Tech Talk Episode #18

Todd Darroca:

Hello and welcome to the RIA Tech Talk podcast, brought to you by RIA Workspace. I’m Todd Darroca, and alongside me is David Kakish. Together we’re on a mission to simplify the complex world of technology for our ias just like yours. Now in the podcast, we’ll be your tech guides breaking down those often confusing tech topics into plain old practical terms. So join us on each episode as we dive into the latest tech trends, share our expert insights and help you navigate the ever-changing world of RIA technology. So let’s get started. David, David, David. We’re talking about why owning your own IT hardware could save your RIA money. So why is that important in today’s world?

David Kakish:

Well, sounds good. Well listen, Todd, I want to welcome you. I want to welcome the listener and yes, why as an RIA, when you own your own IT hardware, it’s going to save you money and it’s going to save you a lot of headaches and things like that. And here’s the story. I was working with a prospective client recently and they were considering working with us, but then they were just really confused because we don’t do what’s called the hardware as a service where you quote rent the equipment and they had another proposal. And in that proposal, the other IT provider included a network firewall, a switch and a wireless access point, but then it was a monthly payment and they would lock him into a two or a three year contract because of that. And I looked at that and she was confused like why don’t we do it and why the other guys do it and what’s the advantage and what’s not. It’s a great question. That’s really what we’re going to dive in today. And the big question is should your RIA buy this network equipment or is it better to get it as a service from your IT provider? And yeah, that’s really what we’re going to dive in. And by the end of this session, you’re going to know the pros and cons of whether or not you buy it or you get that as part of the service with your IT provider. But yeah, that’s what we’re going to talk about today.

Todd Darroca:

I’m not going to lie, I never thought you could rent. I know in the AV world you can rent camera equipment and lighting and all that stuff, but I didn’t think you could rent servers or switches and all that stuff. I always thought you had to buy those outright. So this is definitely something new for me to learn. So let’s start with hardware as a service orp.

David Kakish:

Yeah, yeah, exactly.

So I want to be careful with the acronyms. This is an acronym that’s well known in our industry, but it’s not well known for the RIAs, right? The RIAs have their own acronyms and this and that and stuff like that. And you’re going to laugh at me, but I still get IRA and RIA A mixed up and I’m like, which one is which? But anyways, so I want to be careful with unquote renting. What a lot of IT providers will do is say, Hey listen, we’re going to provide you a network firewall. We’re going to provide you a switch and we’re going to provide you the wireless access points. That’s just part of our service and then you’re going to pay us X per month or something of that sort. So they stay away from the word rent because there’s a lot of negative connotation with rent. But for a long time in our industry in the IT industry, there was a very popular acronym, HAAS, Haas is what they would call it, hardware as a service.

And our organization, we never philosophically bought into it at all because it didn’t make any sense. But the whole idea there is you go and you work with a new RIA client, you give them new computers, you give them new network hardware, you give them new everything and then they pay you X per month and it’s all included. And they were actually even doing it at the laptop and the desktop level. And that’s such, it was crazy because that’s such a private thing. I like to use a Mac or I like to use a Windows or a Dell or an hp, and then it just becomes a total nightmare. The next evolution of that was like let the people buy their computers, but then you can do hardware as a service for the network equipment and the servers and all that fun stuff. Still, in my opinion, it’s a scam.

It’s a really bad way of doing that. I can understand the benefits for the IT provider. The benefit is you get one standard, which makes a lot of sense. You get new equipment instead of outdated old equipment and then you’re supporting one tech stack. So anyways, so the whole idea, again, whether you’re renting it or it’s part of their service or it’s hardware as a service, what we see now in the RIA space, some IT providers are saying, yes, we’re going to support you, it’s X dollars per employee per month, and then we’re going to provide you the network infrastructure and it’s going to be X dollars for the network infrastructure and we’re going to provide you. And it largely contains the three things, the network firewall, a switch or multiple switches depending on the size and then wireless access points. Now anyways, that’s just to kind of explain what that is, right? Not everybody does that. Some people do it. There is some perceived benefit to it, but not really. And I’ll kind of dive into that and maybe I’ll talk about the downsides first and then I’ll talk about the benefits of owning the hardware. So Todd, going back to you right at the beginning, you were surprised that people were doing that, but it is there, it’s fairly common with some providers.

Todd Darroca:

Yeah, I mean I’ve worked with IT pros for almost 10 plus years in the trenches with them, and I’ve never even my own IT guy, his name’s Jeff. I’ve never heard him say, we’re renting this or you can rent this. I’ve always, and maybe he did and just didn’t tell the team, but that’s very new to me because I would think that with technology you would want to own it just because of the security with it. And again, it’s like an iPhone, I guess it’s the planned obsolescence, but I don’t know if that’s the same thing for all hardware where yeah, you’re going to have to buy a new one. But yeah, it’s new for me. I didn’t realize that was happening. Yeah,

David Kakish:

Yeah. Well listen, lemme talk a little bit about the upside, right? Again, the upside for the RIA and the upside for the IT provider, let’s start with the upside for the RIA. It’s simple. You get all new equipment, right? It’s one monthly fee and you just pay it. The really big downside is you pay a lot more than what it’s worth. And I’ll kind of get into that in a little bit. The upside for the IT provider is like, look, it’s a standard. This is a tech stack we support, it’s standard. And then this way it’s a guaranteed way to sort of eliminate all the old outdated stuff that might be sitting there seven years, 10 years, five years and so on. So that’s kind of the upside. So I mean there is a little bit of an upside, but really the downside is much larger for the RIA and that’s really what I want to focus on.

So, okay, got it. Cool. So number one is again, a network firewall, a switch and a wireless access point. Again, let’s just pretend you’re an RIA with 10 employees, 10 total employees, something like that’s going to cost you under $5,000 without getting into too much detail. So you can buy a network firewall, you can buy a switch and a wireless access point with three year subscription so that you’re covered for three years, it’s going to cost you less than $5,000. Our model is if you already own it, we’re going to work with what you have and with time sort of replace that so you don’t have to buy everything brand new. Obviously if you don’t have any of that, we’ll work with you so you can get that. But I think the big downside of renting this IT hardware or having it bundled with the IT service provider is you’re going to pay a lot more money for it over a two or three year period. And so what the IT provider will, because it’s a risk for the IT provider to provide all that for you, they’re going to want to lock you into a two year, three year, or maybe even a five year contract. So what happens is, look as an RIA, you’re probably not living paycheck to paycheck. You can afford to put $5,000 down and then have that work for the next three to five years for you. By the way, if you’re a financial advisor and you’re living paycheck to paycheck, you’re probably in the wrong business.

Todd Darroca:

I don’t want to know who you are because I haven’t gone yet.

David Kakish:

So ultimately what happens is, again, if you pay for it upfront, it’s five grand. You’re done, right? I’ve seen the numbers where if you pay for it over two years or three years and they bundle it in their services to make it confusing for you, you’re going to pay, I’ve seen five x, I’ve seen 10 x, I’ve seen three x, you’re going to pay significantly more for that hardware. And it’s just insane because what you ultimately need that IT provider to do is to manage, monitor, and maintain the hardware, not to resell it or sell it and things of that sort. And so I just kind of wanted to put that out there. Regardless of how you spin it, you’re going to end up paying more for it. So that’s a big downside. The other piece is at times that equipment is in the name of the IT provider, not in your name.

So you actually don’t own that. And so I won’t get into how you expense that, right? In the first model, it’s just a monthly expense, and the other, it could be a capital expense. Financial advisors know this much better than me, but the key here is you unquote are renting that so you don’t own it. Whereas if you buy it, you own it and then it’s yours. Now, the one that I really think is a huge negative for you as an RIA, when you don’t buy your own equipment, you’re really dependent on that IT provider. So you enter into a contract, you’re into it, it’s not working out for whatever reason, and you want to leave, well, guess what? Now you’re locked into a three year or even a five-year contract depending on that vendor and that IT vendor will sometimes say, oh, you want to leave us?

Great, well let me come in and take my network as a scare tactic and intimidation tactic. But anyways, so that’s kind of the downside for you as an RIA. And again, what’s interesting, and I don’t understand why IT providers do that, it’s a really big risk for the IT provider to buy all this gear and then give it to you as a rental or as part of their services because now it’s a big risk for them. So it’s a philosophical thing. They’re trying to make money on reselling hardware and doing it as a subscription. And it’s just silly because it’s like, look, just pay for somebody’s services, not like some piece of hardware or anything like that. So I think for an RIA, if you’re working with an IT vendor and you like them a lot and you want to move forward with them, but their model is like, yeah, hey, we just have it as a subscription for this network equipment or rent.

Just say, Hey, look, we’ll happily pay you whatever it is, but let us just tell us what this equipment is. We’ll go out and we’ll buy it, and then you can manage it. We understand you want to have one tech stack, we understand you want to have this no problem. We just want to go ahead and buy that. And then you guys can manage that. That’s what I would respond. I’d be very hesitant to enter into contract, into a contract or some kind of an agreement where the hardware is just bundled in. There’s many downsides to that, and I’ve kind of touched upon that. So

Todd Darroca:

Is there any, I guess protection, the example you gave of the IT guy saying, fine, I’m going to come take my network. Is there anything to prevent that IT provider from literally doing that and just saying, fine, this is all mine and you’re screwed since it’s his equipment without?

David Kakish:

So it’s a great question. It’s a great question. So I spent a lot of time inside of IT circles, and ever since day one, we launched our business back in 2007. Philosophically we never sold hardware. We just like guys, the margins are low. There are people that do it significantly better than we do CDW, Dell Insight. I mean there’s so many of them. Why are we trying to make a couple of points? So these are the internal discussions, right? And RIA wouldn’t know about that, but internal discussions when I’m talking with other IT providers, I go, the margins are so low, it’s just not worth it. And then the complexity of a return and then what if that laptop is registered in the IT vendor’s name instead of the end customer? And so there’s just so many complexities since day one. We’ve made a decision not to be doing any of this at all.

And I got to tell you, in these mastermind groups and things like that, people harass me all the time and I go, guys, it’s a philosophical thing. I don’t want to discuss it. Our clients love that we don’t resell hardware and software and bundle it in, but they’re like, but you’re not locking them in. You’re not making money off of hardware, you’re not. And I go, that’s not where we make our money and we’re not interested in making that. So the big thing in these circles, they’re like, yeah, you want to get a client in, you want to lock ’em in. And hardware as a service or bundling in the network hardware is a great to lock ’em in for two years, three years. And our philosophy is, look, we want our clients to work with us because they want to, not because they have to or some contract.

And to answer your question, depending on how the contract is structured, if the client wants to break it early and they’re renting the hardware, the IT provider can come in and they can take that. Not only can they just come in and take that, they can remotely bring it down for you too. So I mean it’s a step further. So usually what’s happening in those scenarios, it’s just kind of getting a little bit ugly with lawyers and stuff like that. But yeah, I mean I would be careful. You want to be able to say, Hey, we want to pay you for the service, not some piece of hardware and pay three x the price of the hardware over three years when I can just afford pay it upfront.

Todd Darroca:

So what’s the argument then if you could say, well, if I rent this, then I’m always going to have the latest technology. Technology is always advancing super fast. So why it would seem like a good thing to just rent it and then continue updating it. So why would that not, I mean is that even wash in this whole thing or is that kind of like

David Kakish:

Yeah, well, what you’re saying is perfect because in theory, that’s what should happen in practice. What happens is this network equipment can last three to five years. Let’s just go with a three year mark. You’re paying for it over the course of three years, and then after three years they’re going to come in and they’re going to put new network equipment. But over these course of the three years, you’ve already overpaid for the cost of that hardware. I can tell you, I’m not exaggerating. The cost of the hardware, let’s just say is $5,000 over three years, you’re probably paying anywhere from 15 to $30,000 for that same hardware, right? It’s crazy, right? But you don’t see it that way because it’s part their services and it’s insane. I go, guys, clients, RIA, clients are happy to pay for your service, just don’t mark up this hardware and try to make money off of something that it’s just anyways. But do you see, it’s a philosophical thing.

Todd Darroca:

So let’s switch then into why owning it. It’s kind of renting or owning a house kind of deal, it sounds like a little bit. So why owning the IT hardware is the better bet? Obviously because you’ve said 5,000 versus 30,000,

David Kakish:

It’s not always that much, but I can tell you at minimum it’s two x and above from what I’ve seen. So obviously benefits of owning your own IT hardware, computers, networking equipment and things like that, cost savings, you’re going to save a lot of money. Yes, you might pay that $5,000 upfront, but it’s better. And I haven’t done the math in my head, but it’s better than paying $700 a month for three years or something like that. That’s number one. Number two is you just have a lot of flexibility and customization because I don’t know, there’s a better wireless access point that’s out there and you want to go out and you want to buy that in the future, you can do that. And then the third thing is you actually own the asset rather than having it as an ongoing expense. And then the other thing, and this is key, is the independence from the vendor, the IT vendor not being locked into that IT vendor. You can switch without a lot of complications or anything like that. Those are kind of the typical things that we see.

Todd Darroca:

And do you see any IT or what should somebody do if they’re looking at an IT vendor and they say, well, until you get all that hardware, we’re not going to touch you. You can buy hardware, but you have to buy these. And customers like, well, I already have these, and IT guy’s like, well, I’m not going to work with you then. Is that where huge red flag run or is that something where it’s like, well, he may be actually suggesting something that’s smart to do or

David Kakish:

Yeah, I wouldn’t run from that. I would work with that IT provider. And I’ll tell you why. Because it’s also, again, it’s a philosophical thing. Some IT providers have a very specific tech stack. They’re going to say, we’re going to support a Cisco Meraki firewall, whatever. We’re going to support SonicWall firewalls, going to support Cisco switches and Meraki wireless access point. They want to have the same tech stack across all of their clients. That doesn’t scare me at all. And actually in some ways, they might even be doing you a favor because you’ve got maybe consumer grade products in your office or outdated or whatever. So that doesn’t scare me saying, Hey, here’s the hardware that we need you to buy. Right? That’s perfect. I mean, you want that in an IT vendor because they understand it, they understand it well, I just don’t like when they bundle it in their services or you pay for it over three years.

Because at minimum, and all the math that I’ve seen, at minimum, you’re paying two x the price of that hardware at minimum. And I’ve seen it where it’s like five X and even 10 x, and it sounds crazy, but I’m telling you because that network hardware isn’t that expensive, but it’s a way for the IT provider to have another profit center that’s never been a profit center. For us, our philosophy is, Hey, let’s work with what you have, and then what we’re going to do is with time, we’re going to have strategic technology reviews with you and with your team, and we’ll suggest to go ahead and replace that. Now, if you’ve got something that’s really bad or very outdated, we’re going to tell you to replace it during the onboarding process. We’re going to be pretty transparent, but we don’t necessarily dictate a very specific tech stack because here’s the reality in the RIA space we work with.

I mean everybody thinks they’re fundamentally unique, but it’s the same four or five vendors we see across the board, and we’re well versed with all of ’em. And so it’s fine. That’s our approach. But no, it doesn’t scare me when an IT provider comes and says, Hey, listen, we need to have, especially on the network side, on the computers and the Mac, a lot of flexibility because people have their preferences and things like that. But on the network hardware, it doesn’t scare me. What would scare me is only if they’re trying to lock you into a subscription or a three-year contract again to rent that equipment just significantly cheaper to just go ahead and buy that upfront. So

Todd Darroca:

Besides the big concerns or the big elephant in the room, what are some common concerns that you hear from your clients or in the industry when somebody says, I want to buy the hardware?

David Kakish:

Yeah, kind of like what you said, right? There’s a little bit of some of these things where people say, well, I got to pay upfront. And I go, yeah, it’s okay. You’re probably not broke. You’re not living paycheck to paycheck, so you can afford to pay that five grand upfront. So that’s kind of a big one, but again, it’s not like 50 grand upfront or anything like that. And what scares a lot of clients sometimes is that they’ll see that monthly subscription from that IT provider and they’re like, wow, it’s a thousand dollars a month over three years. If I were to buy that, that’s going to be like $36,000. No, I’ll just pay a thousand dollars per month. The reality is the cause of that hardware is not $36,000. It’s much closer, again, much closer to $5,000. And I’m sharing some numbers with you where I’ve recently seen that, right?

Last week I saw this, just so you know, the cost of the network equipment that they would have to buy for their size. I think they were like nine employees. I’d have to go back and look, but they were nine employees. I priced it out for ’em. It was under $5,000. They were going to be paying around, I think $1,100 a month for 36 months. Let’s just say it’s a thousand dollars. So either you could pay $5,000 upfront or $36,000. Now to be fair, the $36,000 also included some services from that IT provider, but you don’t have a way of breaking that out, right? Yeah, it’s crazy. So yes, the common concerns is upfront costs. The cost is going to be a lot less than that. It’s not going to be $36,000, it’s going to be $6,000. That’s number one. Number two, the maintenance and the upgrade.

What we love to do with our clients, so they have a sense of how much does it cost to really own this is to get the three year subscription on this network hardware and that subscription is directly with a manufacturer like SonicWall, Cisco, and so on. And then that way you know what your cost is, and we generally break out the line items so they know the hardware and then the SonicWall subscription or Cisco or whatever. And then the other concerns, well, what happens when the technology’s obsolete? Kind of like what you said, Todd, or hey, the monthly subscription is kind of nice because they’re going to come in and they’re going to replace that. Well, a typical IT provider is going to replace it every three years, but so what? At the three year mark, you go and you buy the new network equipment, and then it’s the same process. You’re just saving a lot of money by not renting it or by not having it part of their subscription. And again, Todd, I’ll go back and say it’s a philosophical thing. We have never, never resold hardware, and it’s always been a conscious decision because we want the best interest for our clients and we don’t want to have a conflict of interest because the easy thing to do is, yeah, go buy all this stuff and we’re going to mark it up and make some money and stuff like that.

And to be fair, in the IT vendor circles, I get harassed a lot. It’s like, David, why don’t you guys do that? There’s a lot of money to be made there. I go, we have our trust with our clients. We will never do that. We have never done it, and we’re never going to change that because we don’t want to lose that trust. We don’t want to have that conflict of interest. Yeah, I think now that, so Todd, you’re smiling because you’re like, oh, yeah, philosophically it makes sense, right?

Todd Darroca:

It does. I could see why they’re like, oh, that’s a good revenue stream. But I do, I dunno, you’ve always said you’re vendor agnostic, so this just kind of falls in line with all of that where if you start reselling something, you’re going to be biased toward that. So that’s nice.

David Kakish:

Yeah. And by the way, on a last note, a last note, there are certain things where there are manufacturers and distributors that will only sell things to IT providers, not even end consumers, and I don’t want to say vendor names, I am sure some, but again, their customer, if you think about that, their customer is the IT provider, not the end customer, which is crazy. At the end of the day, we’re here to serve you as an RIA client and sorry, I get a little too passionate about this, it bothers me. There’s just something fundamentally wrong when people are doing that. And with prospective clients that I talk to, they’re scratching their head. They’re like, David, are we missing something here? And I go, no, I have to sort of explain this. So I think in the future when I talk with these clients, I’m just going to say, go listen to this podcast. You’ll know more about it because the math, right? So Todd, you looked at the math right now, you’re like, wow, $5,000 and $36,000. It’s crazy. You’re

Todd Darroca:

Like, that’s crazy. Yeah,

David Kakish:

They’re like, even

Todd Darroca:

If you were to upgrade in three years, you’re still only spending $10,000 instead of $36,000. So you’re still ahead and even on the tax breaks, if you make it as an asset or whatever, you’re still going to break there. So that’s wild, wild, wild.

David Kakish:

Yeah. Well, before we wrap up, this reminds me of there’s an episode of Seinfeld where Kramer’s like, oh, it’s a tax write-off. It’s a tax. You know what I’m talking

Todd Darroca:

About? Well, I am not a big Seinfeld fan, but I have watched Schitt’s Creek. Have you ever watched Schitt’s Creek before?

David Kakish:

A little bit. Not much, but yes.

Todd Darroca:

Okay. There’s similar to what you’re talking with Kramer, there’s that character named David and he keeps buying things for his own small business and his dad goes, well, how are you paying for it? And David’s like, it’s a tax write off. I just write it off. And he’s like, well, you have to pay for it. No, it’s a write off dad. So if that’s kind of what Kramer the same situation. But yeah,

David Kakish:

So Jerry Seinfeld asks, Kramer looks at him and he goes, you don’t know what a tax write off is,

Todd Darroca:

So what should somebody walk away with today? What can you tell somebody once they click power off on their iPod or their radio and listen to us? What should they be going to do?

David Kakish:

Yeah, I think, listen, I think the big takeaway is work with IT providers that actually allow you to buy the equipment, even if you have to buy new equipment for them to work with you. I think the ones that are really bundling in the IT infrastructure as part of IT or service, I think there’s just huge markup in your overpaying for something that you’re not using. And so have that honest discussion with them and say, Hey, I know you will support one tech stack and that’s fine. We support you with that. Philosophically, our organization is we want to own our IT assets, and so we’ll buy that. Whatever it is, give us a quote and we will buy it. And it’s okay. They can make money off of the markup of buying that IT provider, the markup of the hardware. You just don’t want to be paying over two years, three years, five years, because again, you don’t want to overpay and then you don’t want to be locked in. If for whatever reason, it doesn’t work out and it necessarily doesn’t work out because it’s a bad relationship. There’s an acquisition, there’s a merger, something fundamentally changes in the business. Now you’re really stuck for that two years, three years, and so on. So I would just have that honest discussion with the IT provider, what do we need to buy? We’ll buy it so you can support us. We just don’t rent equipment. That’s kind of how we’re set up. That’s what I would do if that was my company or my business.

Todd Darroca:

Nice. So big message, takeaway, own don’t rent.

All right. Well David, if there’s nothing else, are you good? Anything else? Okay, awesome. Well, hey guys, we are at the end of the show here. So we want to say thanks so much for listening to us and of course, listening to the RIA Tech TikTok podcast, brought to you by RIA Workspace. And so for more podcasts and resources, go to riaworkspace.com and check out the Learning Center. All of our current and past episodes are up. And feel free to reach out with us with any questions or topics you’d like us to cover. And of course, want you to stay tuned for more RIA Tech Insights in our next episode. So for David Kakish, myself, thanks so much for listening and have a great day.