Declaration of Independents

More financial advisors are breaking away from brokerage firms and wirehouses to become independents.

Declaration of Independents

More financial advisors are breaking away from brokerage firms and wirehouses to become independents.
… to an independent model. In many cases, they may not even know how to begin breaking their industry ties and initiating the process of establishing a successful independence.

To change that dynamic, it is first necessary to understand why this trend is growing and what industry pressures are encouraging more advisors to go independent. With that in mind, advisors can then acquaint themselves with the essential information they need to know before beginning the journey toward becoming fully independent, including concrete tips and general best practices for doing so.

Pressures and Principles

There is a constellation of factors behind the growing trend as to why more advisors are exploring life as an independent operator, but the vast majority of reasons include some combination of the challenges they are encountering in today’s industry, the operational and financial limitations of brokerage firms, and what many see as the appealing opportunities afforded to independent advisors.

The biggest motivating factors fall into one of the following four categories:

  • The capability of an advisor to provide clients with a range of best in breed solutions, and the lack of access or rather limitations presented in the traditional brokerage, wirehouse and banking channel.
  • The nuts and bolts of day-to-day business. From simple things like paperless account opening, funding and trading accounts, to more complex issues such as getting marketing campaigns or growth initiatives approved, it can simply be tougher to get things done in the banking, wirehouse and broker-dealer world. The time from inception to implementation is generally longer, and there is a lot of oversight and bureaucracy that some advisors get tired of.
  • Client pricing structure. Some advisors feel limited by the brokerage pricing model. They may feel like their prices are not aligned in relationship to services being rendered, or that they are not getting their fair share of compensation out of the fee schedule, and they don’t own their book of clients, which leads to the fourth point of contention…
  • Advisor compensation. Advisors in the wirehouse space find that their compensation is very compressed relative to their independent contemporaries where they earn one fourth to half of what their independent peers do on the same level of business. That status quo is frustrating, and the counterbalancing appeal of the brand name on the door has waned significantly in the wake of the financial crisis and more currently the flagrant disregard to regulatory compliance.

Frustrated advisors typically complain about a general dissatisfaction involving all four of those elements: they want to intuitively offer more agnostic solutions to their clients at a better price point, and they want to reap greater benefits for their hard work and they want to own their book of clients. Increasingly, they see a transition to an independent model as the best way to achieve each.

A Pivot Point

Once you decide you want to make a move—and are doing so for the right reasons—the next step is to decide whether to set up your own RIA or join an existing firm. There are many variables at play here, and the responsibilities of a business owner are significantly more complex than when acting solely as an advisor. Considerations like protecting your brand and securing custodial relationships should not be entered into lightly or without a trusted professionals guidance. While setting up an RIA is complex, the rewards are potentially meaningful  for the advisor: total control of their own compliance, what fees they offer, what solutions they offer, and the ability to control their cost exposures as a business.

Joining an RIA is very different in terms of the responsibilities involved. In this scenario, you are essentially jumping into a fully functioning platform, complete with established infrastructure and corresponding economies of scale. In exchange, you are giving up a little bit of control. You will have to put in a bit more due diligence at the beginning of the process, because every RIA is different. Be sure to evaluate your capability and corresponding compensation, making a true apples-to-apples comparison in this new environment to see how your book of business would be serviced and how much that generates in income net of what your cost exposure would be. This exercise can help you see the capabilities and limitations of an RIA candidate’s infrastructure, especially in the core areas of your business that can keep you going strong today and take you where you want to go tomorrow.

Leveraging Momentum Through Transition

Regardless of whether you choose to start your own RIA or join an existing RIA, there are some consistent guiding principles to consider when affecting your transition.

First, because many wirehouse advisors are tied to a forgivable loan structure, factoring that repayment into your transition capital requirements when switching over is very important. Second, pay close attention to the Broker Protocol by making sure that your existing firm is a member and that the organization you are going to is also member. If you are setting up your own RIA, make sure you are prepared to register as a Broker Protocol member firm accordingly.

The Broker Protocol largely protects you against litigation and in a nutshell permits you to take five pieces of client information with you when you resign: name, account titles, mailing address, emails, and phone numbers. With those five pieces of information, you can go out and “re-recruit” your clients. You might have some logistical support from your new RIA or custodian, but you should plan on doing the heavy lifting to make your transition a success. When you do it right, you can actually turn these transitions into a marketable event and actually grow your business. There are plenty of anecdotes of Advisors creatively marketing their transition, while abiding by the Broker Protocol, to expedite transitioning their clients and create buzz; a good place to begin is to explain why you are leaving and why that is good news for your clients. If you are going independent for the right reasons, that logic can be compelling. If you tell your story the right way, clients will listen and want to be a part of it.

Seek Experienced Guidance

Most custodians and RIA consultants are a good place to start the conversation about transitioning to independence. They, especially the consultants, understand the level of confidentiality involved and they are experienced at educating advisors about what such a move entails and what ramifications a given choice may have. Most advisors are not sure how to pick the right custodians or negotiate pricing—or even what pricing should be. The right consultancy can serve as a kind of mentor, which is especially important when setting up a new RIA. They can help you bridge the gap between expectations and reality, and can walk you through the complexities and considerations that need to be navigated across all dimensions of your practice. It is also a good idea to talk to people who have already made a similar transition – I’ve found myself that they are happy to share their experiences if you just ask.